Tax boost a drag to economy, study says

CARSON CITY -- Nevada legislators could worsen an already disastrous economy by increasing taxes in 2011, a national tax research organization said in an analysis released today .

The Tax Foundation said legislators risk hurting the economy further if they decide to levy a corporate income tax or a gross receipts tax or expand the sales tax to services not now taxed.

Legislators and others have mentioned these taxes as those that might be considered at the next session.

Noting that California, Washington, Oregon and Arizona recently raised taxes, the Tax Foundation commented in its study: "Nevada's already enviable tax climate looks better and better. As the economy improves, the state is well-positioned for capital investment and job creation."

Created in 1937, the Tax Foundation has taken conservative stances on taxes and consistently ranked Nevada as one of the least taxed states in the nation. It ranked Nevada this year as having the fourth most favorable tax climate for business. In 2008, it found that the Silver State's residents have the second lowest state and local tax burden in the nation.

Joseph Henchman, tax counsel and director of state projects at the Tax Foundation, said Nevada needs to look at Maryland, where income taxes were increased for a short-term gain in revenue but now have led to a disincentive for the rich to invest.

"People are having trouble all over," Henchman said in a telephone interview. "You could make changes now to solve your short-term problem but undermine your ability to grow."

State Senate Majority Leader Steven Horsford, D-Las Vegas, declined immediate comment.

But he said in a previous interview that state revenue might fall more than $3 billion below what some consider must be spent when the Legislature convenes on Feb. 7.

Even Assembly Minority Leader Pete Goicoechea, R-Eureka, said recently that some tax increases might be necessary to balance the state budget.

Republican governor candidate Brian Sandoval thinks raising taxes is exactly the wrong thing to do, said campaign spokeswoman Mary-Sarah Kinner. Democratic candidate Rory Reid, who has said he intends to balance the budget without raising taxes, could not be reached for comment.

The Legislature paid Moody's Analytics $253,000 to study the state tax structure and review possible broad-based taxes on business.

Also, a 20-member citizens Vision Stakeholders Group was created by the Legislature to recommend changes, including taxes and other changes needed to improve the quality of life in Nevada over the next 20 years.

Horsford has vowed to try to implement recommendations from the tax study and the Stakeholders Group. The tax study's results, due July 1, have been delayed, and some observers contend they might not be released until after the November election.

In the analysis, Henchman said corporate income taxes are harmful to economic growth and are a volatile way to raise revenue. He said gross receipts taxes -- considered and rejected by Nevada legislators in 2003 -- are "destructive."

In 2005, Kentucky adopted a gross receipts tax and rejected it within a year.

"It's not based on profit, so each industry's profitability and costs are constantly weighed by politicians who decide on rates and exemptions and credits," Henchman said.

The same problem exists with expanding the sales taxes to include services that are not now taxed, Henchman said.

What happens is that lobbyists plead to legislators that their industry is vital and should not be taxed, he said.

"They tried that in Maryland in 2006," Henchman said. "It started out they were going to tax lawyers and medical services, tanning salons, car washes and everything. At the end of the day, the only one left was computer services."

Then, computer companies mounted a lobbying effort that led to the repeal of taxing their industry, he added.

"Times will get better," said Henchman, aware of Nevada's high unemployment rate and budget problems.

"Right now we are seeing a glimmer of a national economic recovery. State revenue increases will lag until people start investing and spending money. Nevada doesn't need to make it more unattractive to investors," he said.

Contact Capital Bureau Chief Ed Vogel at evogel@reviewjournal.com or 775-687-3901.