Monday, October 28, 2002
Copyright © Las Vegas Review-Journal

GROSS REVENUE TAX: Task force budget plan taking shape

Concerns about equity of cornerstone could hinder proposal in Legislature

CARSON CITY -- Growing conditions were perfect this summer at Joe's Apple Farm in Winnemucca. The farm sold $500,000 worth of red and yellow Delicious apples and earned a nifty $100,000 profit.

The rains didn't fall at Sarah's Apple Farm in Battle Mountain. She sold $500,000 worth of Granny Smith and Fuji apples, but made nothing after spending $100,000 on irrigating her orchard and paying other expenses.

But under a proposed state gross revenue tax, each of these two fictional farms would pay the same tax. At the suggested tax rate of a quarter of 1 percent, each grower would pay $1,250 in gross revenue taxes.

The 0.25 percent gross revenue or receipts tax has become the cornerstone of the series of taxes that the Governor's Task Force on Tax Policy will recommend to solve state budget problems throughout the next decade.

Debate and final action on the tax proposals will come at next year's Legislature. A two-thirds affirmative vote is required in both the state Senate and Assembly to pass any tax.

Gov. Kenny Guinn readily agrees that the gross revenue tax may be unfair because companies pay the same tax rate, regardless of whether they are profitable. The tax would be collected on all income earned by companies, even on food sold in grocery stores. It also would be tacked onto the 6.25 percent gross gaming tax and collected on nongaming revenue earned by hotel-casinos.

"There is no good tax," Guinn said. "There is no fair tax."

The governor pointed out that for years less profitable casinos have complained about the gross gaming tax. Except for the smallest gaming establishments, all casinos pay the 6.25 gaming tax, regardless of their profitability.

Guinn said he is looking favorably at all the tax proposals being advanced by the task force, but adds he is "not endorsing anything yet." Final recommendations could come at the task force's meeting on Nov. 6, the day after the general election.

But Senate Taxation Chairman Mike McGinness, R-Fallon, doubts the gross revenue tax will secure a two-thirds majority in the Legislature.

"I wouldn't put my money on that one," McGinness said. "I would be more apt to vote for a fair tax than one that would hit a lot of people unfairly."

Although similar to a sales tax, the gross revenue tax is one that is paid directly by the business on all of its income. The tax is hidden in the purchase price of the product.

No one disagrees, though, that consumers ultimately would end up paying for this tax in the form of higher prices.

Although the tax may appear inequitable, Task Force member Mike Sloan said employees of companies losing money also have children attending schools at state expense. If their companies do not pay taxes, then other companies paying taxes are subsidizing their children's education.

Sloan has been the task force's biggest proponent of the gross revenue tax. He repeatedly has called for national companies like Wal-Mart and Bank of America to start paying business taxes in Nevada. These companies only pay the $100-per-year, per employee head tax. In 43 states companies also pay business income taxes, including rates as high as 10 percent in California.

"The national companies are already collecting the taxes, but they are just not remitting them to the state," said Sloan, a vice president of the Mandalay Resorts Group. "I pay the same price (for coffee) at Starbuck's in Del Mar (Calif.) that I do in Las Vegas. Prices are not lower in Las Vegas than in Seattle because we don't have business taxes."

To prove his point, he asked friends to compare prices for the same prescription purchased at Walgreens pharmacies in various cities. Prices in Los Angeles, Chicago and Salt Lake City were the same. The prescription cost more in Las Vegas.

"We paid higher for the prescription here than in three cities with state income taxes," Sloan said. "I think they just do it to us because they think they can get away with it."

The task force already has given tentative approval to nearly $500 million a year in tax increases, including increases in liquor, cigarette, property and entertainment taxes. Members want to raise about $250 million from a gross revenue tax patterned after taxes in Washington and four other states.

Since 1935, the state of Washington has had a gross revenue tax, called the state business and occupation tax. The tax brings Washington $1.8 billion a year. Rates vary widely, from 0.47 percent on food to 1.5 percent on lawyer and accountant fees and real estate commissions.

Mike Gowrylow, a spokesman for the Washington Department of Revenue, said the tax is not popular with business for the same reasons businesses in Nevada don't like it.

"It taxes you regardless of whether you are profitable or not," he said. "But it is becoming popular with taxing authorities. New Jersey was looking at it."

Task force plans call for exempting real estate sales from the tax. The first $350,000 in revenue earned by all companies in the state also would be exempt.

Task Force Chairman Guy Hobbs said that exemption would free 60 percent of the companies in Nevada from paying the gross revenue tax. They still would be required to pay the employee head tax.

Hobbs favors the new tax because it would be easier for the Department of Taxation to collect than other proposed taxes, and also because the first-time businesses now escaping taxes would start paying into the state.

He also figures the gross revenue tax is more stable than a sales or business profits tax. The task force found Nevada companies received about $110 billion in total income during 2001 and that figure has been rising through the years.

In selecting the gross revenue tax, the task force rejected the proposal by state Sen. Joe Neal, the Democratic candidate for governor, to increase the gaming tax by 4 percentage points and an often-bandied around plan to levy taxes on untaxed services such as lawn and pool services, dry cleaning and auto repairs.

The task force said the job of selecting what services to tax was too daunting and suggested the Legislature assign another committee to look at it after next year's Legislature.

Hobbs said the gross receipts tax only looks inequitable because "you are comparing it against nothing," but that members found it looks quite favorable compared with net profits, payroll and other taxes.

He pointed out that some of the same companies now howling about the gross revenue tax were complaining two years ago when the Nevada State Education Association sought a 4 percent net profits tax.

His own company could escape taxation completely if Nevada adopted a net profits tax, according to Hobbs, but like every other company would pay the 0.25 percent tax on all of its income if the Legislature approves the gross revenue tax.

He is a partner in Hobbs, Ong & Associates, a government and financial consulting company that can adjust the salaries it pays employees and end each year with little or no profit.

"The ability to manipulate your taxes is great with net profits," Hobbs said. "I've talked with accountants. They know better than anybody else how to reduce your taxes."

Carole Vilardo, president of the Nevada Taxpayers Association, said her organization opposes the gross revenue tax.

"We don't think it is a tax that is reflective of the types of businesses we have in Nevada," she said. "Washington state has heavy manufacturing and well established substantial businesses. Nevada is the exact opposite. We are an entrepreneurial startup state."

Retail Association of Nevada Executive Director Mary Lau said her organization also opposes the gross revenue tax. The association includes general merchandise and convenience stores, drug stores and supermarkets.

Lau said the standard profit in the grocery business is 1.8 percent, far less than most other businesses.

"You cannot apply a 0.25 percent to all businesses and be fair," she said. "This thing is fraught with problems."

Like McGinness, both Lau and Vilardo predicted it will be tough for Guinn to win legislative support for a gross revenue tax. They said the task force should have been looking at taxing discretionary services.

"Tax janitorial services," Lau suggested. "That is discretionary spending."

Task force member Ken Lange said members postponed acting on service taxes in part because "they were less politically palatable" than other taxes.

These taxes tend to fall on individuals rather than businesses, he added. One of the task force's directives was to come up with broad-based taxes that would be spread on all businesses.

Lange, the executive director of the Nevada State Education Association, said businesses complain year after year about tax proposals.

"It doesn't take a rocket scientist to see we have a serious problem with the budget in this state," he said. "This is clearly a time for leadership."