It would seem the Nevada Legislature is finally finished taking a scouring pad to the state’s shiny image as the Southwest’s friendliest place to do business. Indeed, the 2009 biennial session of the state Assembly and Senate is over, its patchwork of cuts in services and taxes on businesses passed to prop up the skeletal remains of a once booming landscape. The tax increases were pushed through over the very vocal objections of the state’s beleaguered governor; the cuts were orchestrated to make the wounds less deep for businesses, which appear to have meekly gone along with the program.
The session ended quietly last week, in stark contrast to the enormous task lawmakers faced at its start: How would they make up a nearly $3 billion budget shortfall, save services and still preserve Nevada’s low-tax, business-friendly climate?
Many lawmakers and some top business lobbying groups say the state’s attractive corporate climate remains mostly intact, although slightly tarnished. In the absence of cooperation from Gov. Jim Gibbons, bipartisan legislators worked feverishly with one another and with businesspeople to devise a way to avoid devastating budget cuts or sky-high taxes. Without new sources of revenue, further cuts would have “gutted the state,” perhaps even causing the University of Nevada, Las Vegas to close, as the state’s hyperbolic higher education chancellor screamed at every opportunity.
A meeting in early May with 25 corporate executives and business interest groups sealed the deal, so to speak. Among them was Las Vegas Chamber of Commerce Chairman Steven Hill and businessman Don Snyder, who gave lawmakers the assurances they needed that their tax and revenue package was acceptable to Nevada companies, said Assembly Speaker Barbara Buckley, D-Las Vegas.
“Of the 25 business leaders in that room, they agreed with us that they probably couldn’t cut more from the state without harming the state,” she said.
The end result was a plan that included $1 billion in budget cuts and $781 million in new tax revenues in addition to an earlier increase in the room tax — the tourists certainly weren’t getting away scot free. As much as $346 million more will be earned in payroll taxes in the next two years (officially called the Modified Business Tax). The final tax plan — overriding a Gibbons veto — increased the sales tax by 0.35 percent to generate $280 million. An additional $61 million will be raised by a doubling of the annual business licensing fees from $100 to $200.
The Modified Business Tax, or MBT, was increased from 0.63 percent to 1.17 percent for non-financial institutions that have annual payrolls of more than $250,000 — after deducting for the costs of employee health insurance. However, the tax rate for the first $250,000 of payroll will drop from 0.65 percent to 0.5 percent, a nice break for small businesses. State Sen. Randolph Townsend, R-Reno, Buckley, and other supporters of the measure say that increase should only affect about 26 percent of Nevada businesses.
“So, we lowered the Modified Business Tax for 74 percent of businesses,” Buckley said.
Another $94 million in revenue will be generated from changes in the way vehicle registration taxes are calculated.
The payroll tax was always the most obvious target. But it could have been a lot worse, and some taxes had to be raised. That is pretty much the sentiment both with lawmakers and business lobbyists. Most concede any additional burden on companies already battered by the recession was not going to be positive.
“Without question, we knew the two components would be payroll and sales (tax),” said Townsend. “Sales tax because visitors pay 20 to 40 percent of the sales tax and payroll because it is broad-based.”
A compromise was struck between what many businesses wanted: A very minimal payroll tax increase and a full-point sales tax increase, Townsend said. He added that he doesn’t think the Silver State will lose any luster in terms of drawing new businesses here, particularly since Nevada’s neighbors are facing similar challenges.
“The financial markets understand the economy has affected everyone,” he said.
Regardless, the payroll tax hikes will slow business growth, said Assemblyman Ty Cobb, R-Reno. He was one a handful of Republicans who backed Gibbons in his stance against any new taxes that weren’t already approved by voters.
“I think we in the Assembly Republican Caucus estimated how much more it (tax increases) would cost businesses, and we thought it would cost 10,000 jobs (lost or not created),” he said.
Cobb said he actually heard of one Southern Nevada business laying off workers in anticipation of the payroll tax increase.
Assemblyman Richard “Tick” Segerblom, D-Las Vegas, disputed those jobs loss estimates, but didn’t argue that a very small number of firms may choose not to move to the state as a result of the increased payroll tax, which is estimated by the Las Vegas Chamber of Commerce to cost about $216 extra a year for each employee making an average salary of $40,000 at a company with a total payroll of more than $250,000.
Nevada doesn’t need those type of firms anyway, Segerblom said.
“Nobody will be laid off because of the payroll tax,” he said. “We are talking about a couple hundred (dollars) more for each employee a year. Any business that doesn’t want to pay that, I don’t want in the state.”
For months leading up to the legislative session, Las Vegas chamber officials have made clear the state’s retirement system needs retooling, that the system is underfunded, and overly generous, to the tune of $10 billion, an egregious unfunded liability for future Nevadans.
The Las Vegas and North Las Vegas chambers of commerce ultimately decided to back the payroll tax increase after gaining some concessions on the Public Employee Retirement System, or PERS, and the Public Employee Benefits System, or PEBS.
“We were pretty pleased at what we got accomplished. Certainly, we had recommendations that were not enacted, but it was part of a compromise,” Hill said. “What will determine if more needs to be done is if the (state’s) unfunded liabilities come down.”
Townsend, too, said reforms to public employees’ benefits was a required component in gaining the support of many Republican lawmakers.
“You have a 30-year budget deficit of billions and billions of dollars, and you have a significant amount of retirees because people my age — the baby boomers — will retire, adding to the future liability. That liability really weakens your ability to borrow.”
Carole Vilardo, the president of the Nevada Taxpayers Association, agreed. She said the unfunded liability needed to be curtailed.
While the chamber succeeded in much of its lobbying push to reform PERS and PEBS, Hill conceded it was “a hard time for small businesses to pay more taxes,” but said those companies also needed the state services paid for by tax revenue. In addition, a larger percentage of firms should see a payroll tax decrease.
North Las Vegas Chamber lobbyist Patrick Smith said his organization ultimately supported the tax package after the PERS and PEB concessions, but was more concerned about the impact of the payroll tax increase. He expressed doubt that 74 percent of the North Las Vegas Chamber members fell into the under-$250,000 exempt category.
However, the alternative to increasing existing taxes was to look at creating new taxes, Smith said.
“We were working to prevent creating a new tax system, because it was too tight a time frame,” he said. “We felt to do this, we had to use the system that was there.”
Banks and all businesses were leery of creating a corporate income tax, Kirk Clausen, Nevada regional president of Wells Fargo, said right before the session’s end.
“A lot of people like a payroll tax because it doesn’t create a state IRS … I’d rather stick to one system that is fair to everyone.”
Still, bankers can’t catch a break, it seems. Financial institutions continue to pay a higher payroll tax rate at 2 percent. Vilardo said she was the only one to speak out in favor of putting banks and other financial institutions on equal footing with everyone else.
“Where I have a problem is that stock brokers, insurance brokers, people who sell annuities, a lot of them are small-business people who are being penalized,” she said. “You are penalizing banks for establishing branches in rural communities where they are competing with online banks, who don’t hire locally.”
Townsend had a theory on the banks’ silence.
“Maybe they were afraid if they stuck their heads up, they would be targeted again,” he said.
Townsend, along with some other lawmakers who opposed the governor’s budget, say there was a big public misconception about the legislators being responsible for raising taxes. Some Democrats even accused the governor of leaving lawmakers to do his “dirty work.”
“If they just passed the governor’s budget, we would have had a $672 million tax increase,” Townsend said.
The Republican senator pointed to a further weakening of the economy, which left another $581 million to make up, and the governor’s refusal to seek another $31 million in tax revenue from gaming markers. Added to that, there was a $60 million shortfall in expected revenue from the increased room tax.
Buckley said the severe cuts to education in the Gibbons budget, including those aimed at UNLV, were not acceptable to either Democrats or Republicans, except for “those few who didn’t want to find any solution.” The lawmakers restored $300 million to UNLV from Gibbons’ budget, only cutting its funding by 12.5 percent.
The assembly speaker praised the majority of Republicans, led by Senate Minority Leader Bill Raggio, R-Reno, state Sen. Warren Hardy, R-Las Vegas, and Townsend for putting the welfare of the state first. She also lauded the business community for its willingness to cooperate.
“We went through the package line per line (with business leaders),” Buckley said. “They are committed to the state. Their children go to school here.”
It was a mess to clean up from the start, she added. A 44 percent revenue shortfall is what lawmakers “walked into,” the speaker said. And for all their hard work, Gibbons held a public veto ceremony, calling the tax measures “a job-killing, economy-crushing insult to the working families of Nevada,” the timing of which couldn’t be any worse, especially since he promised voters taxes wouldn’t be raised on his watch.
But Nevada is still a business-friendly state, legislators contend. It’s certainly better off after the governor’s “plan of gutting the state” failed, Segerblom concluded.
“There’s not a hell of a lot you can do in 120 days without a governor,” he said. “We did the best we could without a governor.”
Contact reporter Valerie Miller at vmiller @lvbusinesspress.com or 702-387-5286.