Nevada’s tax system, which has neither individual nor corporate income taxes, has brought the state significant increases in population, employment, and economic growth. A new proposal to impose the largest tax increase in Nevada history would put the state’s future economic growth at risk.
In his proposed 2015 state budget, Nevada Gov. Brian Sandoval (R) included more than a half-dozen new or increased taxes. According to the state’s nonpartisan Legislative Counsel Bureau, Sandoval’s proposed tax hikes exceed $1.3 billion and will increase the state’s budget from $6.6 billion to $7.3 billion.
The tax proposal has two main components. First, it makes several temporary tax hikes permanent, including increases to payroll, sales, and business license taxes. Second, it would increase the cigarette tax from 80 cents to $1.20 per pack, impose a gross revenues tax on slot machine operators, increase the mining industry payroll tax from 1.17 percent to 2 percent, and create a business license tax on gross revenue, which is better known as a margins tax.
Although many of the details about the new margins tax are not yet available, its design is similar to a 2014 proposal that would have implemented a 2 percent margins tax on a business’s gross revenue. Sandoval opposed the 2014 plan, which was rejected by voters in November by a 4-to-1 margin. The 2014 proposal, called the Education Initiative, would have also imposed a 2 percent tax on businesses that gross more than $1 million a year after deductions for payroll and cost of goods.
The new tax collections would cause a massive increase in spending. According to the Nevada Policy Research Institute, spending would increase by $1.8 billion above current levels. In addition to the $1.3 billion in new taxes, the state government would transfer a total of nearly $500 million from existing tax sources into the general fund and the Distributive School Account.
Under Sandoval’s proposal, the license fee, which is currently set at $200, could reach as high as $4.2 million. Like most gross receipts taxes, this proposal would be poor tax policy for several reasons. First, because the tax is imposed on total revenue and not profits alone, struggling businesses that are not making a profit are forced to pay it. Second, the tax would generate new money for education without fixing the problems of waste and mismanagement currently plaguing the state’s schools.
The primary stated goal of Sandoval’s tax proposal is to improve education funding, but Nevada has already shown higher spending does not improve student achievement. Despite spending significantly more on education per student than neighbors Utah and Arizona, Nevada has lower graduation rates and test scores than both those states, according to the Nevada Policy Research Institute. The problem is not funding; the problem is wasteful, unnecessary spending and the lack of serious school choice options.
The margins tax would complicate Nevada’s tax code while discouraging new investment. The Texas margins tax has restrained the state’s economic growth and fallen well short of revenue estimates, raising only $4.45 billion in 2008, far short of the expected $5.9 billion per year. Nevada should not replicate Texas’s failed tax policy but should instead focus on education reform and a tax system that attracts 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.”
Sandoval’s Tax Hike Higher than Reported
http://www.npri.org/issues/publication/sandovals-tax-hike-higher-than-reported
The Nevada Policy Research Institute argues the tax increases proposed by Gov. Brian Sandoval (R) are even higher than first reported: “That’s what a spreadsheet prepared by the state’s nonpartisan Legislative Counsel Bureau and given to lawmakers shows. In total, finds the LCB, the tax package sought by Sandoval exceeds $1.3 billion.”
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.
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.
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
The Tax Foundation finds the Texas margins tax has collected far less in revenue than expected, caused significant confusion and compliance costs, resulted in significant litigation and controversy over “cost of goods sold” definitions, and created 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.
The Myth at the Heart of the Margin-Tax Debate
http://www.npri.org/issues/publication/the-myth-at-the-heart-of-the-margin-tax-debate
Victor Joecks of the Nevada Policy Research Institute questions the claims made by margins-tax supporters that the state needs more funding to improve education outcomes. Joecks notes Nevada has tried for decades to increase student achievement by spending more, increasing its current expenditures on public elementary and secondary education from $87.27 million in the 1969–70 school year to a staggering $3.68 billion in the 2010–11 school year. “Even after adjusting for inflation and an increasing number of students, Nevada’s inflation-adjusted per-pupil spending has nearly tripled in the last 50 years. During that time, student achievement has declined, and Nevada’s graduation rate sank to last in the nation.”
The Fiscal and Economic Impact of a Margin Tax on Nevada
http://heartland.org/policy-documents/fiscal-and-economic-impact-margin-tax-nevada
Commissioned by the Nevada Policy Research Institute, the Beacon Hill Institute at Suffolk University developed a Nevada State Tax Analysis Modeling Program (NV-STAMP) identifying exactly how tax law changes can be expected to alter economic actors’ decision making. They found a margins tax would lower private-sector employment by 3,610 full-time equivalent positions; lower total employment by 1,640 full-time equivalent positions; reduce real disposable income by $240 million annually; and decrease investment by $7.1 million per year.
Nevada Considering Problematic ‘Margin Tax’
http://taxfoundation.org/blog/nevada-considering-problematic-margin-tax-
Joseph Henchman of the Tax Foundation discusses the proposed Nevada margins tax and uses the Texas version 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 Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
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 subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
