Brookings report says Nevada’s economic, budget crises will last 10 years

CARSON CITY -- A report issued today by a regional think tank concludes that Nevada will have a tough time economically over the next 10 years and that state government revenue shortfalls cannot be handled only by cutting spending.

The report predicts "an especially harsh budget climate throughout the decade" for Nevada, even though the economy will improve and the population will rise because of the "region's sunny climate" and reduced housing costs.

The report, titled "Structurally Unbalanced," examines budget problems in Nevada, California, Arizona and Colorado.

"Nationwide, the Great Recession is technically over. ... A halting and tentative economic recovery is underway," the study noted. "And yet, all is not well, and especially not in California and the Mountain states. Three years after the collapse of a massive housing 'bubble,' the deepest economic downturn in memory has exposed and exacerbated a massive public-sector fiscal crisis that is affecting all of the region's states."

With the region already down 2 million jobs, "the state budget crisis promises to bring the most painful next round of dislocations," according to the study, issued by Brookings Mountain West at the University of Nevada, Las Vegas, and the Morrison Institute of Public Policy at Arizona State University.

Nevada state government faces a $2.5u2007billion to $3 billion revenue shortfall going into the 2011 legislative session but has constraints on its ability to raise revenue, the study says. Those constraints include the constitutional prohibition against income taxes and earmarks that mandate how more than 50 percent of state funds must be spent.

"You need to reset the revenue system to generate revenue in ways not so susceptible to the nature of the economy you have," said Mark Muro, one of the study's authors and a senior fellow and policy director at the Washington-based Brookings Institution.

But Brookings concluded that "massive budget gaps cannot be responsibly closed by only cutting spending."

It called for revenue diversification and broadening of tax bases, including looking at gross receipts taxes -- a tax rejected by the Legislature in 2003.

It also called for more flexibility for municipal governments and for building a state rainy day fund. Nevada had a $236 million rainy day fund that it spent in 2008 after the recession hit.

Gov. Brian Sandoval said Tuesday that he had not seen the study and would not comment on its conclusions.

Sandoval is preparing a new two-year state budget that includes no new taxes and will cut budgets of state agencies and salaries of state workers.

The state will have about $5.4 billion in revenue, down more than $1 billion from current spending. That would necessitate across-the-board cuts of about 17 percent, although Sandoval said some agencies will be cut more than others. State employees now must take one unpaid furlough day per month, and that probably will continue, based on comments by Sandoval.

He said again Monday that raising taxes would be the worst thing Nevada could do in dealing with the recession.

Nevada's economy might not return to previous peaks until the latter part of the 2010s, according to the report. Gaming will play a diminished role in the future Nevada economy, and the housing and tourism boom that preceded the recession "is not likely to be repeated anytime," the study found.

"Job growth will likely remain anemic, while unemployment rates will remain stubbornly high, perhaps through the entire decade."

The study found the problems in all four states were a mix of the cyclical problems of the recession and structural problems in state financing and policymaking.

It noted that California and Arizona have the worst structural problems and that recent permanent tax increases, including a sales tax increase, in Nevada have helped close the structural deficit.

Still, the study predicted the economies of the other states will recover much sooner than Nevada's economy.

Review-Journal reporter Hubble Smith contributed to this story. Contact Capital Bureau Chief Ed Vogel at evogel@reviewjournal.com or 775-687-3901.