Policy Documents

Research & Commentary: Nevada Margins Tax

December 27, 2013

Nevada’s tax system, which has neither individual nor corporate income taxes, is well-designed and has allowed the state to enjoy significant increases in population, employment, and economic growth over the past few decades.

A new proposal on the 2014 ballot could undo much of this progress by creating the state’s first business tax. The proposal, called the Education Initiative, would impose a new 2 percent tax on businesses that gross more than $1 million a year after deductions for payroll and cost of goods. This tax is modeled after Texas’s margins tax and is charged to businesses based on their revenue, not profits. This tax, like most taxes that follow a gross receipts model, adds layers of complexity to the tax code. 

Nevada’s proposed margins tax would be poor tax policy for several reasons. First, because the tax is imposed on total revenue and not just profits, even struggling businesses that are not making a profit are forced to pay the tax. Although the proposal would soften the potential blow to small businesses by exempting companies with revenue under $1 million, this applies only to the smallest businesses; even small- to medium-sized businesses frequently generate revenues above this limit. 

Second, the tax would generate new money for education without fixing the problems of waste and mismanagement currently plaguing the school system. Supporters of the new tax estimate it would bring in $800 million a year in additional funding for K-12 education. The proposal is supported by the Nevada State Educators Association, the teachers union, which seeks a dramatic increase in school funding.

Nevada has already proven higher spending does not bring improvements in student achievement. Despite spending significantly more on education per student than Utah and Arizona do, Nevada has lower graduation rates and test scores than both those states, according to the Nevada Policy Research Institute. The problem is not funding; it is poor planning and wasteful, unnecessary spending.

The Texas margins tax—the model for Nevada’s—has restrained the state’s economic growth and fallen well short of revenue estimates, leading Texas policymakers to consider repealing it. According to the Tax Foundation, the tax raised just $4.45 billion in 2008, far short of the $5.9 billion per year that was expected. 

Imposing the new tax would complicate Nevada’s tax code while discouraging new investment. Nevada should not replicate Texas’s failed tax policy but instead focus on education reform and a tax policy that helps attract entrepreneurs and workers. 

The following documents examine Nevada’s proposed margins tax and the problems such a tax creates.

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy 
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Texas’s Margins Tax: Principles for Reform
http://heartland.org/policy-documents/texass-margins-tax-principles-reform
Texas’s franchise tax—better known as the “margins tax”—does not work as advertised. The tax has not achieved any of the goals its creators set out for it. This paper describes how the margins tax works, outlines the promises made at the time of its creation, describes how those promises were broken, and provides three guiding principles for policymakers. 

Nevada Lawmakers Mull ‘Margins Tax’
http://news.heartland.org/newspaper-article/2011/05/27/nevada-lawmakers-mull-%E2%80%98margins-tax%E2%80%99
This article from the Heartlander digital magazine describes an interview by the Nevada Policy Research Institute with Will Newton, executive director of the Texas office of the National Federation of Independent Business, regarding Texas business owners’ experiences with the state’s margins tax. 

Nevada May Consider New Business Taxes
http://heartland.org/policy-documents/nevada-may-consider-new-business-taxes
Joseph Henchman of the Tax Foundation discusses how and why Nevada is considering creating new business taxes: “Some of these ideas for new or expanded taxes have focused on business, including a corporate income tax, a gross receipts tax similar to Washington’s or Ohio’s, or a ‘margin’ tax similar to Texas’s.”

The Margins Tax and You: Unions’ Tax Initiative would Harm Many Nevadans
http://www.npri.org/publications/the-margins-tax-and-you
Geoffrey Lawrence, deputy policy director at the Nevada Policy Research Institute, outlines several major problems with the margins tax and how it affects average taxpayers. 

Nevada Considering Problematic ‘Margin Tax’
http://taxfoundation.org/blog/nevada-considering-problematic-margin-tax-0
Joseph Henchman of the Tax Foundation discusses the Nevada margins tax and uses the Texas margins tax to explain why the new tax is unlikely to work out well for Nevada. 

Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes. 

Texas Margin Tax Experiment Failing Due to Collection Shortfalls, Perceived Unfairness for Taxing Unprofitable and Small Businesses, and Confusing Rules
http://taxfoundation.org/article/texas-margin-tax-experiment-failing-due-collection-shortfalls-perceived-unfairness-taxing
This article from the Tax Foundation examines the Texas margin tax and finds it has collected far less in revenue than expected, causing significant confusion and compliance costs, resulting in significant litigation and controversy over “cost of goods sold” definitions, creating calls for substantial overhaul and even repeal. The article concludes the Texas margins tax should not be used as a model for tax reform in any other state. 

Nevada Margins Tax for Education Not Likely to Raise as Much as Teachers Union Calculates
http://watchdogwire.com/nevada/2013/11/08/nevada-margins-tax-for-education-would-not-raise-as-much-as-teachers-calculate/
Thomas Mitchell of WatchdogWire analyzes the estimate of the Nevada State Education Association teachers union of the revenue that would be created by the proposed 2 percent margins tax on businesses. The union says the tax would bring in $800 million a year in additional revenue, but business community leaders say that number is a pipedream.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Finance, Insurance, and Real Estate News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.