Friday, May 7, 2004 | 5:05 a.m.
WEEKEND EDITION
May 8 - 9, 2004
During last year's rancorous debate in the Nevada Legislature that led to a record state tax hike, there were plenty of predictions that the new taxes would ruin the state's economy.
Businesses would fold, unemployment would rise and people would have little money left to spend for themselves, opponents of the tax plan warned.
In an editorial last July 24 the Las Vegas Review-Journal said "... the new levies send a clear message to many companies which have thoughts about expanding in or relocating to Nevada. Forget about it."
But since the Legislature approved in July the plan to raise $833.5 million in new and increased taxes through June 2005, the local economy instead has been booming.
Employment is up. So are personal income, taxable sales and gross gaming revenue. Between last July and March, Nevada Power Co. hooked up 3,028 businesses, bringing total businesses in its Southern Nevada service area to 83,464.
The only thing down since July is unemployment. Even cigarette sales, which were hit hardest by the tax hikes, rebounded to normal levels in March after a prolonged slump.
"We are certainly recovering pretty well from where we were a year ago and especially two years ago," said Perry Comeaux, director of the Nevada Administration Department, which oversees the state budget. "Our tourism is back up. It looks like our economic growth is coming back. Sales tax revenue is especially strong. Automobile sales are strong.
"I would say our economy is healthy. Let's just hope it stays that way."
There were 846,100 people in the Las Vegas area with jobs in March, 35,000 more than at the same time the previous year, according to the Nevada Employment, Training and Rehabilitation Department. And the job gains were spread over a cross section of the labor force, according to state statistics. In March unemployment was at 4.4 percent.
"When we started talking about increasing taxes the economy was flat," said R. Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas. "Now, the economy is strong so it's a different world. If you have an unemployment rate in the 4 percent range, you are doing well.
"The impacts of the taxes on the overall economy have not been much. What we had was a relatively modest change in taxes. In the aggregate we did not significantly change the tax system. But we've got to go through a year before we can really see what happens because of the seasonal impacts."
Although the new payroll tax went into effect in October, personal income in Nevada rose 1.6 percent to $71.9 billion in the fourth quarter of last year, the nation's ninth-highest percentage increase over the third quarter, according to figures released last week by the federal Bureau of Economic Analysis. Net earnings in Nevada rose $632 million, or 1.3 percent, in the fourth quarter, a percentage gain exceeded in only 13 states.
The Nevada Development Authority, which recruits businesses, has not fielded any complaints about Nevada's new taxes from companies looking to move here.
"On the corporate side we're still one of the lowest-taxed states in the United States," Somer Hollingsworth, the authority' president and chief executive, said. "So the new taxes haven't slowed us down. None of the businesses moving here have any heartburn paying a little more in taxes because they know we're a pro-business state."
Las Vegas' Chamber of Commerce has not heard from any of its more than 6,800 members that the payroll tax -- the largest single revenue source among the new taxes -- is causing businesses to lay off employees.
The payroll tax, retroactive to October, is 0.7 percent of gross wages for all businesses except for financial institutions, where the rate is 2 percent. Businesses can deduct from those taxes the amount of money they spend on employee health insurance benefits. Beginning in July, the payroll tax rate for all businesses except financial institutions will drop to 0.65 percent.
"It doesn't appear that the payroll taxes have affected the salaries of employees," Christina Dugan, the chamber's director of government affairs, said. "Payroll taxes also haven't been a factor in eliminating jobs in Nevada."
None of the 735 members of the Retail Association of Nevada have laid off employees as a result of the payroll tax, according to Mary Lau, the association's executive director. Like other business organizations, Lau's group preferred the payroll tax over a gross business receipts tax proposed by Gov. Kenny Guinn that was not approved by lawmakers.
"Right now the payroll tax is not impacting our businesses as much as the gross receipts tax would have," Lau said. "If the recovery slows down, then all the mandatory expenses will be more painful, but the percentages of taxes you are paying would also slow down because you wouldn't be having as many employees."
There were scattered complaints about a handful of job losses among specialized segments of the work force -- such as piano players and hula dancers -- who said they became unemployed because of the new state taxes on live entertainment.
But Frank Leone, president of the 700-member Musicians Union of Las Vegas No. 369, estimated that no more than five local musicians have lost their jobs because of the tax. With an increasing number of musicals at the resorts, musician jobs have actually been increasing, he said.
"I would say the impact of the entertainment tax on musicians is minimal," Leone said. "We got the Nevada Gaming Commission to change its interpretation of the tax. Singing seems to be the dividing line between what is considered entertainment and what is ambient (non-singing background) music."
And most musicians in his union play ambient music and therefore have been spared from the entertainment tax.
Few individuals have been keeping a closer eye on the effect of the new state taxes than Jeremy Aguero, a partner in and principal analyst for the Las Vegas research company Applied Analysis. Aguero's company provided economic analysis to a task force of business and community leaders which submitted comprehensive tax recommendations for last year's Legislature to consider.
"The impact of the taxes is masked by the fact that we're in a period of strong economic recovery," Aguero said. "We believe we have been on a clear path of recovery in Southern Nevada since fall 2002. But it's only been in the past three quarters that we have seen the type of robust growth we're historically known for."
Continued population growth, coupled with low interest rates on home mortgage loans, has kept Southern Nevada's housing market strong. This is despite an increase effective in October in the real property transfer tax, which is paid by both the buyer and seller when property ownership is transferred.
Prior to October the revenue collected from this tax in Clark County -- $1.25 per $500 of property value -- was shared by the state and the Clark County School District. The tax has been increased to $2.55 for every $500 of property value, with the additional money going into the state's general revenue fund.
But the real property transfer tax increase hasn't done anything to slow down housing demand, according to Dennis Smith, Home Builders Research president.
"It's going so well that there's not much that could affect it," Smith said.
Monica Caruso, spokeswoman for the Southern Nevada Home Builders Association, agreed.
"We have so many people moving in that every builder we know has waiting lists," Caruso said. "It's really a boom economy."
Banks were specifically targeted by the 2 percent payroll tax and a new excise tax of $7,000 a year on each branch in excess of one per bank, which took effect in January. The banking industry still is not pleased that it was singled out in this manner by lawmakers, but there has been no talk of bank employee layoffs or branch closings because of the new taxes.
George Smith, president of Bank of America's Nevada operations, told the Las Vegas Sun last month that the bank taxes were affecting his company's earnings "but we are in such a robust economy we are OK with it." Bank of America, the state's largest bank, announced last summer that it was adding 19 branches in Nevada in two years, two of which were opened in Las Vegas earlier this year.
The number of Nevada-licensed bank branches increased from 133 on June 30 to 141 as of last week.
"I'm not really seeing that it's having an impact at this point," Nevada Financial Institutions Division Commissioner Carol Tidd said of the new bank taxes. "It's not like we're getting any correspondence from the banks that the taxes are killing them and that they are shutting down."
Big arenas also haven't noticed a decline in paying customers despite the implementation in January of the new state taxes on live entertainment. Casinos have paid entertainment taxes for years. The new taxes are 10 percent on admission, merchandise, food and drinks in nongaming venues that seat between 300 and 7,499 people and 5 percent on admission only for all facilities that seat at least 7,500.
About the only complaints Steve Stallworth, vice president and general manager of the Orleans Arena, said he has heard have come from event promoters. Stallworth said some promoters, particularly those involved in family entertainment such as ice shows and circuses, are reluctant to raise ticket prices.
"I don't think it has kept people from attending an event," Stallworth said of the entertainment tax. "The promoters just want to make sure that fans can still afford to get merchandise."
The Thomas & Mack Center hasn't felt any negative effects from the taxes its customers must now pay, arena booking director Joe Santiago said. The promoters have learned to cope with the entertainment taxes because their customers pay those taxes in many other states.
"The 5 percent tax we've had to put on our own shows hasn't cost us any business," Santiago said. "Some promoters are charging the same price with the tax and some are adding the tax on top."
Because most of the tax hikes didn't take effect until October or January, more than half of the $833.5 million in anticipated new tax revenue is expected to be raised from July through June 2005, when the current budget biennium ends.
That money will go into the state's general fund, whose largest programs are education, welfare and public safety. General-fund expenditures are expected to be $2.3 billion for the fiscal year that ends June 30 and $2.53 billion for the next fiscal year. But the general fund makes up only a portion of the total state budget.
When other funds are added, including money from the federal government and money for highways, minus transfers of money among state agencies, the net state budgets are expected to be $5.9 billion for the fiscal year that ends in June and $6.2 billion for the following year.
Two areas of the economy hardest hit by the state tax hikes have been liquor imports and cigarette sales. State taxes on beer, wine and spirits, all set at different rates per gallon, increased by 75 percent overall in August. Liquor imports in January and February were nearly 1 million gallons lower than in the first two months of 2003.
The state tax on cigarettes increased in July from 35 cents to 80 cents a pack. In the first seven months after the increase, cigarette sales slumped well below average before rebounding to normal levels in March, according to the Nevada Taxation Department.
The dip in cigarette sales is something the department intends to investigate. Chuck Chinnock, its executive director, said possible explanations for the decline include purchases in neighboring states where cigarette prices are now more competitive, and purchases over the Internet where buyers can avoid taxation.
But Chinnock said that based on all tax revenues the state has collected this fiscal year, Nevada's economy is strong.
"It does show much more stability," Chinnock said. "It does show that the recovery is well on its way here."
Taxable sales on all goods and services from July through February were up in 15 of Nevada's 17 counties compared to same period the prior year. And taxable sales increased in 72 of 92 business categories in Clark County.
Aguero said much of the increased spending could be attributed to homeowners who had more purchasing power after refinancing their homes at lower interest rates.
"All the economic trends that were once down are now up," Aguero said. "Visitation is back on the rise after it was sluggish for about 18 months. People are getting back to work and they're spending more money. People are better off today than they were 12 months ago or 24 months ago.
"The Legislature took the approach of spreading the tax burden as far and wide as they could so the impact on any individual would be mild compared to the overall tax burden."
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