Stopping a bleeding budget

Nevada legislators will soon find themselves grappling with at least a $1 billion difference between projected revenue and actual collections in the two-year period starting July 1.

But it's not the first time this decade the state's income came in well below expectations.

Silver State leaders in 2003 wanted to raise nearly $1 billion in additional taxes and fees to avert budget cuts resulting from a slower economy. To help achieve that goal, then-Gov. Kenny Guinn assembled a panel to consider new revenue sources for the state. His eight-member Task Force on Tax Policy spent 11 months forming a comprehensive revenue plan, but the Nevada Legislature didn't hew closely to the task force's proposals.

If lawmakers had adopted the panel's plan, how different would Nevada's fiscal situation be now?

Even experts who served with the task force say their suggestions couldn't have saved Nevada from today's sharp downturn, but they also point to enduring lessons about the state's fiscal structure that came out of the group's work.

"I don't think there's a tax system on the planet that's going to be immune to economic ups and downs," said Jeremy Aguero, a principal in Applied Analysis and a member of the working group that supplied economic forecasts and other data to the task force. "The reality is governments live on commission. When the economy is performing poorly, so goes the tax system."

Carole Vilardo, president of the Nevada Taxpayers Association, a watchdog group intended to promote fiscal responsibility, agreed. "There is no mix of taxes that has insulated any state at this point. Assuming you had repealed the business head tax, added the gross-receipts tax and expanded the amusement tax, I don't think those provisions would have done a thing."

The task force's plan would have covered a projected $4.5 billion state budget shortfall between 2002 and 2010, and it would have replenished a $100 million emergency drawdown from the state's rainy-day fund. At the plan's center rested a gross-receipts tax of 0.25 percent on all revenue Nevada businesses collected beyond $350,000. The levy would have raised $200 million a year, according to analysts' forecasts.

The panel's proposal also called for raising $65 million from an amusement tax on movie tickets and other entertainment, $63 million from higher levies on cigarettes and $96 million from higher property taxes. But the blueprint didn't survive the 2003 Legislature.

Nevada lawmakers ditched the gross-receipts tax and instead imposed a 0.7 percent payroll tax on nonfinancial companies and a 2 percent payroll tax on banks. They placed a $7,000 tax on each bank branch beyond a company's first one, and they doubled the real property transfer tax. Also passed: a live-entertainment tax of 5 percent to 10 percent per ticket, a 75 percent boost in alcohol taxes and a cigarette-tax increase of 45 cents a pack, from 35 cents to 80 cents. While the task force's package would have raised $859 million in new revenue from 2003 to 2005, the Legislature's policies brought in $836 million.

Guy Hobbs, chairman of the task force and managing partner in Las Vegas fiscal-consulting firm Hobbs, Ong and Associates, said the group's plan would have reduced today's budget shortfall, though it's difficult to say by how much without some numbers-crunching. But Hobbs didn't need to conduct analysis to note the Silver State's revenue would still have come up short in the current budget cycle.

That's because the amount of revenue the proposal would have raised was based on economic conditions in 2002 and 2003, when the business climate was far healthier than it is now. The Nevada economy did suffer declines in visitor volume and gaming win right after the terrorist attacks of Sept. 11, 2001. But those drops didn't last long, and they paled in comparison to today's indicators.

Visitor volume from January through October 2002 fell 0.6 percent compared with the first 10 months of 2001. Visitor volume has fallen 1.5 percent in 2008, by contrast. Traffic through McCarran International Airport fell 1.1 percent in November 2002 compared with the same month in 2001. That flier count was off more than 13 percent in September year over year. Even revenue from taxable sales increased 1.2 percent in October 2001, the month after the attacks. Today, taxable sales have dropped in 15 of the last 17 months, sometimes plummeting by double digits. Property taxes, sales and use taxes, gaming taxes -- virtually every major source of budget funding Nevada generates took a hit in the last year. And with business sales down significantly, the gross-receipts tax would likely have fallen noticeably as well.

Look at the gaming tax, said Vilardo, whose group opposed the gross-receipts tax because it would have charged businesses that didn't turn profits. The state's gaming levy is a gross tax of 6.75 percent on casino revenue, and collections declined 6.2 percent in August compared with August 2007. Also consider Washington state, Vilardo said. It has a gross-receipts tax of as much as 1.5 percent, and economists project a deficit of $3.2 billion from 2009 to 2011 to go with it.

Plus, taxes change behavior. That cigarette-tax gain? It failed to meet projections. Tax collections on smokes actually dropped 6 percent the first month after the levy went into effect, as consumers cut back to save money. The live-entertainment tax was supposed to gather $27 million in revenue in its first six months, but Review-Journal reports at the time showed it would bring in only $4 million.

So forget about any revenue guarantees on the gross-receipts tax, Vilardo said.

"A gross-receipts tax is chilling to the extent that anytime you change the methodology of your tax base, people wait to see how it's going to shake out," she said. "That shakeout can take a year, or two years. It can slow you down. Whether that slowdown is permanent depends on how onerous it's perceived to be. If someone has a choice between places where they want to open a business, and they perceive a tax is too onerous because of its rate or its auditing procedures, they'll go someplace they believe is easier to deal with."

But Aguero, like Hobbs, said a gross-receipts tax, with its broader application to a wider range of businesses, would have meant a smaller deficit today. The payroll tax, which mostly shares the same broad base as a gross-receipts levy, has held up "fairly well" compared with the double-digit declines in sales and gaming taxes, he said. Nor would a gross-receipts charge have necessarily deterred businesses from moving here, he said. Rather, the state's lagging infrastructure and educational systems could be costing Nevada new companies as much as any business tax would have.

Both Aguero and Hobbs said some of the task force's conclusions continue to hold up well.

The group identified some "predictable problems" with revenue that re-emerged in 2008's lean times. For example, the sales tax applies mostly to tangible goods sold at retail, so sales-tax collections rely heavily on construction activity, car sales and tourist purchases. Other big components of Nevada's economy, including services, don't charge sales tax, so a downturn in construction and tourism amplifies revenue shortfalls in the Silver State.

"What came out of the task force report was that our tax system is inordinately narrow, and that creates a certain instability or inherent risk in our tax system," Aguero said.

That's why the task force supported a gross-receipts tax. Such a fee would have expanded tax collections so the state's revenue structure would have more closely mimicked Nevada's overall economy, Hobbs said.

With a new debate on taxes and government expenditures set to begin when the Nevada Legislature reconvenes in February, observers hope lawmakers will revisit both revenue sources and expenditures.

Hobbs said he's not necessarily sold on a gross-receipts tax, but he would like to see some kind of "transactional tax" that would bring more businesses into the revenue structure.

Nor should legislators react to the budget shortfall simply by saying, "We need more (money)," Hobbs said. It makes sense to consider government expenditures and efficiencies as well. Leaders should ask what's necessary for an acceptable level of state services, and evaluate expenses such as public-sector salaries and benefits.

"I don't believe the system is loaded with inefficiencies, but are there areas where we can find cost savings and improvements down the line? Absolutely," Hobbs said.

On top of government workers' salaries, pension plans and health benefits, Vilardo said state leaders could make up revenue in several other areas. Some public-health services, for example, could be means-tested, so that the consumers who use them would pay into the system what their incomes allow. State legislators could also urge Congress to pass the Streamlined Sales Tax Act, which would allow Nevada to collect sales and use taxes on goods bought via the Internet or catalog.

Studies show Nevada lost out on at least $100 million in sales tax revenue in 2004 thanks to purchases online and through catalogs, Vilardo said.

And the state has no choice but to consider expenses, she said, because higher taxes on consumers and businesses already struggling in a downturn might worsen the economy.

"We will survive, but hopefully, this time around, we learn some lessons," Vilardo said. "We shouldn't spend every cent we anticipate coming in."

Contact reporter Jennifer Robison at jrobison @reviewjournal.com or 702-380-4512.