Nevada’s Legislature will soon make its final decision on Gov. Brian Sandoval’s $7.4 billion general fund budget. Our legislators have voted for most of what they want to spend. By the time you read this, we should know whether they are willing to vote for the taxes to pay for it.
Almost 40 percent of the proposed general fund is targeted toward K-12 education, as the state splits the cost with local governments and is the guarantor of any shortfalls. Roughly 30 percent of the general fund will go for social services, and 15 percent to help support higher education. The remaining 15 percent or so pays for everything else, including public safety, prisons, infrastructure, elected officials and the staff of state agencies. The general fund doesn’t include federal money supporting Medicaid and the highway fund that uses the gas tax to pay for road construction.
Only two other states have smaller general funds as a share of Gross State Product (GSP), and state general funds nationwide average more than 4 percent of GSP. If it passes, Nevada’s new general fund is going rise to an estimated 2.5 percent of GSP, not enough to affect our ranking as 48th among states, and significantly lower than it was 10, 25 or even 35 years ago.
Ten years ago, for example, Gov. Kenny Guinn approved a budget of $5.8 billion for the 2005-2007 biennium. In real per-capita terms — that is, adjusting for population growth and inflation over the last decade — that budget would be $8.8 billion now.
Eight years ago, Gov. Jim Gibbons approved a budget of $7.4 billion. In real per-capita terms, his budget would be $9.8 billion today. Some of that budget was unspent, however, because the Great Recession intervened.
Still, Sandoval’s general fund budget is $1 billion more than the one he signed two years ago, and only half of that comes from inflation and population growth. To pay for the remaining real per-capita increase, he has proposed new taxes on business the estimates are going to provide half a billion dollars to the biennial budget.
There are bookshelves full of studies telling us we need to broaden our tax base. Our state’s current tax system relies primarily on sales and use taxes, which have been falling as a share of our economy due to untaxed internet sales and the rising share of untaxed services, and on the gaming tax, which has been declining as gaming has spread internationally. An insurance premium tax and Guinn’s Modified Business Tax (MBT) also provide some funds, though not enough to make up for the decline in the first two.
With a few exceptions, state and local governments tend to rely on taxes that are regressive in practice. In Nevada, upper-income households are estimated to pay half the effective rate paid by lower-income households. Most states try to offset this a bit with state income taxes, but not Nevada.
Nevada is also one of only a few states without a business profits tax, and those few states have other business taxes. Sandoval’s current tax plan restructures his earlier proposal for a Business License Tax (BLT), and like any good sandwich it puts the meat between two slices of bread.
First, it aimed to increase the MBT, including the sunset taxes that were due to expire. For most industries, the MBT rate will increase from 1.17 percent to 1.475 percent of payroll. The exemption would also fall, so more of our small firms would have to pay it.
Second, the proposal aims to increase the $200 annual business license fee to $500 for corporations and $300 for other businesses. Roughly 330,000 firms currently pay this fee, and the state would seek better compliance from those who don’t. This tax increase hits smaller businesses more, but the increased cost could be offset somewhat if the state could do a better job of working with the cities and counties to make registering a business much less time-consuming and inconvenient. As it is, small business owners have to go from office to office, taking time away from actually running their firms.
But the bacon in the sandwich is a new “commerce” tax on gross receipts that would only apply to bigger firms with more than $3.5 million in revenue. Up to half this tax would count as a credit toward the MBT, easing the burden for labor-intensive firms. The rates still would vary by industry, so some firms might play games with how they define their businesses to get the lower rates for a related product. But the rates still would be much less than 1 percent of gross receipts, so the impact of these differences may not be significant.
While some of any business tax is passed on to customers, the rest still is going to be paid by those who own these firms so these new taxes are going to redistribute the burden somewhat. However, even including the existing MBT, these business revenues are still below relative to most other states, and still dwarfed by sales and gaming taxes.
No tax is perfect. Our goal should be any tax be as efficient as possible, so that it can be as lean as possible.
But we must also look at the value of what those tax revenues are spent on. These taxes shall mostly be spent on trying to improve our dismal K-12 rankings. There can and should be strong discussion over some of the Governor’s proposals for how to improve our children’s education, but we can still agree on the desired ends, because an improved education system is essential to the new Nevada we need to create.
Economists generally agree that taxes are less inefficient if you apply low rates to many things, rather than high rates to a few things. A tax base should be diversified and stable, so revenues don’t decline too much during recessions or lead to excessive spending during booms. Taxes should be fair and easy to collect, they should grow with the economy, and they should be spent carefully on things that have long-term benefit for the state and its people.
Even with these new taxes, Nevada still will be a low-tax state, and the general fund still will be one of the smallest in the nation. But if we want to start improving the education of most Nevadans, there are few alternatives left.
Elliott Parker is professor of economics at the University of Nevada, Reno.