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August 20, 2014

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State Budget:

The unpopular, endlessly debated truth about taxes

Too narrow: A broader revenue base would help state weather economic downturns

Analyst Guy Hobbs says that contrary to the way it was portrayed last week, the report he co-authored does not say the state’s tax system is just fine.

Late last week, the Las Vegas Chamber of Commerce touted that a report it commissioned found Nevada’s tax system to be relatively stable. The tax system isn’t to blame for the state budget crisis, the economy is, the chamber said.

The study “dispels myths that our tax system is somehow unbalanced,” said Cara Roberts, the chamber’s spokeswoman. “We have a tax system that has proved to be quite sound and generates significant revenue during good times, and now that we’re experiencing an economic downturn, it’s underperforming.”

By playing up “The Relative Stability of Nevada’s Tax System” (the title of the report Hobbs helped write for the chamber) the business organization seemed to be firing a shot across the bows of Democrats Barbara Buckley, the state Assembly speaker, and Steven Horsford, the Senate’s new majority leader. The two have been conducting town hall meetings across the state, taking the public’s suggestions on how to fix what they have called a “feast or famine, boom or bust” state funding system.

The lawmakers have been talking of the need for an overhaul. The chamber is worried that will mean more and higher taxes, so it pointed to its report and said: Look, our system is not so bad. The study found that “the reality is that every state’s tax system is a function of consumption, productivity and/or wealth. When the economy suffers broadly, as is the case in the vast majority of states today, there is no tax system in the nation that is immune to its effects.”

To that, Buckley says: No matter how Nevada’s stability stacks up against other states’ fiscal problems when the numbers are analyzed, the real life experience has made it painfully clear that Nevada needs to do a lot better. Other states are not her concern.

“Our system is broken. There’s no doubt about that,” she added. “That’s why for several months I’ve been talking about overhauling the state’s financial structure.”

Even in Republican strongholds such as Elko, she said, people agree with her general assessment.

“Everywhere I go — Las Vegas, Reno, Fallon, Carson City — people are overwhelmingly positive and receptive to new ideas,” she said. “And they’re bringing new ideas.”

Hobbs, who co-authored the report with another of the Las Vegas Valley’s most well-respected analysts, Jeremy Aguero, doesn’t disagree with Buckley. A broader tax base might have done much to offset the current crisis, Hobbs said, because the state relied so heavily on sales tax revenue from construction, real property transfers and gaming.

“What happened is, we’re dependent on sectors of the economy that aren’t as stable as they once were. For 20 years, it worked great. Now it’s in the tank,” Hobbs said.

“People will make out of a report what they like,” said Hobbs, a former Clark County financial director turned president of his own fiscal consulting firm. His report for the chamber was by no means the first time he looked at the state’s tax system. In 2002, he also was chairman of Gov. Kenny Guinn’s tax policy task force.

At roughly 1,000 pages, the task force’s report was an exhaustive look at every nook and cranny of state budgeting. The 23-page chamber report, Hobbs said, is more of a primer than something from which policy decisions should be based.

Aguero said their report lays down “a framework for discussion ... that clarifies some things that are true, some things that are myth.”

The study did not, he added, say the state has one of the most stable tax systems in the country.

“Maybe if you look at it from just a per-capita basis, but the report included much more information than just that and I would challenge anyone to read it all then come away with that conclusion,” Aguero said.

The report is one of several done by Aguero and Hobbs for the chamber. Others included a report about how the salaries of public employees were higher compared with their counterparts in the private sector. That same report, however, also noted that Nevada has fewer public employees per capita than any state in the country.

The latest report acknowledges that Nevada is “heavily” dependent on retail sales and gaming taxes.

“This system has generally worked well for Nevada in most years,” it says. It later cautions: “Past performance should not lead to unfounded confidence in future performance, particularly when one considers the augmentations made by the state Legislature in the early 1990s and again in 2003.”

The foundation of that 2003 “augmentation,” a more than $800 million tax increase, was the comprehensive study completed by Hobbs’ task force.

The chamber agrees that “now is a good time to analyze our state budgeting process to see if it can be improved,” wrote Hugh Anderson, chairman of the chamber’s government affairs committee. And, he noted, the state should “consider establishing a budget stabilization fund specifically dedicated to K-12 education. By setting aside money in good years specifically for education, we protect our schools from having to endure draconian budget cuts during lean times, such as we are facing today.”

But neither Buckley nor Horsford seems comfortable enough with how things are going to leave next year’s legislative session without more substantial changes in the way the state manages its money, and their party is in the majority in both houses of the Legislature.

“With the latest fiscal numbers, there have been estimates with our shortage of revenue that we’d have to cut one-third of the money to education, safety, and health and human services,” Buckley said. “So there are obviously things that need improving.”

And the chamber’s argument, that government and business are tied together, so of course government suffers when business suffers and that’s just the way it is — that doesn’t work, Buckley said.

“That is always going to be the case,” she added. “But that doesn’t mean you can’t create an end to the boom-and-bust cycle that has you funding needed services during good times and gutting them in bad times.”

After reading the report’s summary, Horsford doesn’t think it makes a case to believe that the entire tax system is stable. And he zeroed in on another topic the chamber highlighted: the question of whether local government revenue is more stable than state revenue.

“In Nevada, there is a common belief that local governments have an advantage over the state in terms of revenue stability because local government is more dependent upon property taxes, while the state relies more on sales and gaming taxes,” the chamber noted.

“Revenue sources are an important consideration,” the report says in summary. “However, the idea that simply trading sales tax for property tax ... will somehow improve the state’s lot lacks foundation.”

Local governments seem to do better, the report adds, because they approach budgeting more conservatively and they have “a superior ability to adjust to actual revenue performance.”

Horsford contends that local governments’ money, routed through the state, remains an important consideration “because the biggest difference is the amount of money being distributed to local government. When you take out what gets redistributed to the local government, the state revenue source is based 62 percent on sales and gaming. So to allege that this is a very stable source is not taking everything into account.”

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