EDITORIAL: Margins tax initiative a business killer

The margins tax was a terrible idea from the moment the state teachers union put it on paper and began collecting signatures to qualify it for the 2014 ballot. But we now know the initiative is even worse than previously thought: In addition to killing jobs, the plan, if passed, creates a huge disincentive for small business growth.

The so-called Education Initiative was initially thought to exempt the first $1 million in business revenue from the 2 percent tax. The exemption appeared to ensure the state’s smallest companies wouldn’t be drilled by a huge new tax bill amid a weak economic recovery.

It turns out, the $1 million exemption isn’t a true exemption at all — it’s a tax cliff. As soon as a small business exceeds $1 million in taxable revenue (some deductions are allowed), all revenue is subject to the 2 percent rate. To put that in some perspective, imagine a small business logs $1,000,050 in taxable revenue for a given year. If the first $1 million were exempt, only $50 in revenue would be taxed by the new levy. The business owner would have a margins tax bill of $1. Instead, that additional $50 in revenue lifts the company’s tax bill from zero to $20,001. That’s someone’s job.

Imagine being a small retailer with a narrow profit margin, heading into Christmas season knowing that an especially good month of taxable sales might push you over the $1 million threshold — and might consume your entire profit. Imagine having a financial incentive to close your store two weeks early and turn away customers at the busiest time of year.

The same scenario would apply to untold numbers of other businesses: general contractors, landscape maintenance companies, engineering and law firms. Every business that could possibly reach $1 million in taxable revenue would have its accountant monitor receipts and advise when might be a good time to take the rest of the year off.

Remember, the margins tax is not levied on business profit. It’s a tax on business revenue. That means a business might have to significantly exceed $1 million in revenue to recover the profit lost by just a few extra dollars in sales. Let’s say your company has a 7 percent profit margin. That’s $70,000 made on $1 million in revenue. Crossing $1 million in revenue wipes out $20,000 in profit. Recovering that $20,000 tax bill would require about $300,000 in additional sales. Your new profit margin is less than 6 percent.

The calculations are more complicated than that, of course, depending on which deductions a company chooses. But there’s a simple truth in this scenario: If you grow your annual sales from $1 million to, say, $1.25 million, you make less money. What a horrible reward for all the risks entrepreneurs take.

Then there are the struggling companies that lose money. Even unprofitable enterprises would be forced to pay up. That could compel some businesses to close up. The tax bills for the state’s largest employers would be devastating — so devastating the state’s unions aren’t supporting the initiative.

The best way to improve funding for schools is economic growth, not punitive tax policy. Nevada needs jobs, not a tax that kills them. Nevada needs investment and new industry, not a tax that could scare them off. Nevada’s economy is too weak to withstand passage of the margins tax in November. Voters must reject the Education Initiative.