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Nevada’s fiscal structure in need of an overhaul
Sunday, April 11, 2010 | 2 a.m.
Nevada continues to face one of the most difficult fiscal situations of any state in the country, but we are not alone. According to the Center on Budget and Policy Priorities, the recession created budget gaps in most states. In addressing these gaps, 42 states cut spending while 33 increased taxes and other revenue. The American Recovery and Reinvestment Act also provided important funding that assisted states in closing about 33 percent of their gaps.
Nevada, however, fell into the deepest hole. From the end of 2007 through the middle of 2009, Nevada’s personal income declined by 6 percent, twice as much as in any other state. Over the same period, Nevada’s revenue declined by more than 12 percent, twice the national average decline for state and local government tax collections.
Our last legislative session balanced the budget with cuts in program spending, salary saving through furloughs, and temporary increases in taxes. The recent special session cut programs even more. While the American Recovery and Reinvestment Act prevented even more drastic expenditure cuts or tax increases, we will not likely see additional relief from the federal government going forward. Unless the Nevada economy recovers more quickly than most analysts anticipate, the Legislature will face an even more difficult task in balancing the next biennium’s budget than it faced during the last session.
Nevada’s biennial general fund budget is roughly $7 billion, which works out to about 2.5 percent of total state output, or a little more than $100 per person per month. Current estimates report a $3 billion hole, all things included, a huge portion of the total budget but a small portion of our overall economy.
Why are tax revenues declining so much more in Nevada than elsewhere, and can we expect them to ever recover? Our state depends heavily on gaming taxes, and related taxes on hotels and restaurants, because visitors pay a large share. Gaming in Nevada was once a profitable monopoly, but that monopoly is gone and these revenues have declined as a share of our economy for decades.
We also depend heavily on the sales tax. The boom in housing construction and the added money spent on furnishings for new houses covered the relative decline in gaming receipts. The Great Recession hurt these revenues disproportionately, but few people expect they will bounce back to former levels. Tax revenue lagged behind economic activity because activity shifted from taxed to nontaxed areas.
We no longer can continue to plug budget holes with quick fixes that do not address our longer-term problems. Instead, we need long-needed modifications in the existing tax structure that will provide a better revenue stream going forward. We could accomplish this with new taxes, such as personal or corporate income taxes, but a less dramatic approach would instead broaden the bases for existing taxes.
With its propensity to tax narrow parts of the economy, recent structural changes in Nevada’s economy mean that we no longer collect the revenue to maintain necessary state services. This unstable structure demands immediate attention.
This inherent problem means the Legislature revisits the revenue issue on a regular basis, tinkers with existing taxes, and adds new wrinkles. Nevertheless, several prior tax-funded studies commissioned by the Legislature yielded the same forgettable result. We know we need to change it, but legislators fear the political consequences of favoring “big government,” even though Nevada runs the smallest state general fund in the country, as a share of our economy, and even though Nevada successfully constrained the growth of the total general fund expenditure for decades to no more than population growth plus inflation.
We need serious consideration of several changes in tax structure. Here are three examples:
First, the explosion of Internet purchases has shifted transactions from those that yield sales tax revenue to those that do not, and has created a big hole in this revenue source for many states. Nevada and 22 other states already passed legislation to conform to the Streamlined Sale and Use Tax Agreement, a pact to simplify, standardize, and modernize sales tax collections to prevent a federal prohibition on Internet taxes. This needs to be implemented and expanded so we can better collect taxes on this rapidly growing share of our sales.
Second, consumption spending nationwide has shifted from goods to services over recent years, but the latter is largely exempt from the sales tax. The sales tax levy should fall equally on goods and services, and our tax structure should reflect the overall economy. Extending the sales tax to services, however, requires careful consideration of what constitutes final, rather than intermediate, transactions. Moreover, when considering this, we should also reconsider the existing exemptions to the sales tax to make sure they still make sense.
Third, the modified business tax collects revenue from wages and salaries. More broadly, taxing wages and salaries comprises a part of the value added by firms. Replacing this with a value-added tax on firms would expand the base to include nonwage and salary income, such as rent, interest and profit.
The economy changes as production and consumption patterns adjust to changes in technology, competition, consumer preferences and demographics. A well-designed tax system needs to adjust in concert with the changing economy.
Stephen M. Miller is professor and chair of the Department of Economics, College of Business at UNLV. Elliott Parker is professor and chair-elect of the Department of Economics, College of Business at UNR.
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Gentlemen;
You have plowed no new ground here. You have provided another rehash of what has been kicked around here and the other papers months ago.
Where are the numbers to support your arguments?
"The explosion of Internet purchases has shifted transactions from those that yield sales tax revenue to those that do not, and has created a big hole in this revenue source for many states."
How has this affected Nevada?
Consumption spending nationwide has shifted from goods to services over recent years, but the latter is largely exempt from the sales tax?
How has this affected Nevada?
Third, the modified business tax collects revenue from wages and salaries. More broadly, taxing wages and salaries comprises a part of the value added by firms. Replacing this with a value-added tax on firms would expand the base to include nonwage and salary income, such as rent, interest and profit.
How will this affect Nevada?
You represent yourselves as experts, show me the facts and data to support all of this. How will this affect revenues?
Wow....imagine that......two government employees pushing for more government revenue.
In there search for falsehoods, they choose to ignore some facts.
You would think that college professors would want to present a balanced and unemotional approach to presenting facts.
One fact is Nevada's economy grow at a much higher rate than all those other states for a long time.
The other fact is that because of that Nevada's government budget has grown a much higher rate than all those other states for a long time.
There are tons of other states that have the whole broad band of taxes. They are hurting just as bad or even worse than Nevada.
New York and Califorina probably have laid off more government employees and teachers on a percentage basis than Nevada.
If they were true in their thinking then they should offer a reduction in some taxes and an increase in new taxes but they are not.
They just want more freaking money government which in turn mean more money for them and their buddies.
So the bottom line in learning a lesson from this letter is this.
DEMOCRATS want to have a PERSONAL INCOME TAX.
If you want a personal income tax then vote for Democrats.
Otherwise, vote Republican.
Turrialba, this is a newspaper for general reading by average citizens, this is not the proper forum to drop every statistic and cite every source as is true with a journal publication. If they were to do that, it would become too long and people wouldn't be able to follow. Have you ever read an economics journal publication with the things you are suggesting? I would advise you to do so and then you'll understand why they kept it conversational in nature...
SgtRock, nowhere in their discourse was a personal income tax proposed so your statement is without merit (please also take note of how I used the pronoun "their"). I would also challenge your statement: "If you want a personal income tax, vote for Democrats. Otherwise, vote republican", and replace it with a more appropriate and logically supported statement:
If you want the same policies that have proven reckless, irresponsible and have damaged the growth of our state, then vote Republican. Otherwise, vote with intelligence.
I admire the professors for their attempt to bring light to the issues plaguing this state, and for providing valid and pragmatic possible solutions. However, I think we all know this issue won't be solved without strong leadership and support from our governor, which we are currently lacking...
I proposed that rhaffe take some reading courses.
They said, " Instead, we need long-needed modifications in the existing tax structure that will provide a better revenue stream going forward. We could accomplish this with new taxes, such as personal or corporate income taxes.."
And said this, "Third, the modified business tax collects revenue from wages and salaries. More broadly, taxing wages and salaries comprises a part of the value added by firms. Replacing this with a value-added tax on firms would expand the base to include nonwage and salary income, such as rent, interest and profit."
Dear Sgt. Rock,
The sentence you quote is out of context. The ellipsis you used covered up a "but" which showed that the column was making an alternative argument.
Second, a value-added tax is not an income tax, corporate or personal. While all taxes have distortionary effects on incentives, creating economic inefficiencies, a VAT has less than an income tax, and less than our current tax on a firm's payroll (the modified business tax). It also does not contain the progressivity conservatives hate, the idea that people with higher incomes should pay at a higher rate. However, it is not as transparent to the taxpayer as an income tax or a sales tax.
It is clear that our current tax structure cannot generate the revenue it once did. What sort of taxes would you advocate instead? Or do you simply oppose all taxes, no matter the type?
@Rhaffke:
I hardly think it is asking too much of these learned scholars to tell us how the $3 billion budget gap will be filled with the three solutions they propose. The numbers they use in the first few paragraphs were obtained from Center on Budget and Policy Priorities (and cited)
What happens after that get vague. What would it look like? Does the proposals sum to $3 billion or can we reasonably expect something less than that amount?
What are the distributional effects of the proposals among households and businesses.
I think the readers can handle this and this could be accomplished in the same space.
In 2005, University of Nevada, Reno, researchers estimated the state lost about $50 million in taxes it did not collect from sales over the Internet in 2003. It further estimated that lost revenue in 2008 "could easily exceed $96 million."
Source:
http://www.lasvegassun.com/news/2008/sep...
$100 million down, $2.9 billion to go.
Let's look at taxing services:
lets assume that gross state product is $100 billion.
http://www.statemaster.com/graph/eco_gdp...
Lets further assume that services comprise about 70% or $70,000,000,000. If a 6% tax were imposed on all services, then we could expect revenues of about $4.2 billion. If one-half of the value of taxes were assessed, we would have revenues of $2.1 billion.
Third, the modified business tax collects revenue from wages and salaries. More broadly, taxing wages and salaries comprises a part of the value added by firms. Replacing this with a value-added tax on firms would expand the base to include nonwage and salary income, such as rent, interest and profit.
Right now we need $800 million to close the budget hole or a little less than what was cut during the Special Session (assuming all internet sales taxes are collected and flow into the General Fund and one-have the value of the service economy is taxed as 6 percent).
Can this be obtained from modified business tax?
I leave this for the learned professors to explain.
@Rhaffke:
That wasn't so bad was it?
Actually, it was that bad--biennium GSP should be $200 Billion.
Internet Sales Receipts = $200 million
Services value of $140 Billion and tax 25% at 6% would equal about $2.1 Billion or $1.5 Billion per year.
This leaves about $750 million or $350 million each year for the modified business tax.
Total 1.5 percent GSP need to be taxed.
Sorry about the math.
"expand the base to include nonwage and salary income"
I think the government is still full of waste and spending money on stupid stuff.
Like, why all the diversity offices?
Mr. TeaTime you are absolutely right.
The say they want a stable tax (they really just more taxes...all this is pure BS).
So a tax based on income during a recession is stable?????
So a value-added tax on economic activity during a recession is stable??
Can they point to any state in the union that has stable tax revenue during a recession like this?
California has every tax under the sun so does New York. They are suffering and are actually laying off more government people on a percentage basis than Nevada.
They can't list even one state as an prime example of this heaven of a glorius stable tax plan.
They are full of BS. That is it in a nutshell.
The only states that are doing OK are states that produce exports in minerals like oil or gas.
We have our mining and they are trying to eat its revenue via taxes.
It is dumb argument and people will see right through it.
They should just say...heck...we want more money for the government.
Nobody likes taxes. Is the government trying to do too much? Yes, but as to the what depends on who you are talking to. Do you want to do with basic services? Police? Fire? Controls on prevention of crimes? If it effected you, you would be the first to scream. We need effective government that takes all people into consideration. Taxes should spread out across the board and effect all parties equally. This is not a republican or democrat issue, it is a Nevada issue.
Streamline Sales Tax or capturing the internet is not the only answer, but a part of it. A VAT tax is not the only answer, but a part of it. Reviewing expenditures is not the only answer, but a part of it. Those that provide services have gotten away with murder for years by not paying their fare share of the deal. They benefit from the infrastructure that has been paid for by others, but don't want to pay for it? Really? This commentary is a catalyst for discussion, as all commentaries are, so it has done it's job. People rule things out simply because they don't like it, can't comprehend it, or lack the ability to see the possible merits of it. We need a new Governor, better representation in the Legislature, and people that are willing to step up to the plate and do what needs to be done.
Pardon the umbrage, but one blogger above (Mr. Teatime) called Miller and Parker the worst economists in the state. Actually, if you look them up on RPEc, Miller is the top-ranked economist in the state, and Parker is ranked 7th in the state. Both are ranked in at least the top quarter of economists internationally.
If they are so great then how come they can point to one state as an example of stable tax system?
@EP:
You wouldn't happen to be one of the authors of this article would you?
@EP aka Dr. Parker
No need to answer. I know you are one of the authors.
http://www.lasvegassun.com/news/2010/mar...
SgtRock and Turrialba, while I could easily respond and point out your lack of logic yet again, I will refrain because I'm a firm believer that you can't reason with the unreasonable...
@Rhaffke:
LOL. Where is my logic lacking?
I guess we all agree since nobody offered a shiny example of this mythical stable tax system.
We agree that this "stable tax" talk is all BS and just a con to get more tax money for the state.
SgtRock:
I am afraid you are right. Higher taxes are in our future. The projected $3 billion deficit is too big to cover by spending cuts alone. The lawmakers are out of gimmicks. All the reserve accounts have been emptied into the general fund.
We may have touched bottom economically. I think we will start seeing a modest improvement in some of the gaming and sales tax numbers later this year. The tourists numbers will improve slowly, but the trend of visitors spending less and losing less in the casinos is likely to continue for a long time to come.
It will be years before construction recovers (the Valley is overbuilt--residential, commercial and hotels)and the tax revenue which follow these activities and jobs.
The problem is that while economic activity has fallen, revenues fell at a faster rate. The broader tax base discussed by the authors will probably involve a reduction in certain taxes and an increase or introduction of new taxes. Overall the sale tax rate may fall, but the sales tax will apply to more activities.
The overall tax burden will shift from tourists to residents. The mines are certainly one target. I think we will see some broader tax on services (haircuts are one service discussed.
The authors are correct in noting that a lot of spending on big ticket items such as cars and major appliances has fallen. I myself, while still working, have cut back and put off unnecessary purchases on large items and avoid the sales taxes associated with these purchases. Still I buy food at the same pace as before, but still pay no taxes. I think my situation is very common. Nevertheless the schools must be funded and public safety provided for.
To answer your question about the stable tax--the property tax was until recently the most stable source of revenue (revenues didn't rise dramatically in the good times, nor did they fall during recession). This is no longer true in Nevada with the housing bust. The authors touched a bit on this. So while the worst of the recession is behind us, the crisis of funding state and local government awaits us in 2011. The authors' solution is to tax more activities albeit at lower rates and try to create a bit more stability through diversification of revenue sources.
You are right, there is no perfect tax system with stable revenues.
If you all want to solve the state's financial problems and not live in poverty vote for Fred Conquest in the primary.
Plus, I have a couple of questions for all the anti-tax posse:
How much actual CASH money did you pay in taxes to the state of Nevada in 2009?
What was the percentage of the taxes you actually paid to the state of Nevada relative to your gross income?
I bet most of the complainers did not make enough money to pay much of anything.
But, I agree we need to keep state taxes low for INDIVIDUALS and SOLE PROPRIETOR BUSINESSES.
However, we need to make sure all 350,000 Nevada Corporations and LLC Companies PAY a small (4% is a fair number) percentage of their gross income for the priviledge of having their liability waived.
And then out of that 4% total we send 25% of that money back to the counties as a block grant based on a flat number plus population percentage. For example: each county gets a $1 million plus the rest is divided by percentage of the state population in that county.
One of the best ways to improve the economy is to lower the sales tax for 8% to 4% so individuals will have keep or spend (their choice) of their own money.
To help solve the housing problem, we need to lower the property tax on all single family residences to $600 plus 25 cents per square foot on all homes over 1,000 square feet. For example: A home owner would pay $725 on a 1,500 sq foot home.
Fred Conquest
Democratic Candidate for Governor
www.fredconquest.com