To call a new Tax Foundation study of Nevada’s revenue structure a starting point for tax reform discussions wouldn’t be accurate. Over the years, the state has seen too many tax studies to count, all of which have been considered by the Nevada Legislature to varying degrees, then thrown into desk drawers and onto top shelves to collect dust. Lawmakers and state leaders have talked and talked about tax reform for decades and done nothing to address core flaws in the way Nevada funds state government.
Rather, the Tax Foundation study, commissioned and released last week by the Las Vegas Metro Chamber of Commerce, could serve as an ending point for tax reform — one last bit of guidance before Gov. Brian Sandoval finalizes his 2015-17 spending plan, one last set of suggestions before lawmakers hold hearings on exactly how to fund state government.
The report, assembled over the second half of 2014 through research and interviews with taxpayers, business leaders and government officials, provides solid, practical advice for the governor and lawmakers, regardless of whether their goal is to increase state spending or hold the line on budget growth. Its recommendations are rooted in sound, business-friendly tax policy: simplicity, transparency and neutrality. Taxes should be easy to understand, calculate and report, and they shouldn’t reward or punish specific behaviors.
The spending side of the equation — determined by tax rates — is an entirely separate discussion.
“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 study’s authors wrote.
Among the flaws in Nevada’s tax system are a high sales tax rate that is applied to too few transactions, making it especially regressive; a live entertainment tax that has confusing exemptions; and property taxes that result from confusing assessments.
The Tax Foundation study issued several recommendations, none of which yet have the support of the chamber. Paul Moradkhan, vice president of government affairs for the chamber, said the business organization likely would endorse a tax reform agenda before the start of the legislative session in February.
But this newspaper can get behind several tax reform ideas articulated in the Tax Foundation report because we’ve been calling for similar changes for years.
First, and most importantly, the Legislature shouldn’t waste even one of the 120 days of the 2015 session considering new taxes — especially any kind of gross revenue tax or corporate income tax. Astoundingly, the landslide defeat of Question 3 in November’s election has not extinguished calls within some circles for a new version of the margins tax the initiative would have imposed. The make-business-pay-more crowd continues to assert that Nevada has no broad-based tax on companies when, in fact, it has for years: the modified business tax, or payroll tax. In fact, Tax Foundation officials told the Review-Journal’s editorial board that Nevada’s payroll tax, which exists in no other state, is one of the least volatile, most predictable business taxes they’ve seen.
Second, apply the sales tax to services and reduce the rate. Nevada has one of the highest state sales tax rates in the country at 6.85 percent. (Clark County’s sales tax boosts the rate to 8.1 percent in Southern Nevada.) The rate is high because the tax is applied to too few retail transactions. Instead of making that rate ever-higher on a limited range of commerce, make it lower and spread its reach. That should make the sales tax less regressive because higher-income households tend to spend more on services than homes with lower incomes. However, extending the sales tax to services would set off a lobbying frenzy for exemptions for everything from legal services to health care to child care. Warning to lawmakers: the more exemptions you grant, the higher the tax rate has to be. The goal should be the broadest reach possible at the lowest rate possible.
Third, repeal the live entertainment tax and instead apply a reduced sales/services tax to show tickets and other commerce currently covered by the live entertainment tax.
Fourth, make all tax rates permanent. Much of the state’s current budgeting problems are rooted in temporary sales, motor vehicle and payroll tax rates that expire every two years.
Fifth, simplify the way property taxes are calculated to reflect market value instead of replacement value. However, lawmakers and Gov. Sandoval should be especially cautious in changing the state’s property tax caps. Nearly one-third of Nevada’s mortgages are still underwater — these homeowners mustn’t be drilled with higher payments on homes with negative equity. Moreover, raising or eliminating the property tax caps would bring a windfall to fiscally reckless local governments and their bargaining units, who’ll demand a new round of pay raises.
Which brings us to the greatest flaw with Nevada’s tax structure, the one that isn’t addressed by the Tax Foundation study: levies that lavish local governments with revenue while pinching the state. Nevada’s schools, mental health system and social services wouldn’t be in crisis if we didn’t overpay for local government salaries and pensions. There’s enough tax revenue in this state to adequately fund all government services. It’s just terribly misallocated.
But the chamber and the Tax Foundation have done a great public service here. Improving the way Nevada taxes will make deciding how much Nevada taxes its residents much easier.