Commerce Tax: The real facts

Editor’s note: Assistant Controller Geoffrey Lawrence co-wrote this column.

Rob Hooper of the Northern Nevada Development Authority recently penned an apology for the commerce tax passed last month by Nevada’s legislature and signed by Gov. Brian Sandoval. NNDA exists to promote investment in Nevada, so he tried to put the best face possible on this abomination.

However, Nevadans deserve the unvarnished facts about this particularly pernicious tax. So we’ll respond to his key points.

Claim: “The margins tax was a bad piece of legislation because it taxes all companies the same” but the commerce tax creates needed flexibility.

Response: Hooper seems worried that people will see the important similarities between the commerce tax and the awful margins tax proposal voters defeated last fall 4-to-1. While the two measures differ, they are the same in their essence because both are assessed on the gross receipts of a business, not on net income. So, even firms that are losing money will have to pay the tax, and some companies operating barely in the black will be pushed into the red by this tax.

The Tax Foundation, which has conducted research and public education since 1937 to promote economic growth and opportunity, calls gross receipts taxes (GRTs) “distortive and destructive” because of their many flaws.

Hooper claims the commerce tax’s unequal rates applied to 26 different Nevada business sectors constitute a virtue, but they are instead its most cynical and perverse feature. They take the margins tax idea to a new low because the primary beneficiaries of this approach are the politicians, lobbyists and influence-peddlers who wrote the new law.

With it in place, every industry must throw gobs of money at these insiders in every legislative session or become the target of their efforts to increase various industries’ tax rates. By dividing business into 26 categories and setting the stage for the insiders to prey on each sector, the tax-and-spend crowd has perfected the divide-and-conquer strategy.

The politicians and wheeler-dealers calibrated the commerce tax to yield modest revenues — 1 percent of Nevada’s general fund budget — in order to make it seem innocuous and get it passed. But their goal, as reflected in previous GRT proposals and Sandoval’s first proposal this year, is to increase the total tax ten-fold or more. Hence, rates will have to go up proportionately, and so will the taxes paid by Nevada businesses.

With different rates for each sector, the insiders can punish their enemies while rewarding their friends and those who buy them off. And in order to multiply its revenues ten-fold, they’ll have to mete out a lot of punishment. This is the answer to Hooper’s claim that the commerce tax burden is really low. Of course it is, because that was the way to get the camel’s nose under the tent so that the two massive humps could eventually follow.

Claim: The commerce tax rates are low, so “the idea that a company would have to lay off employees ... only comes from people who have not done the math.”

Response: Businesses can’t raise prices without losing some customers and sales, so even small new taxes cause a proportional decrease in their demand for labor. Either some employees of marginal value will be laid off or wages will fall, or both. As the tax burden grows, this damage will grow commensurately.

So if the numbers of lost jobs and depressed wages don’t grab headlines immediately, they will soon enough.

Claim: “The new commerce tax will not seriously impact any business currently in Nevada” and will actually improve the climate through more spending on education.

Response: We’ve already completely refuted the first part of this claim. Education? True, the new budget increases hugely the monies being thrown at teacher unions. However, even before the commerce tax, Nevada state spending on K-12 had grown faster than every other budget item except health and human services.

Nevada already tripled per-pupil spending on an inflation-adjusted basis over the past 50 years. We’ve gotten little or no improvement for that money, but middle management at school districts has grown to ridiculous proportions. And there remain many low-cost or no-cost ways to improve our schools.

Those who say the commerce tax is about improving education needs some schooling themselves.

Ron Knecht is Nevada’s elected controller and Geoffrey Lawrence is assistant controller.