Studies have documented the failures of our tax system

Guy Hobbs

Sunday, Aug. 9, 2009 | 2 a.m.

In August, Brian Greenspun turns over his Where I Stand column to guest writers. Today’s columnist is Guy Hobbs, a fiscal analyst who is president of the consulting firm Hobbs, Ong & Associates.

Before this year’s session of the Nevada Legislature we all knew state lawmakers would face one of the most challenging sessions in Nevada’s history.

State revenue collections were experiencing dramatic declines, and corrective measures were being contemplated. Demands to fund education, transportation and other essential public services were increasing to, if nothing else, meet the pent-up demand caused by underfunding in prior sessions.

The numbers were staggering. At best, Nevada was looking at projected revenue for the next two years that was $2.4 billion less than what was considered necessary to fund services.

Even with reductions proposed by the governor, the budget was projected to be short by $1.6 billion. Dealing with budget gaps of this magnitude proved to be a daunting challenge, to say the least.

It is important to establish that this was not an epiphany on the eve of the legislative session. The state’s economy had been showing clear signs of weakness for many months before the session.

More troubling, however, is that clear warning signals about the built-in weaknesses in our state’s tax and revenue structure had been sounded well in advance of the problems materializing. It is clear that these warnings have fallen, and continue to fall, on deaf ears.

How evident were these warnings? Comprehensive and credible studies of Nevada’s tax and revenue system have been performed five times over the past 50 years; most recently in 2002.

Without exception, these studies had common themes. One of the most common findings was that Nevada’s system of taxation relies on very narrow areas of the economy. This was pointed out by the Zubrow report in 1960, the Lybrand report in 1966, the Price-Waterhouse report in 1988, the Assembly Bill 801 report in 1990, and, most recently, by the Governor’s Task Force report in 2003 (a study that I headed).

Let’s consider a case in point: our state’s application of sales tax.

This is an important example, as revenue from sales tax accounts for roughly one-third of the state’s general fund budget. Sales tax in Nevada is applied only to the retail sale of tangible personal property.

Items that are not tangible, such as services, are not taxed. Even among the tangible items traded in our economy, there are dozens of specific exemptions that further limit the application of the tax.

This is not to say that the exemptions from sales tax are necessarily a bad thing; many serve a greater public purpose than would otherwise be the case. However, the existence of these exemptions, coupled with those that exist for intangible items, leads to significant consequences.

Consider the fact that just 60 years ago goods made up 70 percent of our economic trade, and services made up 30 percent. Consider also that our economy today is nearly the inverse, with 60 percent of trade coming from services and 40 percent from goods.

This indicates a clear shift, over time, from a goods-oriented to a services-oriented economy. Has the application of the sales tax in Nevada over that period changed to account for the shift? No. In fact, decision-makers over that time have added countless exemptions to the reduced share of goods that could be taxed, and exacerbated the problem.

As troubling as the system’s failure to keep pace with shifts in the economy is the fact that the structure of the sales tax system, because of this oversight, relies heavily on very narrow and volatile areas of trade. For example, up to 20 percent of the sales tax base depends on a robust construction industry. Large shares are also concentrated in new car sales and tourism. How have the construction, car sales and tourism sectors of our economy been doing lately?

One would think that, with our recent experiences with economically challenged industries, we would have seen the light and would be moving to fix these glaring problems within our tax system.

Instead of fixing the problems — which each of the tax studies has noted — what did we do? It seems that, among other things, we thought it best to increase the sales tax rate while leaving the narrow base untouched. It also seems we thought it best to commission yet another study to help determine what may be wrong with the system.

It may be wise for the state to save the $250,000 it has appropriated for the latest study of the tax system and consider reading those that have been prepared in good faith. The results of the new study are contained in prior versions.