Sunday, June 26, 2005
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GREENER PASTURES: Western states fight to attract, keep businesses -- Part I

Dissatisfaction with California's business climate drives companies to Nevada, but some of them say Silver State repeating neighbor's mistakes

Click image for enlargement. Click image for enlargement. Playing off the 2003 election of California Gov. Arnold Schwarzenegger, the Nevada Commission on Economic Development created its "Nevada to the Rescue" ad campaign to lure Golden State businesses. The ads appeared in major publications in Los Angeles, San Francisco and Sacramento, among other cities. NEVADA COMMISSION ON ECONOMIC DEVELOPMENT California Gov. Arnold Schwarzenegger poses in the cab of an "Arnold's Moving Co." truck in front of the "Welcome to Fabulous Las Vegas" sign on Las Vegas Boulevard on Aug. 4. Schwarzenegger was in Las Vegas to ask businesses to return to California. Photo by John Gurzinski/REVIEW-JOURNAL FILE PHOTO

In recent years, Nevada officials have cultivated the state's image as a haven for beleaguered businesses, a respite from the corporate income taxes and inventory fees that most other states have.

And like hundreds of other business owners from California in particular, the executives of Best Lighting Co. were won over. The lighting manufacturer moved its Newport Beach, Calif., distribution center to the Speedway Commerce Center in North Las Vegas about five years ago in search of reasonable incentives, affordable land and less restrictive business regulations, said Dave Melanson, vice president of operations. "We came here and it was a breath of fresh air."

But Melanson said he has since found reason -- 833 million reasons, to be exact -- to question the long-term viability of the state's business climate.

In July 2003, Gov. Kenny Guinn signed an $833 million tax increase -- the largest in Nevada's history -- that Melanson and other business executives say hit the commercial sector especially hard, with hundreds of new levies and fees against business and industry.

Now, "the `Californication' of Nevada is happening right before my eyes," Melanson said. "I've seen a dramatic decline in the quality of life here in the last five years. They're beginning to tax the hell out of us. We saw it coming in California -- the workmen's comp (premiums), the overtaxation, the constant harassment by city officials. Nevada's not there yet, but this state is going to kill the goose that lays the golden egg, and people will start going to Montana, Tennessee, Mississippi and Texas."

Others say such predictions are overblown, and Nevada's tax structure imposes so little on business and industry that a small growth in taxes has little effect on the state's economy.

"We always need to be concerned about diversifying the economy, so we want to keep a good pro-business climate," said state Senate Minority Leader Dina Titus, D-Las Vegas. "However, if you look at the number of businesses moving here from California and the rest of the country, I think we have a pro-business climate. I don't think a small increase in taxes hurts. We still have no corporate income tax and no net proceeds tax. The business taxes here are very low and regulations are kept to a minimum."

Nevada's business leaders say they have a vested interest in the contrast between the Golden and Silver states because so many companies new to Nevada come from California. Last year, 32 of the 60 businesses the Nevada Development Authority helped bring to the Las Vegas Valley came from California, and 38 of the 77 businesses the Nevada Commission on Economic Development assisted in bringing to Nevada hailed from California.

Though few people assert that commercial pipeline is in immediate jeopardy, increasing numbers of industry watchers say they're concerned that, since the 2003 tax increase and a recent run-up in property prices, Nevada has been on the same high-tax, high-cost path that hobbled California businesses in recent years -- and they say understanding California's fiscal issues is essential to avoiding them.

'California is quicksand'

Edward Wiseman is president and owner of North Las Vegas-based Spacecraft Components Corp., an electrical-connector manufacturer that relocated to Nevada from Hawthorne, Calif., in early 2004 after city officials sought to impose what Wiseman called a burdensome regulation on the company.

"They sent us a questionnaire asking for all the names, addresses and phone numbers of the suppliers from whom we purchase material and how much we spend with them every year," Wiseman said. "Their purpose was to force those people to have a (Hawthorne) business license to sell to us, even if they weren't in Hawthorne. I told them we'd been in business 40 years and had developed sources and suppliers that they were going to be making public record, and our competitors would have access to that. It was the crowning blow."

Wiseman also wanted to escape high workmen's compensation insurance premiums. In California, he said, Spacecraft Components' premium was $195,000 a year; in Nevada, the company, which has about 80 employees, pays $41,000. Other basic expenses are lower as well: Wiseman estimated his company's utility costs are as much as 30 percent lower than in California, and liability insurance is 20 percent to 30 percent less expensive.

Bruce Cowan, president and chief executive of Acclaim Electronics, said his 20-employee company had "almost a whole person dedicated to paperwork" when the computer chip distributor was based near Carlsbad, Calif. After moving to Las Vegas in 2003, Cowan said, Acclaim's business costs dropped by 50 percent.

"California is quicksand," Cowan said. "There's no doubt in my mind that California is not the place to do business."

A study published in February 2004 confirmed that California's business climate has forced many companies to seek less-regulated locales.

The California Business Roundtable, an association of chief executives from some of California's largest corporations, retained Massachusetts consultant Bain & Co. to issue the California Competitiveness Project, which analyzed how the state compares to others in attracting and keeping new businesses.

The report found that 100 percent of senior executives surveyed said they viewed California's business climate unfavorably. What's more, nearly 40 percent said they planned to move jobs out of the state. The study also reported that a typical small manufacturer in California with $20 million in revenue and $200,000 in operating income would have an income of more than $1 million in Nevada.

California's relatively high taxes help boost the cost of doing business. The state's 8.8 percent corporate income tax is higher than that in all but 10 states, and California also imposes a 9.3 percent income tax on unincorporated businesses.

"We've had a trend involving a Legislature that doesn't take job creation into account when they're changing or creating new laws," said Sara Lee, a spokeswoman for the California Chamber of Commerce in Sacramento.

Lee cited the state's Labor Code Private Attorneys General Act, which she said employers called the "Sue Your Boss Law," as one example of inhospitable legislation. Signed in 2003 by outgoing Gov. Gray Davis, the bill encouraged lawsuits against employers over minor labor code violations such as small amounts of unpaid overtime.

And in March 2004, the Service Employees International Union sponsored the Budget Accountability Act ballot initiative, known as Proposition 56, which would have reduced the threshold for adoption of the state budget from two-thirds to 55 percent of the Legislature.

"Everything in California was regressing," Wiseman said. "Democrats there felt business was something they could tax and get more funds out of. It was part of a social experiment on labor, but (legislators) didn't have to pay for it."

New taxes in Nevada

Some local businesspeople and legislators say they're concerned Nevada is embarking on the same kind of experiment.

Kara Kelley, president and chief executive of the Las Vegas Chamber of Commerce, said she and other chamber executives "absolutely hear" concern from members about growing taxes.

"When we do member education, we hear it quite frequently," she said. "People tell us, `One of the reasons I came here is (low taxes), and now they're going to screw it up.' "

State Sen. Bob Beers, R-Las Vegas, said he also hears anecdotal evidence of the commercial sector's growing frustration with state taxes. Lost in all the talk earlier this year of $600 million surpluses and $300 million tax rebates, he said, is the fact that the state will increase its spending 24 percent in the next two years, while population and inflation will increase 12 percent in the same period.

"We have gotten to the point where people looking to move here move somewhere else instead," said Beers, who added he will go door to door this fall with a petition for a Taxpayers Bill of Rights limiting state spending growth to the same percentage increase in population and inflation rates combined.

"The average businessperson sees the direct impact of all our policy changes on them. They see that they're not able to give their employees as large a raise, and it worries them."

So when and why did businesses begin to see more taxes?

In 2002, Guinn, citing an $800 million budget shortfall resulting from the economic effects of the terrorist attacks on Sept. 11, 2001, assembled the Governor's Task Force on Tax Policy to suggest new revenue streams. Among the proposals: new sin taxes and increased property taxes. At the center of the task force's recommendations was a gross receipts tax of a quarter of 1 percent on all businesses making more than $350,000 a year. The levy would have erased almost half the state's deficit. The nongaming business community didn't warm to the idea.

"After the gross receipts tax (was suggested), we had companies put us on ice," said Somer Hollingsworth, president and chief executive officer of the Nevada Development Authority, a private, nonprofit economic diversification agency in Las Vegas. "We had a lot of companies tell us, `We're not doing anything until we find out what you're going to do with taxes.' They wanted a stable situation, and they saw the state not being stable at that point. Even though it was just a discussion, it really scared them. We sat there for 120 days (the length of the legislative session) with companies not doing anything."

The 2003 Legislature shot down a gross receipts tax but found other corporate sources for new revenue.

The list of taxes and fees enacted in 2003 runs 12 letter-size pages -- the majority of which detail business license fees through the secretary of state's office. For example, incorporation-document correction fees went from $150 to $175, while the fee for resignation of a resident agent rose from $40 to $100. The cost of resignation of an officer or director became $75, compared with no fee prior to the session. Registration of a resident agent doubled in price, from $250 to $500. A broker-dealer license cost $150 before 2003, compared with $300 after the session, and a security sales license went from $55 to $110. It also costs more to dissolve a business in Nevada -- $75 today, compared with $60 before the 2003 session.

In addition, the business license fee increased in 2003 from $25 to $100 and converted from a one-time charge to an annual fee.

The talk of the business community in 2003, however, was the addition of a gross payroll tax that replaced the quarterly $25-per-worker head tax. The 0.7 percent payroll levy, which went into effect in October 2003, dropped to 0.65 percent in July 2004. The Legislature reduced it further, to 0.63 percent, in the 2005 session. It will go back up to 0.65 percent in July 2007 unless the current rate is reauthorized.

Steven Miller, policy director of the Nevada Policy Research Institute, a libertarian think tank, said the taxes "are a significant problem."

"It's bad policy to put disincentives on the creation of jobs," Miller said. "A lot of these taxes get passed on to employees, but over and above that, these taxes are a real disincentive for talented and high-income people to move here and start up their businesses.

"People are always interested in Nevada because it still has a low-tax reputation from 25 years ago, but when people start to understand the actual new taxes, you can see their expressions change. I talked at a Rotary Club meeting and happened to mention in passing the payroll tax. A couple visiting Las Vegas came up to me afterward. He was an eminent domain lawyer, and they were asking for a clarification on the payroll tax, and you could see it hit them. You could see the shift of attitude as their illusions of Nevada as a low-tax state were swept away."

Yet, economic development officials say the number of companies moving to Southern Nevada is as high as ever.

Bob Cooper, economic development manager for the city of Henderson, said 13 companies so far this year have committed to relocating to or expanding in Henderson, up from 10 companies midway through 2004.

"We're doing fairly well. We're concerned anytime we see a rising trend in business operating costs from a tax basis," Cooper said.

"However, we have to look at the primary source for most of the businesses moving here, and that's California. In comparison, we still have a very favorable climate, not just in basic taxes but also in expenses like workmen's comp insurance. Across the board, companies here can operate at a far more efficient rate than businesses in California."

Hollingsworth added that "not one client we've brought in" has complained about the payroll tax.

In fiscal 2002, the Nevada Development Authority assisted 50 companies, 13 of which came from California, in moving to the Las Vegas area. In fiscal 2003, the authority assisted 53 businesses, 19 of which came from California. Fiscal 2004 brought 60 new businesses, including 32 from California. As of mid-June, the authority had assisted 42 companies in their moves to Southern Nevada in fiscal 2005, which ends June 30. Thirteen of those businesses are from California.

Titus said Nevada's taxes haven't discouraged businesses from relocating to Nevada because many executives "are more concerned about having a well-educated work force and a good quality of life for employees. And those are the kinds of businesses we want -- ones that bring in well-paying jobs, that care about funding education, that care about environmental issues and support for the arts."

Hollingsworth added that concern about new taxes has come primarily from companies already in Nevada.

"Local businesspeople went into shock over the (payroll) tax because they hadn't seen it before," Hollingsworth said. "But everything is relative to where you're recruiting from. What we think of as a problem, Californians won't even notice, because they're dealing with so many problems."