Excess revenue might boost education, social funds

Gov. Brian Sandoval believes Nevada's economy is picking up. If he's right, he wants to use the excess revenue on education and social services, taking some of the sting out of his proposed budget cuts.

With sales taxes coming in higher than expected, the governor plans to funnel extra cash to schools, universities and other vital programs to supplement his $5.8 billion, two-year budget, according to top aides.

Sandoval won't know how much additional money he'll have to tap until the Nevada Economic Forum delivers its final revenue projections at a May 2 meeting. But his administration is eyeing the potential for another $100 million in sales tax revenue and possibly millions more from mining, entertainment and gaming if casino receipts improve.

'TRIGGER' VS. NEW REVENUE

Heidi Gansert, Sandoval's chief of staff, said the governor also might use the May 2 projections to set revenue goals that could trigger more spending for education or a rainy day fund. The trigger would be if tax collections come in higher than anticipated over the next two years -- for instance, increasing by 5 percent instead of the 3 percent expected now for sales tax revenue.

"There has been some improvement in the economy, and we'd like to look at triggers so we can restore some of the funds to education," Gansert said . "It's the governor's priority."

Democrats reacted skeptically to the idea of pledging excess tax collections to education and other programs. They said it's no substitute for considering tax hike proposals, including a new sales tax on services, extending an $800 million tax package set to expire in June and reducing tax deductions for mining, now flush thanks to record gold prices.

"I don't think triggers are the answer," said state Sen. Sheila Leslie, D-Reno, chairwoman of the Senate Revenue Committee. "What we need is a serious discussion about raising more revenue. And that's not happening."

More than a month into the 120-day legislative session, Republicans backing Sandoval's pledge not to raise taxes remain at loggerheads with Democrats who think his budget is as much as $2 billion short of needs. Frustration is so high among the Democratic leaders that Leslie suggested the party in power might not submit a formal plan to raise more revenue through new taxes if it stands no chance of passage with the required two-thirds vote.

'NO SECRET TAX PLAN'

"As of today, there is no secret tax plan," Leslie said, dismissing talk that Democrats are putting one together behind the scenes. "We need some cooperation, some leadership, from the other side, or maybe we won't submit anything. What's the point?"

Spending triggers have been used in the past by governors and legislators, often to give out pay raises if revenues exceeded projections. In 2009, lawmakers put in a trigger to do away with cost-saving furlough days for state employees, but revenues were less than expected. In fact, a special session was called in February 2010 to fill an $800 million budget gap.

In 2003, lawmakers approved an $860 million tax package, but only after Republicans insisted that if tax collections came in higher than anticipated the extra cash would go into a fund that couldn't be immediately spent. The fund hit $300 million as the economy took off. As a result in 2005, then-Gov. Kenny Guinn approved a tax rebate to return the money to Nevadans.

"We gave away the fat cows before the skinny cows came," said state Sen. Joe Hardy, R-Boulder City, who as an assemblyman backed the tax package because it included the provision not to spend extra tax collections. "We could use that money now."

A 1991 law requires the state to have a rainy day fund, but it dried up with the recession. The same law also prohibits using surplus revenue for ongoing operational expenses. But lawmakers could get around that with an exemption, said Carole Vilardo, president of the Nevada Taxpayers Association, which helped get the law passed.

"They can do what they want, and usually do," said Vilardo, a lobbyist since 1973 at the Nevada Legislature.

DEMOCRATS FOCUS ON SANDOVAL BUDGET

For now, Democrats remain focused on highlighting shortcomings in the Republican governor's budget, which after a three-year economic downturn slashes funding to 2007 levels. Budget leaders expect to complete an initial review of the spending plan by the end of March. Like Sandoval, they are waiting for independent revenue projections from the five-member Economic Forum to figure out the exact size of the gap between available revenues and what lawmakers want to spend.

"I have no idea right now how much extra revenue we'll need," said Assembly­woman Debbie Smith, D-Sparks, chairwoman of the Ways and Means Committee. Asked whether she has heard any creative ideas for raising new revenue, Smith pointed to a proposal that has support from Democrats and some Republicans: a new sales tax on services. GOP support is conditioned, however, on delaying imposing such a tax until the recession is over and making it "revenue neutral" by simultaneously lowering the sales tax on goods.

Sandoval, however, questions whether it's possible to add a sales tax on services in a revenue-neutral way.

"The governor has not expressed support for the idea of a tax shift," said Dale Erquiaga, Sandoval's top adviser. "No detailed proposals have been presented. And no matter how the shift were accomplished, someone would be paying a tax when they aren't under the current system."

BROADENING TAX BASE SEEN AS NEED

Still, the idea has gained traction in the Legislature, especially because most lawmakers see it as a way to start broadening Nevada's narrow tax base, which relies mostly on the sale of goods and the gaming industry.

"I'm not trying to bring any pressure to bear on the governor or anyone, but I think we should take a serious look at it," said Assemblyman Pat Hickey, R-Reno. "We're in danger of raising sales tax on goods too much."

Hickey said a compromise would be to approve a sales tax on services now but wait to implement it until the next biennium after a study determines which services should be targeted and at what rate. Nevada could borrow against future sales tax collections to balance its budget now, he said, pointing to an idea from a University of Nevada, Reno professor.

The economics professor, Elliot Parker, has both gotten Hickey's attention and met with Leslie to discuss his proposal to help solve the state's current budget crisis and set Nevada on a path to a broader and more equitable tax system, he said.

"We're still a service-based economy, but we don't take much advantage of that," Parker said.

A sales tax on services in Nevada could raise anywhere from $600 million a year to an astounding $5.8 billion, depending on how it's structured, according to a February study by two of Parker's UNR colleagues.

The lower projection would come from imposing a 2 percent tax rate on 20 percent of services sold each year in Nevada, excluding education, health and social services, and the hotel accommodation and food services sectors.

The higher figure comes from imposing a 6.85 percent rate -- equal to the current overall sales tax on goods -- on 100 percent of services, an unrealistic expectation, the study said.

LESLIE: TARGET HIGHER-INCOME BUSINESSES

Hickey said he wouldn't want too many services exempted. Leslie said her main concern is that the tax be structured in a way that targets higher-income businesses and people so no extra burden falls on poorer Nevadans.

As for borrowing now against future tax collections, Leslie said that would just "kick the can down the road," so she doesn't like the idea.

A WORK IN PROGRESS

The budget clearly remains a work in progress, for Sandoval and legislators.

"The budget will take several more weeks to develop, and we know that projections and revenue estimates are going to change," Erquiaga said. "If the Economic Forum predictions also come in higher than expected, the governor believes that the new money should go to education and to mitigating cuts in critical social service programs first."

Priority has yet to be given to specific funds or programs, he said.

Higher education officials have said the $162 million budget cut will mean closing dozens of degree programs and possibly campuses. Schools have warned of massive layoffs because of more than $200 million in cuts in support from the state. Sandoval has recommended teacher salaries be cut by 5 percent and benefits frozen to save most of that money.

Democrats have pointed to inadequate funding for even Sandoval's spending plan.

Earlier this month, Budget Director Andrew Clinger acknowledged the budget was $106 million short because school districts said he overestimated a school construction bond reserve account Sandoval wanted to tap for $425 million.

Other coming adjustments could play in Sandoval's favor, Clinger said. Sales tax collections are up $32 million over projections in the past six months . He estimated that could mean an extra $100 million for the two-year budget.

The mining industry said last week it expected an extra $10 million in tax payments to Nevada this year.

Clinger said caseload growth in the Department of Health and Human Services was lower, which could save money. Also, President Barack Obama proposed the federal government help states by forgiving or delaying interest payments on borrowed unemployment money. That would save Sandoval's budget $66 million in current interest on $645 million owed.

James Richardson, lobbyist for the Nevada Faculty Alliance, rolled his eyes at the notion that the budget problems could be solved by scraping up extra piles of revenue or borrowing against future tax collections. "That is not a long-term sustainable plan," he said. "It's another stopgap measure built on a wing and a prayer."

Contact Laura Myers at lmyers@reviewjournal.com or 702-387-2919.