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September 2, 2014

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Tax break pulled ‘out of the air’ could cost state $900 million

CARSON CITY - Not as though it happens every day, but sometimes listening to National Public Radio can cost your state $1 billion.

In 2004 Chris Giunchigliani, then a state assemblywoman, was listening to NPR while working on "smart growth" bills to introduce the next year.

"Suddenly, I heard someone on the radio talking about 'green building,' and I thought, 'Gee, that would be good to have here, too.' "

Giunchigliani, now a Clark County commissioner, loves government policy the way some people love to breathe. She quickly searched online and found out what it means to go "green." She found a few other states giving tax breaks to businesses for building green.

She came up with her own tax break: 50 percent. If a business met a certain green standard, it would get a 50 percent property tax break for 10 years. And if a business applied in the fourth quarter of 2005, it could qualify for a 50 percent sales tax break on construction materials.

50 percent. One-half. A nice, easy figure to calculate.

Where did it come from?

"I just pulled it out of the air," said "Chris G. , " as she is known to those unsure about how to pronounce her vowel-intensive last name ( for the record, it's june-killy-AH-nee). She found other states with different percentages, 25 or 30, or they had caps, "and I just put in 50 percent."

Two years later, maybe it seems like just so much trivia. But what happened in 2005 is part of the reason state lawmakers have been living through sleepless nights and exhausting days.

After the Las Vegas Sun quoted a Clark County School District official saying the tax breaks could cost the state $900 million over 10 years, the "green tax break" has dominated this tiny city and the part-time lawmakers who take up residence here every two years.

The consequence of those 50 percent tax breaks is becoming painfully clear. Nevada already has an uncommonly small state Treasury - in 2005 surveys, it ranks 48th and 49th among states in spending per capita. It can't afford the loss of $900 million over 10 years, much less the higher estimates of $1.5 billion to $2 billion. At that price, relatively inexpensive programs like all-day kindergarten, at $60 million a year, become even more improbable.

How did it come to this?

The answer is a tale that reveals as much about Nevada as it does about constructing green buildings. If this were a book, the table of contents might read something like this:

Chapter One: A well-meaning legislator tries to do something good for the environmentally challenged state she loves.

Chapter Two: The Legislature speeds her bill to approval. The frugal state, whose Legislature meets just once every two years, has only the sparest research staffs. No analysis is done about the consequences to the treasury. Besides, says Giunchigliani, no one expected many Nevada businesses to care enough to go green.

Chapter Three: Las Vegas developers and casinos spot an opportunity. They have the brain power, the profit motive and the resources to understand what the Legislature did not. Building green can save a lot of money, even before tax breaks are considered. Thus many Strip properties were already incorporating green techniques and materials.

Chapter Four is really just an equation. What no one thought would happen, happened. More and more builders are going green and applying for the tax breaks. MGM Mirage, to name just one, estimates it will spend an additional $125 million to $225 million to make its $7.4 billion CityCenter a green development, said company spokesman Alan Feldman.

For that, it will reap as much as $390 million in tax breaks.

Spend a dollar and, if you're smart about it, get $1, $2 or $3 back.

And start to give state lawmakers sleepless nights.

Giunchigliani chuckles when she says she pulled the tax break figure "out of the air." She knows it sounds funny. But she says she has a clear conscience. She was trying to do something good for the state. What better than to help business in Nevada while helping the environment?

Minutes and notes archived from the 2005 Legislature provide a glimpse of what happened next.

Giunchigliani's bill was discussed in at least five Senate and Assembly committee meetings in 2005. Lawmakers haggled over the type of "green" standard to use. They talked about expanding the bill to include homes (which didn't happen). They talked about how green construction could foster new businesses in Nevada. They spoke about photovoltaic cells and renewable energy and state buildings and codes and training.

From transcriptions and minutes, roughly 18,000 words were uttered in about 1,150 sentences. If you read every word, it becomes clear that neither Giunchigliani nor anyone else had any inkling that this little idea would loom so large.

Here's why: In all those words, just 320 were devoted to the tax abatement. Only once did anyone come close to wondering whether the incentives might hurt the state. Sen. Michael Schneider, D-Las Vegas, asked on June 1, 2005: "Will local entities have any problems with this because the incentive is property taxes? We have kept property taxes down and now we are doing something else with them."

Ivan Ashelman, vice chairman of the state Public Works Board, dismissed the notion, publicly doubting that you'd see "an enormous amount of these buildings built."

Then he offered a potential escape. It does not have to be 50 percent. It could be tweaked, lowered.

But no one picked up on it. In the days before the bill became law, the 50 percent figure wasn't mentioned again.

Instead, the prevailing assumption was that Nevada would be Nevada. After all, the state has a certain reputation.

It was only three years ago that the words "idiot or insane person" were replaced in the state constitution with "a person adjudicated mentally incompetent." Voters who approved that ballot measure - which was sponsored by Giunchigliani - did so by only 8 percentage points; 352,000 Nevadans voted to keep the wording as is.

As for building green, Giunchigliani said, "You think of Nevada, and we're not really progressive environmentally.

"We've got to drag people kicking and screaming sometimes into moving into growth issues and quality air issues and simple things like bike paths," Giunchigliani said. "I think all of us were thinking people might nose around it, but not really do anything."

So the Legislature decided to aggressively invite green buildings. It ended up with incentives that even the U.S. Green Building Council described as "radical."

Lawmakers doubted business would jump at the opportunity. But they underestimated the industry that drives Las Vegas.

It left her hands and over time what Chris G. had wrought was slowly broken.

Sure, the 50 percent tax breaks were law. But she says the sales tax portion of the tax relief was to go only to people who applied in the three-month window, from Oct . 1 to Dec . 31, 2005. (There is no similar sunset for the property tax break.)

Applicants worked to get around the strict sales tax deadline. They argued that the state Tax Commission watered down the law by saying that builders were still eligible for sales tax breaks if they had shown a "substantial intent" to build green within the three-month window.

And if anyone was still wondering whether there were loopholes in the regulations, a state employee did something that worked to reassure them.

A month ago the head of Gov. Jim Gibbons' Office of Energy, Hatice Gecol, changed a regulation so casinos could allow indoor smoking and still apply to be a green building.

To understand the significance, consider this: In 22 states and 75 localities that have adopted the green building standards, Nevada is alone in allowing smoking. When something so concrete everywhere else is cast aside here, can you blame businesses for thinking other loopholes might exist?

Friday, the Legislature disclosed that it is proposing changes to fix the law for the future, eliminating the sales tax break and reducing the maximum property tax relief below the 50 percent level. But lawmakers remain uncertain about what they can do about exis ting applications for tax breaks. That issue is scheduled for discussion next week.

When Chris G.'s bill was cruising through the Legislature in 2005, only 14 projects in Nevada had registered with the U. S. Green Building Council. By April of this year, 85 had registered, with about 22 of those trying to gain the tax credits from the state.

Registering is an indication that a builder will try to get its building certified as green. It's not only important for marketing reasons, it also gives registrants access to an online road map that can help move project managers toward certification.

Eventual certification depends on meeting LEED standards. LEED, or Leadership in Energy and Environmental Design, is a point system. You get points not only for being energy efficient and water miserly, but for building into designs seemingly simple changes that over time can positively affect the environment.

Design elements include things like building close to mass transit or bus lines, providing parking for vans or car poolers, and bike racks and showers for those who would bike to work, and on and on. (By virtue of building on the Strip, casinos and hotels automatically qualify for a few of those points.)

The more points you earn, up to the maximum of 69, the greener your project, the more money you get back through tax breaks. For instance, to obtain a 50 percent property tax break for 10 years, developers would need 39 or more points - the "gold" level. For those reaching the silver standard, 33 to 38 points, the tax break is 35 percent to 42 percent.

After the mayhem of last week, the governor so far has identified four projects that remain eligible for tax breaks. Others might become eligible - perhaps under less generous tax incentives - after lawmakers rejigger the law before leaving Carson City in June.

The four projects are MGM-Mirage's CityCenter; The Palazzo, a Strip development by Sheldon Adelson; Fontainebleau, which was announced two years ago and has yet to break ground; and the world distribution center for Patagonia, an outdoor clothing and gear manufacturer, in Reno.

The tax breaks were intended to help offset the added expense of building to green standards. The U.S. Green Building Council says new nationwide studies show that green construction adds up to 3 percent to the cost of a project.

But the breaks are so generous, Nevada businesses can actually make money by going green.

Feldman, the MGM Mirage spokesman, roughly estimated that his company so far has spent $125 million carrying out certain green-building standards necessary for CityCenter to attain a "silver" rating. He added that it could "easily" reach as high as $225 million.

At the same time, because the company followed the letter of the law, it qualifies for a materials sales tax rebate of about $90 million. And if the project earns the silver status it is aiming for, he said , it will qualify for about a $30 million-per-year tax break for 10 years.

So even if the company spent the high end of $225 million to be green, it will get about $390 million in tax breaks.

A spokesman for another major Strip project, The Palazzo, which is registered with the state as an 8 million-square-foot development, did not return a call for comment.

A spokesman for Fontainebleau, also planned for the Strip and registered at about 7.1 million square feet, would not release any information about the project.

Patagonia, which built a 171,000-square-foot addition to its Reno warehouse, is going to get about $80,000 per year for 10 years, $800,000 total, after meeting the LEED gold standard on its $17 million project. It will also reap the sales tax break, but company officials didn't have a good estimate for that amount.

Patagonia said it spent about $1.2 million, or about 7 percent over budget, on green changes. Dave Abeloe, distribution center director , who's been with the company 29 years, said the new building is a replica of one built about 10 years ago, with a few modifications.

"We were ahead of the curve back then," Abeloe said.

Building green, he said, saves Patagonia 47 percent on energy and water expenses every year. That's an important lesson for state lawmakers. Patagonia might be the standard bearer for green companies, but it is still in it to make money.

Here's another important lesson :

As state lawmakers spend the next two weeks figuring out what to do about the green law, they might want to keep words from Abeloe in mind.

"Even if the incentives weren't available, we would have built this building green."

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