The Las Vegas Metro Chamber of Commerce on Tuesday unveiled an independent study of potential Nevada tax reforms, including a comprehensive overhaul that would affect a half-dozen levies — from sales and property to entertainment and business taxes — as well as proposals for more narrow fixes on just one or two taxes.
The Tax Foundation study, based on five months of research and interviews with taxpayers, company owners and government and business leaders, does not recommend new taxes. Rather, it spells out the need for the Silver State to broaden and update its confusing and antiquated tax system to ensure more stable revenues for government services.
“Nevada should consider fixing what is broken with the current tax system instead of pursuing a brand-new tax to layer on top of the narrowly based, complex existing taxes,” the authors wrote. “A number of elements of the tax system exist only in Nevada, and those in particular should be scrutinized.”
The study, to be published as a book later this month, was commissioned by the chamber as a way to jump-start tax reform discussions before the Feb. 2 start of the Nevada Legislature’s biennial session.
The chamber isn’t yet endorsing any specific reforms, although the business group plans to do so — probably before the session gets underway, said Paul Moradkhan, vice president of government affairs for the chamber.
“We believe this report is a part of the conversation about next steps,” Moradkhan told the Review-Journal editorial board Tuesday. “We wanted this to be an unbiased report.”
He said the chamber asked the Tax Foundation to determine “what we’re doing right and what we’re doing wrong.”
Moradkhan said that along with tax reform, the chamber wants to raise more revenue for the K-12 system, which remains at or near the bottom of most national lists for performance, including graduation rates. Settling early on tax reform scenarios will allow more time to debate tax rates and spending needs, he said.
“There’s a desire to have that revenue enhancement conversation,” Moradkhan said. The tax reform study is “a great starting point for us. We’re not doing this May 15 during the session. We’ve started the conversation.”
The chamber and other business leaders, including the mining, gaming and retail industries, teamed up to defeat a proposed 2 percent margin tax on businesses in the Nov. 4 election but vowed to back both tax reform and more education spending in 2015 to improve schools.
Some 79 percent of voters rejected Question 3, which would have raised money for schools. Opponents said the tax would have devastated Nevada businesses because it would hit companies making $1 million or more in annual revenues whether or not they were profitable.
Republican Gov. Brian Sandoval also has vowed to reform taxes as part of his upcoming budget proposal, which will include education reform and a boost in school spending as priorities. He’s dealing with a budget shortfall this year, however, and a newly elected, conservative state Assembly that might balk at tax reform.
In the 2014 election, Republicans gained majority control of both the Nevada Senate and Assembly, but most of the newly elected members of the Assembly have signed pledges not to raise taxes.
Still, Sandoval sounds determined to push for major tax and education reforms during his second four-year term.
“We must continue to look beyond our traditional revenue sources, which are not recovering at the same pace as the rest of our economy, ” Sandoval said Monday. He added that Nevada must look “toward funding mechanisms that compare and complement the growth of our changing economy.”
Sandoval’s budget is based on an Economic Forum projection that Nevada will collect about $6.3 billion in tax revenue over the next two years, which is less than the $6.7 billion budgeted for the current two-year spending plan. That’s with no tax reform or rate increases.
State agencies requested $7.7 billion in spending, but the governor has asked for revised, lower cost budget proposals. He will deliver his budget proposal Jan. 15.
The Tax Foundation study offers reform scenarios that could raise new revenue, depending on tax rates, or remain “revenue neutral,” which would be more acceptable to conservative lawmakers who signed pledges.
Here’s a look at the study’s four main options:
■ Option A is ambitious, offering comprehensive tax reform to simplify, broaden and stabilize Nevada’s sales tax, Live Entertainment Tax, Modified Business Tax, Bank Branch Excise Tax, Business License Fee, and property tax.
Now, the state’s sales tax rate on goods is 6.85 percent, but local add-ons can boost that. In Clark County, the sales tax rate is 8.1 percent. On average, the sales tax on goods statewide is nearly 8 percent.
The Tax Foundation proposes extending the sales tax to services because Nevada’s economy has become largely service-based. Only about half of the things Nevadans buy are taxed today, compared with 80 percent in 1970. Services can range from haircuts to legal fees, so revenue raised will depend on what is included or exempted.
A small base expansion could raise $152 million a year, according to the study; a medium expansion could raise $288 million; and a large base expansion could raise nearly $2 billion.
If the sales tax is expanded to services, entertainment and other items, the state rate could be lowered to 5 percent, for example, to raise the same amount of revenue and perhaps more.
Option A also would exempt manufacturing machinery from the sales tax base. Nevada is one of just nine states that have this tax on capital investment.
The Live Entertainment Tax could be replaced with a regular sales tax on admission charges, food, beverages and merchandise sold at venues. The current tax is complicated, with the levy imposed on any facility with 200 or more seats where live entertainment is provided and admission is charged. But big events such as Burning Man, Electric Daisy Carnival and NASCAR are exempt.
In this scenario, the Modified Business Tax — essentially a payroll tax on each employee — would apply to all businesses with more than $62,500 in taxable wages per quarter, eliminating exemptions and industry specific rates.
It would roll back the higher MBT rate for financial institutions (now 2 percent) to 1.17 percent, which is the general business rate. It would repeal an exemption for companies with $85,000 or less in quarterly wages. It also would repeal a Bank Branch Excise Tax, which raises little revenue. And it would replace the flat $200 annual Business License Fee with a graduated fee structure.
Finally, on property tax, this scenario would change the assessment method from replacement cost to market value, eliminate a depreciation factor and adjust tax caps, now 3 percent a year for residential properties and 8 percent for nonresidential. It also would protect elderly and low-income homeowners,who can’t afford higher taxes.
■ Option B focuses on expanding Nevada’s sales tax to services and having it subsume the Live Entertainment Tax as in Option A.
■ Option C focuses on the existing Modified Business Tax, making the changes outlined in Option A. Reform could be revenue neutral if the MBT rate is cut to 1 percent, raising $5.7 million, the study said. Or it could raise more money: Keeping the rate at 1.17 percent would bring in $83.7 million in revenue, while increasing the rate to 2 percent would raise $408.6 million.
■ Option D focuses on property tax changes outlined in Option A.
The study said options provide “a framework upon which legislators and citizens can make further decisions.”
“Creating sound tax policy is more than a question of how much revenue is being raised and whether that amount is too much or not enough,” the study said. “Public finance experts and economists generally agree that not all taxes are created equal, and certain types of taxes are more damaging to the economy than others.”
Contact Laura Myers at firstname.lastname@example.org or 702-387-2919. Follow @lmyerslvrj on Twitter.