Senate plans vote on Sandoval tax plan by end of March

The Nevada Senate held a three-hour hearing Thursday to comb through details and raise technical concerns about Gov. Brian Sandoval’s business license tax plan, which could be ready for a vote by the end of March.

The meeting came after a 10-hour hearing Wednesday that featured a presentation from Sandoval himself on the plan, which is projected to raise around $437 million over two years to help pay for K-12 education programs.

Senators asked whether the fee, which would rise from a flat $200 a year to $400 and up depending on a business’ type and revenue, would disproportionately affect small businesses. Taxation officials noted that about 180,000 of Nevada’s estimated 330,000 business entities are “microbusinesses,” many of which do not have employees.

The Nevada Registered Agent Association commissioned a study estimating that tens of thousands of business entities with weaker connections to Nevada could flee to states with lower fees. But economist Jeremy Aguero, who explained Sandoval’s plan to lawmakers, said the assumptions behind that study seemed aggressive.

Sandoval and others have said businesses have other reasons for choosing to incorporate in Nevada, such as the legal climate, that went beyond the sheer cost.

Lawmakers raised questions about how large, complex businesses might determine which of the 30 industry categories laid out in the fee would fit them. The law sets a different tax rate for each category, and businesses fall into different tax brackets within those categories depending on their revenue.

They also questioned whether businesses should be able to pay their fee annually, rather than in quarterly installments laid out in the bill. Senators said the quarterly filing deadlines could raise accounting costs for small businesses.

Senate Majority Leader Michael Roberson commended senators for their questions, saying it was a healthy part of the legislative process.

The bill is on pace for a vote in the next two weeks, he said.

IT CAME FROM TEXAS, MOSTLY

Nevada’s current business license costs a flat $200 a year. Sandoval’s proposal would double the base rate to $400 and create a tiered tax system based on industry and revenue.

Budget maven Jeremy Aguero, an economist with Applied Analysis who explained the proposal to lawmakers, said the fee is largely based on the Texas Franchise Tax but cherry-picks elements from other states.

He said the different tax rates set for 30 business categories are based on Texas’ calculations of the average profit margin for the industries. Businesses would move into higher tax brackets within their industry category as they grow.

Only business conducted in Nevada would be taxed; products and services that are exported out of state are exempt. Texas has struggled to define what is taxable “Texas revenue,” so Nevada’s fee borrows a revenue definition from Ohio’s tax code, which Aguero said is better.

“The process has been thought through,” Aguero said Wednesday. “The analytics are sound. The governor’s tax proposal is elegant in its solution.”

IT BEAT OTHER CONTENDERS

State taxation officials said they arrived at the business license fee through a process of elimination, and found it to be the broadest, fairest and simplest option available.

They rejected a gross receipts tax, which applies a uniform tax rate to a business’s gross income or “top line,” because it didn’t differentiate between companies with high and low profit margins and would lead to “pyramiding” — when a product is taxed multiple times before reaching consumers.

They rejected a sales tax on services, saying it would take a year to implement and would target consumers rather than businesses.

They turned down a corporate income tax, which would be based on a business’s net income or “bottom line.” They say that kind of tax fluctuates wildly because profit margins swing from year to year and firms are often unprofitable. It would also require creating a “mini-IRS” and would take more than a year to implement, according to the taxation department.

A plan to raise the rate of the existing modified business tax, which is based on payroll, was scrapped. Only about 4 percent of businesses pay it, and it disproportionately affects labor-intensive companies while favoring capital-intensive ones.

IT DIFFERS FROM FAILED MARGINS TAX

Critics call the license fee a reincarnation of the margins tax, which was panned by the business community and lost by a 4-1 margin in the November election.

Aguero contends that criticism “couldn’t be further from the truth.”

The ballot measure proposed a 2 percent tax on business margins and would have generated $800 million a year, raising Nevada’s business tax rate to one of the highest in the country, he said. Lower rates in Sandoval’s plan would yield about $250 million yearly.

He said the ballot question removed exemptions that were written into the Texas Franchise Tax.

“It made that alternative structurally unsound, which was the basis of its defeat,” Aguero said.

IT’S A GAMBLE

Lawmakers asked how the governor’s staff can be sure the fee will bring in $437 million over the next two years. Aguero said that efforts to determine how much the fee would yield are estimates because Nevada doesn’t collect detailed information about each business’s gross revenue.

But Aguero said he’s confident in the estimate, and believes there’s only a 25 percent chance that revenue will fall short of the projection.