Tax-resistant history leaves Nevada with fewer choices

By David McGrath Schwartz

While fretting over the state's fiscal health, Nevadans would do well to remember those quaint years, circa 1979, when the state was regularly flush with cash.

Heading into that legislative session, lawmakers wondered what to do with $166 million of unspent money.

"There were two understandable reactions to the large surplus," UNR political science professor James Roberts would reflect in an academic paper six years later.

On one hand, it demonstrated that the state had the money to do more for its citizens.

"The second, and politically prevailing view," Roberts wrote, "was that the large surplus was positive proof that the people were being overtaxed and that something should be done to reduce the tax burden on the people."

Guess which argument won.

Nevadans have had a long, strong distaste for taxing themselves. Gov. Jim Gibbons' election last year on an anti-tax pledge shows that sentiment remains strong.

But there is also a rising din for more money to pay teachers better, improve highways, treat the mentally ill, house a growing number of prisoners and care for the sick. That would require a tax increase, or a new tax altogether.

Because of lower-than-projected revenue - a regular curse on Nevada's budget - Gibbons has called for state agencies to plan cuts.

Four governors before him faced similar situations and made similar requests. This time, the governor is finding strident resistance.

Debate about how the state can make ends meet is entwined in the state's unusual tax structure. Nevadans are proud of it. But it causes problems.

Our anti-tax fervor predates statehood. Territory voters rejected the first Nevada Constitution - without corporate or personal income taxes - in 1864 because it dared to impose a gross revenue tax on miners.

The adopted constitution passed with a net profit tax on mining.

The state's financial picture changed dramatically in the 1930s when gaming was legalized.

Illegal gaming was widely accepted in the state. And there was an "equally strong feeling that gaming should be regulated and revenue derived from it," according to the Nevada Taxpayers Association handbook.

"Nevadans thought they found a free lunch," said Thomas Cargill, a UNR economics professor.

The free lunch proved to be a big Nevada marketing campaign: Forget taxes, move to Nevada!

Nevada even called itself "One Sound State."

More big changes occurred in the 1979 and 1981 legislative sessions.

California voters had adopted the landmark Proposition 13 to put the brakes on rising property taxes, and Nevadans wanted the same.

To head off our own proposed initiative, legislators lowered the property tax and increased the sales tax , which, coupled with the gaming tax, drove the state's revenue stream.

Bob List, the Republican governor of Nevada from 1979 to 1983, says relying on gaming and tourists to pay for state government has its benefits - and risks.

"On the positive side, it substantially reduced the burden on Nevadans," he said. But it "is certainly more vulnerable to economic vagaries. It certainly isn't as predictable as a fixed property tax."

In 1982, when the national economy tanked and Nevada's followed suit, List directed state agencies to develop contingency plans for cutting budgets by 10 percent. A freeze was placed on filling vacancies and state workers were laid off.

List faced pressure to call a special session to deal with the economic crisis, but refused.

In the next election, List lost to Richard Bryan.

And Bryan worried how the state would meet its payroll. In the situation of a strapped working man living paycheck to paycheck, Bryan ordered gaming taxes collected monthly instead of quarterly.

Bryan called back a loan that had provided cost-of-living increases for retired state employees. He also took back $7 million that had been transferred to the highway fund in 1981.

In 1983, the Legislature cut $8 million from public schools and raised the room tax by 1 percentage point.

"I've always felt that once the tax shift occurred, it made the state revenue stream much more volatile, subject to any hiccup that occurred in the economy," said Bryan, who went on to be a U.S. senator .

A sound public tax policy to pay for government operations should lean on a number of tax sources - including property and income taxes - to create a predictable and stable revenue stream, economists say. Nevada's revenue, on the other hand, follows consumer spending and gambling patterns.

In 1991, two months after the end of the legislative session, sales tax revenue came in low. Agency heads were told by Gov. Bob Miller to make cuts of up to 17 percent.

A scheduled 4 percent pay raise for state workers, higher education employees and teachers was delayed, though a state court overturned that decision .

School districts were asked to reduce their budgets by about 5 percent of state appropriations.

A class size reduction was deferred, as was opening a new prison.

The state's financial picture recovered but was strained again after the 2001 terrorist attacks. Three months after the Legislature adjourned, Gov. Kenny Guinn called for $90 million in cuts over the next two years.

In 2003, as the state still struggled, Guinn boldly proposed what would have been a fundamental shake - up to the state's tax system: a gross receipts tax on businesses.

The chambers of commerce exploded, Guinn was bruised, legislators cowered and the state opted for a more modest range of smaller taxes and fee increases.

It was a band - aid, not a cure.

Gov. Jim Gibbons was elected a year ago largely on a no-new-taxes promise, and he says he's sticking to it.

And with sales and gaming tax revenue dropping below projections, he has called on most state agencies to plan for 5 percent budget cuts.

Hearing the howls of protest from administrators who say they have no more blood to give, Gibbons will sit down Wednesday with the state's major players to discus how to handle the budget problems.

Today Nevada is the third - most - business-friendly state in the nation, according to the nonpartisan, nonprofit Tax Foundation. Our property tax is comparatively modest. But our sales tax burden is the seventh highest in the nation.

State Sen. Bill Raggio, the state 's ranking Republican after Gibbons, says it's time to take a look at our tax structure, though he's not offering specific fixes.

He observes that during his 35 years in the Legislature, no one was elected to state office on the campaign promise of raising taxes.

Why is it so difficult to even consider levying a business income tax (which would be a legislative decision) or a personal income tax (a much more unlikely scenario, because it would require a state constitutional amendment)?

"We're wedded to our history," said Cargill, the UNR professor. "Once you choose a path, it determines where you go for quite a while. We have a narrow tax base, focused on the gaming industry, and we're kind of stuck in a rut."

He describes it as the turnpike theory: Once you're going down the turnpike, you might not find a way to get off it for a long time.

And Nevada got on that freeway because its people have never had much use for big government, nor the willingness to pay for it.

"The cultural ethic here is folks don't want too much government," Bryan said. "I'm proud to say the regulatory end of government has been light. It's not historically burdensome."

That has led to fantastic growth and private sector opportunities to create jobs, he said.

"Having said that, we've paid a price," he said. "With the structure we currently have in place, we've not done all that we need to do in critical areas."

Guy Rocha, the state archivist, said Nevada's tax structure, once viable, no longer works.

"The world in which we formed our tax base is very different than it is today," he said. "Has Nevada, our leadership, looked at the tax base comprehensively? I would answer no."