WHERE I STAND (GUEST COLUMN):

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.

Discussion: 15 comments so far…

By MysterMr

8/9/09 at 3:40 a.m.

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Rather than Guy Hobbs, perhaps it would have made more sense to have someone with greater decision making capacity when it comes to tax matters write this column... like maybe a orangutan with a dart board?

Guy Hobbs is the apparent Public Employee shill mouthpiece that headed up the sham 2003 "Governor's Tax Force". Among the task force's enlightening suggestions was the implementation of a "Gross Receipts Tax" - a tax that has destroyed business in every state in which its been implemented - and in the case of Washington, costing it its largest employer, Boeing.

I believe it was also the task force that laid out the "doom and gloom" prediction that we were going to have an $800 million dollar deficit. A warning the legislature responded to by raising $800 million in taxes. Subsequently, we had about an $800 million dollar surplus.

Rather than address the fact that the legislature has implemented so many taxes directly on tourists while increasing spending year after year after year. The Nevada State Government doesn't know how to do anything but cater to the unions and spend, spend, spend. "What downturn?" the police and firefighters are saying. Of course they're whining that their raises aren't going to be as big as last year - boo hoo.

Want to fix the Nevada economy? Make it business friendly again, repeal every tax increase back to 2001, bring back the cheap rooms, cheap booze, and cheap food. Create a binding contract with business that if they trust Nevada again, that we won't screw them as we did the last 3 sessions.

As it is now, without an emergency measure to exclude non-resident businesses from paying the $200 business license fee (aka "TAX"), Nevada hasn't even STARTED its recession yet. Get ready for a fun 24 months. Thousands of businessowners emailed and phoned the legislature to tell them that if they doubled the business license fee, they would take their business registrations, and their business tourism (and spending) elsewhere. The legislature responded with a resounding "GO AWAY - WE DON'T NEED YOU!"

And... my apologies to orangutans. I understand they are actually quite intelligent.
By Political_Pragmatist

8/9/09 at 7:47 a.m.

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Oh yes, cut taxes. When that doesn't work, and it won't, cut more taxes.

Want to make a climate more business friendly? Increase the number of educated people to work in those businesses instead of constantly cutting education.

We're sick of libertarian policies which have kept Nevada at the bottom of every statistical measure. Dinosaurs aren't all extinct, yet.

Obviously they only thing they know is how to cut taxes, even if it starves the state to the point of anorexia.
By texexnv

8/9/09 at 8:50 a.m.

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Nevada needs a choice for Governor - not the same old parties that keep taking us deeper in the hole. http://texexforgovernor.blogspot.com/
By Elect_Lon_West_Assembly_18

8/10/09 at 5:58 a.m.

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Mr. Hobbs has made a tradition of telling Nevada what it needs to do in order to fix our struggling state. Nevada's legislators have made it a tradition to overlook the wise advice that has been given.

I was working in the Legislature during the 2003 session and became familiar with the recommendations that were made, and was extremely disappointed that much of the advice was not taken. Yes taxes were raised and the state had a surplus. That's not the issue. The issue is that we need to get away from our narrow tax structure depending on strictly gaming and trade.

We must completely go over Nevada's tax structure with a fine tooth comb and rebuild it from the ground up creating a strong foundation. If this is done properly and wisely the Legislature will not need too continually raise taxes on our citizens and business session after session.

We are ushering in a new dawn in the Legislature lets not start it out by reliving our past mistakes. It is time start anew with fresh leadership and fresh ideas.

"Action and reaction, ebb and flow, trial and error, change - this is the rhythm of living. Out of our over-confidence, fear; out of our fear, clearer vision, fresh hope. And out of hope, progress."(Bruce Barton)
By Patrick_R_Gibbons

8/10/09 at 12:19 p.m.

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First Nevada's total tax collection per capita ranked 26th in the nation before the meltdown. We also had one of the highest income levels and lowest poverty rates in the nation.

Second, "diversifying" the tax code in NEvada means increasing taxes on those industries we don't have many of. If you want to diversify the economy you DO NOT increase taxes on the companies you want to attract.

Third, states that diversify the tax code usually do not do it in a tax neutral way -- meaning its diversified for the sake of increasing taxes.

Fourth, having a diverse tax code does NOT guarantee tax stability. In fact the most stable states in the nation tend to be those with the least diverse tax code (those without personal and corporate income taxes).

Fifth, the corporate income tax is widely considered to be the most volatile and unpredictable of all tax sources. If you want tax stability, YOU DO NOT advocate a corporate income tax -- yet this is what our politicians advocate (Again they just want more money).

Sixth, you DO NOT complain about Nevada's 49th ranking on residential taxes collected per capita as a percentage of income, unless your goal is a personal income tax. This is, however, the exact statistic Barbara Buckley and others have used to try to create this perception that Nevada cannot adequately fund its government

Seventh, Nevada's government has grown faster than California's government over the last decade. Needless to say if you have a rapid rise there is a long way to fall. The government has NOT been fiscally prudent, has not saved money or slowed its own growth to a more unsustainable rate. So not surprisingly the fastest growth rate of government in the nation leads to the largest shortfall as a percentage of the budget in the nation. Instead of cutting back spending to a more rational and reasonable level our government increased taxes 21 percent to avoid making any real cuts.

Eighth what was "necessary" to "maintain" services amounted to a 17% increase in government spending between 07-09 and 09-11. That is a massive increase in spending our government assumed. As it turns out this appears to be more about maintaining the growth rate, rather than maintaining actual services

Finally, why does government have to get more expensive over time? Such dull witted thinking leads us to constantly raise taxes while expanding government programs which seem to serve fewer people per dollar and government worker. Government is simply inefficient and ineffective; why not look to the private sector to provide cheaper and better alternatives to fixing existing problems rather than creating massive and ever growing bureaucracies and public programs which are not held accountable to the people?
By Patrick_R_Gibbons

8/10/09 at 12:21 p.m.

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Oh and Nevada spends between $8 and $9 billion a year and that does not include local government spending.
By CarsonNewshound

8/10/09 at 3:15 p.m.

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Guy Hobbs is dead on. Anyone who disagrees is dead stupid. Too many Nevadans suffer from Libertarianitis. The something for nothing crowd who need to be shipped off to the south pole where the level of services reflect the tax rate they're willing to pay.
By NLV-Indep13

8/10/09 at 4:39 p.m.

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"sales tax accounts for roughly one-third of the state's general fund budget" -- okay, where does the rest come from?

Also, while an analysis of the state tax system is undoubtedly useful, where's the related analysis of state spending? Can't look at one without the other -- and the devil is always in the details.
By Patrick_R_Gibbons

8/10/09 at 4:48 p.m.

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Carson,

...except for the fact that people who agitate for more taxes don't address the points I (and others) have raised.

NLV - you ask a good question. There are property taxes, taxes on insurance premiums, there are duties like gas taxes, user fees and we have the payroll corporate tax and taxes on gross profits for gambling and net profits on mining.

What the "diverse" tax crowd want is a statewide corporate profit tax and or a personal income tax. We've got tons of different types of taxes, but somehow adding those two makes it "diverse"
By Patrick_R_Gibbons

8/10/09 at 4:48 p.m.

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Carson,

...except for the fact that people who agitate for more taxes don't address the points I (and others) have raised.

NLV - you ask a good question. There are property taxes, taxes on insurance premiums, there are duties like gas taxes, user fees and we have the payroll corporate tax and taxes on gross profits for gambling and net profits on mining.

What the "diverse" tax crowd want is a statewide corporate profit tax and or a personal income tax. We've got tons of different types of taxes, but somehow adding those two makes it "diverse"
By Patrick_R_Gibbons

8/10/09 at 4:48 p.m.

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Oh and the general fund accounts for only about HALF of all the spending the state government does.

Then you have to figure in county spending too!
By Patrick_R_Gibbons

8/10/09 at 4:52 p.m.

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Actually if you look here the general fund is less than half http://nevadaspending.com/OpenGov/ViewAc...

2008 total spending was $9.18 billion
General Fund appropriations was just $3.42 billion

So basically the people wanting a more "diverse tax code" look at less than half the government spending while looking at only the residential tax burden as a percentage of our relatively high income (compared to other states) as proof that we need more taxes.

SO basically people who want a tax increase don't want you to see that giant pink elephant in the room.
By Purgatory

8/11/09 at 9:25 a.m.

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...all Nevada needs to do is establish its own currency and mandate it as the legal tender for all business conducted in the state...then, when needed, just print enough money to cover expenses...all politicians will vote 'yea' on more spending...we will have everything for free...plus, we could have tax credits to purchase homes and cars and air conditioners...all health care costs could be covered by the state...we could pay parents to watch their own children instead of forcing them to work outside the home...we could have a little utopia in the Mojave...everyone would want to live here...we would attract the best and brightest people from neighboring states...we would all enjoy a substantially higher quality of life...it would be great...
By Harley

8/11/09 at 9:42 a.m.

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How can a civilization that embraces theft be considered advanced?

Taxation is theft, theft is criminal -- taxation is criminal.

Criminalize taxation.

Any system/entity funded by theft through taxation deserves to fail.

"We cannot solve today's problems with the same level of thinking which created them." --A. Einstein
By ReverendKscribe

8/13/09 at 5:20 p.m.

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Short falls of this magnitude teaches one thing to all. The government of Nevada is too big, too much special interest spending, too much of everything all in the name of social justice. If we ever recover it will take men and women of steel to say no more big government.

"Democracy is a form of government that cannot long survive, for as soon as the people learn that they have a voice in the fiscal policies of the government, they will move to vote for themselves all the money in the treasury, and bankrupt the nation."

-- Karl Marx
Quote is similar to Alexander Tytler, Scottish economist.

"When the people find they can vote themselves money, that will herald the end of the republic."

-- Benjamin Franklin