Saturday, January 22, 2005
Copyright © Las Vegas Review-Journal

Think tank says tax hike unneeded

Guinn, tax panel underestimated amount existing taxes would bring in, study concludes

CARSON CITY -- The Nevada Legislature was "misled" into approving a record tax increase two years ago when it could have balanced a more frugal budget while achieving a $22 million surplus, a conservative think tank concludes in a new study.

The Nevada Policy Research Institute maintains it warned legislators even before the state approved $833 million in new taxes that Gov. Kenny Guinn and the Governor's Task Force on Tax Policy were underestimating the amount of money existing taxes would bring to state government.

"Nevada's citizens, and to some extent Nevada legislators, were misled by faulty and unreliable methodology into supporting a set of unnecessary tax increases," according to the study.

"It isn't my position to argue with them," countered Guinn, who had not seen the study, on Friday. "But it is just not the truth."

Neither he nor the Governor's Task Force on Tax Policy made the tax projections used in preparing the 2003-05 budget, the governor said. Revenue projections used in the budget by law are made by the Economic Forum, a group of five private business leaders.

"They are independent from me," Guinn said.

He also argued that the formula for limiting budget spending proposed by the institute fails to take into account certain federal mandates.

The Legislative Counsel Bureau reported last week that there is a $312 million surplus going into the 2005 legislative session. Guinn wants to use $300 million of that on rebating car registration fees to citizens.

Study authors Robert Schmidt and Charles Barr said the new taxes would not have been needed if legislators had adopted a law approved in Colorado that limits budget increases to the combined rate of inflation and population growth.

Instead of sticking to a Colorado-style limit, they noted Guinn and the Legislature approved a $4.8 billion two-year budget that increased existing spending by 28 percent. That was two and a half times the combined rate of population growth and inflation, according to the authors.

Under Colorado law, excess tax receipts automatically are rebated to citizens. Without such a cap, Schmidt and Barr predicted "many policy-makers are likely to discover additional 'needs' that will eat up the entire surplus, soon requiring even higher taxes."

But Guinn said major parts of the Nevada state budget cannot be limited to the rate of increase in inflation and population.

As an example, he said the Medicaid program, which provides health care for the poor, disabled and elderly needs an additional $100 million over the next two years, far more than the rate of inflation and growth. Nevada has no choice but to accept federal requirements for the program, he added.

In addition, he said the cost of providing teachers and textbooks for additional students entering schools exceeds that rate.

He said the state must spend an extra $300 million over the next two years to provide education for another 35,000 public school students.

Schmidt did not return a call for comment. Former Assemblyman Ron Knecht, R-Carson City, did not receive a hearing in 2003 when he introduced a bill proposing a Colorado-style tax-limit plan.

Sen. Bob Coffin, D-Las Vegas, said no one was misled about anything, and conservative figures were used in estimating tax revenue because there remains a "legitimate concern" about a repeat of the the Sept. 11, 2001, terrorist attack.

As long as the Legislature meets every other year and approves two-year spending plans, Coffin said there will be mistakes in estimating tax and spending needs.

"We will either have overtaxing or overspending," said Coffin, who has not reviewed the study. "You are trying to see too far into the future."

The NPRI study, listed on the institute's Web site, www.npri.org, was completed before Guinn announced he wants to use most of the current surplus to refund $300 million in auto registration fees paid by residents in 2004.

Guinn spokesman Greg Bortolin maintained Colorado hardly is a model for Nevada to adopt.

He noted Nevada leads the nation in job growth and has one of the lowest unemployment rates at 3.7 percent. Colorado's latest unemployment rate was 5 percent.

He added Guinn wants the car registration rebates specifically because tax revenue has exceeded everyone's expectations. The governor wants to put other excess revenue in the state's rainy day fund to handle future emergencies, he added.

"There was no deliberate attempt by anyone to do anything but honestly project the Nevada budget numbers," Bortolin said.

Bortolin said the governor and legislators were fearful about another terrorist attack wrecking the state economy when the budget was approved in 2003.

"Perhaps we should buy their crystal ball? Did they predict 9-11 and that a recession would follow? The economy clearly has done better than anyone could guess in their wildest imaginations," he said.

But Steven Miller, director of policy research for the Nevada Policy Research Center, contends if Guinn and the Legislature were worried about another terrorist attack, they should have cut spending and reduced the need for a tax increase "rather than just piling it on."

Instead of looking at historical trends that show Nevada rebounded after the Persian Gulf War and national recessions, Miller said the Legislature accepted "the sky is falling" view of the Governor's Task Force on Tax Policy.

That panel, made up of private citizens, issued a report in November 2002 that recommended legislators increase taxes by at least $704 million in 2003-05 to keep services at current levels. Members contended that without new taxes, Nevada state government would operate $4.5 billion in the red over the next decade.

When pressed that Guinn and legislators used the Economic Forum for their tax projections, Miller said the forum is "just a fig leaf" over the administration and shows little independence.

He noted the forum makes its tax decisions after listening to three state government economists and a government-paid private economic consulting firm.

"The whole thing is skewed," he said.

Barr and Schmidt said the fear of another terrorist attack should not have been a factor affecting creation of the 2003-05 budget.

"It was unacceptable to assume that this 'worst case' scenario would henceforth be the norm for the Nevada economy," they stated. "In no other state of which we are aware was any reliable methodology employed to make the assumption that a terrorist-impaired economy would be the new permanent condition."

The Nevada Policy Research Institute is a nonprofit research organization that seeks "free-market solutions" to state problems. Schmidt and Barr work for Demographic Solutions, a company that has conducted previous studies for the institute.

Schmidt is a member of the UNLV School of Public Administration faculty who currently is a visiting professor at the Helsinki School of Economics. Barr is a former newspaper reporter and computer programmer who has done work for many major companies. He is pursuing a doctorate degree in environmental science at UNLV.