Most lawmakers won’t be affected by payroll tax

Friday, July 25, 2003 | 5:10 a.m.

While there was plenty of moaning and groaning in the Nevada Legislature about the pain any new state tax would cause, most lawmakers won't be directly affected by the most controversial tax of all.

That would be the payroll tax, which became the designated new "broad-based" business tax by the time the dust settled on a regular legislative session and two special sessions that were punctuated by lawsuits, pickets and cries for recall.

Critics of Nevada's tax structure have argued that it relies too much on gaming and isn't designed to keep up with the state's rapid growth. In response, Gov. Kenny Guinn urged the Legislature to devise a long-range solution that would include a broad-based business tax.

What lawmakers ended up with was $363.9 million in new taxes for fiscal 2004 and $471.9 million for fiscal 2005. Slightly more than half of those taxes will be paid by businesses through the payroll tax, bank and gaming taxes and increased business-licensing and incorporation fees. The remainder will be shouldered by individuals through cigarette, liquor and entertainment taxes and a new real estate transfer tax.

The payroll tax, by far the largest revenue producer of the taxes approved by the Legislature last week, initially will be seven-tenths of 1 percent of gross payroll, minus the amount of money the employer spent on health insurance for employees.

"It is easy to calculate and it encourages employers to provide health care to their employees," Sen. Randolph Townsend, R-Reno, said.

Townsend is one of the few legislators who will pay the tax and will have one of the largest payroll tax bills. He owns retail companies that employ 42 people and will pay taxes on a combined payroll of more than $2 million.

Broad-based tax

He said he supported the final tax package in part because he believes the payroll tax is broader based than the other alternatives that were rejected.

The payroll tax is expected to raise nearly $140 million in its first year and, although it will drop to 0.65 of 1 percent on July 1, 2004, it is expected to generate $182 million in its second year. That's because the tax will cover only nine months of fiscal 2004 but all 12 months of fiscal 2005.

Employers also will not have to pay the current annual $100-per-employee business tax when it expires in October.

When the payroll tax takes effect on Oct. 1, more than three-fourths of the Nevada Legislature will not have to pay the payroll because they do not have employees or they work for tax-exempt entities.

Of the Legislature's 63 members, only 15 -- eight senators and seven assemblymen -- will have to pay the tax because they own or are partners in companies that have workers on their payrolls.

Republicans will be hit harder by the payroll tax than Democrats. Twelve of the Legislature's 32 Republicans will have to pay the tax, but only three of the 31 Democrats will be billed.

Lawmakers on both sides of the aisle who voted for the final tax package -- $836 million in new taxes over the next two years -- said they did not believe the payroll tax was approved because a majority of legislators would not be directly affected. Rather, they said that some form of business tax was needed if the state wished to fund education and other programs.

Legislators who will pay the tax but voted against it -- all Republicans -- said they thought the payroll tax could have been erased or at least reduced had lawmakers agreed to trim the state budget. But they also said the payroll tax was preferable to gross receipts or net profits taxes, which were also discussed but not accepted.

Good of the state

Assemblyman Tom Collins, D-North Las Vegas, who voted for the tax and is the only Assembly Democrat who will pay it, said the taxes for his Collins Power Services company will increase from $700 to roughly $2,600 a year, minus deductions for health care. But he said he is willing to absorb the difference for the good of the state.

"It's more than I would have paid under a gross receipts tax but I'm willing to pay it for the benefit of our state and our educational system," Collins said. "The state needs the money. We have schools that need new books and more teachers. We should have gone for the whole $1 billion that Gov. Kenny Guinn asked for. National chains that have regional pricing are still be subsidized by Nevadans.

"The payroll tax might mean that (Collins Power Services) won't sponsor a soccer team or will wait to purchase new tires. But we were willing to tighten our belt a little."

Assemblyman Garn Mabey, R-Las Vegas, a physician who voted against the final tax package, expects to pay about $2,500 annually for his four employees.

He predicted that people will find loopholes in the tax, such as using independent contractors instead of employees.

"People will find ways to get around it that are legal," he said. "That's what happens with any tax."

The payroll tax will be collected from employers who pay into the state's unemployment compensation insurance fund, which means that self-employed individuals who have no employees and don't pay into this fund will be exempted. So will government agencies, schools and nonprofit organizations.

Of the 48 lawmakers who won't have to pay the payroll tax:

Sen. Sandra Tiffany, R-Henderson, the only employee in her Internet retail sales corporation and an opponent of the final tax package, said she will pay the payroll tax because of the way her corporation is set up.

"I thought the budget was completely outrageous," Tiffany said. "It never should have gotten to the point where we should have even talked about a payroll tax."

But Sen. Terry Care, D-Las Vegas, a partner in a law firm that will pay the payroll tax for 15 people, said that the tax "was something that had to be done."

"I never looked at this as to how it would impact the law firm," Care said of the payroll tax. "Adopting the payroll tax had nothing to do with whether lawmakers would have to pay it. It just ended up the way it did as part of the lengthy compromise process."

None of the lawmakers contacted by the Sun who will pay the tax said they expect it to result in layoffs or pay cuts in their companies. But that doesn't mean they won't feel its effects.

Nevada physicians, for instance, have been complaining that their costs have gone up while their cash flow from health plans has been relatively flat. Medical malpractice insurance costs have tripled for many local doctors over the past two years.

"This will hurt me individually and every physician individually," Assemblyman Joe Hardy, R-Boulder City, a family physician, said. "All physicians are in a bind here because they can't increase their charges. Anything that comes off the top will come off of the physicians' personal salary."

But Hardy was one of two Assembly Republicans who voted for the final tax package and will pay the payroll tax.

"The payroll tax will be a broad-based business tax," he said. "The good thing is that this comes off of the employer and not the employees."

Lesser of two evils

For some lawmakers, such as Sen. Dean Rhoads, R-Tuscarora, the payroll tax was the lesser of two evils. As a rancher who employs six to eight people at a time, Rhoads will pay the payroll tax. He said he supported the final tax package because it did not include the gross receipts tax that was proposed by the governor's task force.

The task force argued that a gross receipts tax would be a stable source of revenue and would have captured many of the large retailers who have escaped other taxes in Nevada. But opponents of that tax argued that it would have penalized businesses such as supermarkets that have large gross receipts but narrow profit margins.

"The payroll tax is better than a gross receipts tax because it doesn't set up an Internal Revenue Service system to collect it," Rhoads said. "I have no problem paying a payroll tax because we all need to pay a little more."

The payroll tax hit for Assemblyman John Carpenter, R-Elko, a convenience store owner who opposed the final tax package, will be about $4,200, or $700 more than he is paying under the existing employee head tax.

"The payroll tax was better than the other alternatives because this will be an easy tax to figure," Carpenter said.

Sen. Sandra Tiffany,

R-HENDERSON