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An amazing coincidence!

The Las Vegas Metro Chamber of Commerce did not have any direction or editorial control over a Tax Foundation study that the business group commissioned a few months ago to determine how to go about fixing Nevada’s tax system.

So it must be an utterly happy coincidence that the Foundation determined that the very best tax for Nevada just happens to be the Chamber’s favorite tax: an expanded sales tax on services.

For the uninitiated, the Chamber has long opposed every tax on business revenue, from a net profits tax back in 2000-2002 to a gross receipts tax in 2003 to a business income tax ignored by the Legislature to the Education Initiative, a 2 percent margins tax defeated on November’s ballot. (In fact, the Chamber spent more than $580,000 to defeat the Education Initiative.)

And the folks at the Tax Foundation agree. A single slide at the end of a lengthy presentation on Nevada taxes warns readers to “beware of false tax reform,” including gross receipts taxes, margin taxes and corporate income taxes. Those taxes fail to comport with the Foundation’s principles of taxation, or simplicity, transparency, neutrality and stability, and since those principles were handed down to us by Adam Smith in his book Wealth of Nations, who are we to argue?

I asked Joe Henchman, vice president of state programs for the Tax Foundation, if it was fair to say that this anti-revenue tax assumption underlies the Foundation’s research, and he replied that he heard objections to corporate income taxes from many people interviewed for the report. Among the many interviewees were business owners, who might naturally be expected to object to a tax aimed at their revenue.

To be clear, the Chamber has not taken a position on any tax. Vice President of Government Affairs Paul Moradkhan said the group just received the report on Tuesday, and needs time to evaluate its findings. But he said the Chamber will release a set of “general principles” by the start of the 2015 Legislature.

“Everything right now is on the table for discussion,” he said. (Well, maybe not everything, right? The Chamber did just blow half a million bucks fighting the Education Initiative, so I think we can assume that proposal is off the table, right? And if history is a guide, a net profits, gross receipts or general corporate income tax are probably off the table, too.)

So where does that leave us?

THE TAX FOUNDATION REPORT

The expanded sales tax on services. The Tax Foundation argues the sales tax is stable (depending on how it’s constructed), transparent, rises and falls with the economy, is broad-based, brings tourists into the tax base and allows consumers to control their liability. (If you don’t want to pay the tax, don’t buy stuff, essentially.)

Nevada’s current sales tax varies by county; in Clark County it’s 8.1 percent, while in some Northern counties, it’s the state minimum of 6.85 percent. (Clark County has passed additional sales taxes for roads, water projects and hiring police officers.)

If the tax were applied to services — which the Tax Foundation says are becoming a larger and larger part of the state’s economy — the rate could be lowered overall. But, the Foundation says, the tax should be charged only on a final consumer purchase. (For example, if a farmer grows wheat and sells it to a miller, who then mills the wheat and sells it to a baker, who then makes bread and sells it to the public, only the final sale of the loaf to the consumer should be subject to the tax, the Foundation argues.)

Not only that, but the Foundation says the Live Entertainment Tax should be eliminated, and ticket sales to events should be subject to the sales tax.

A couple notes about this:

• The sales tax, especially one described above, is a levy that businesses don’t pay so much as collect from consumers. (In fact, the state lets them keep a little of the money for their trouble!) And while some might suggest that all taxes, including corporate income taxes, are passed to consumers, the fact is, that’s not always possible in competitive business environments. And given that 46 of the 50 states have corporate income taxes of some kind, yet still manage to see businesses prosper, it’s not exactly the kiss of death that its opponents argue it is.

• The sales tax is regressive, in that poorer people spend a larger percentage of their income paying sales taxes than do wealthier people. Henchman said there are adjustments that could be made to make it less regressive (say, a lower tax for getting one’s hair cut at Supercuts and a higher tax for a fancy and more pricey salon). But the issue of regressively remains.

The Tax Foundation also endorsed the idea of changing the modified business tax, otherwise known as the MBT or payroll tax. It’s a tax of 1.17 percent of payroll (after certain exemptions) for general business, and 2 percent of payroll for financial institutions.

The Foundation recommended eliminating the two-tiered rate for business and banks, as well as the exemption for small businesses, currently set at $85,000 per calendar quarter. (That’s set to expire next year, however.) The report also recommended eliminating the bank branch excise tax, a fee based on the number of bank branches there are in the state.

A couple notes about this:

• The payroll tax — unique among the states to Nevada — was sought by business in 2003 in order to avoid the dreaded gross receipts tax on revenue. Although it’s essentially a tax on hiring, it’s also remarkably stable (even in the recession, it didn’t fall as far as other tax revenues) and easier to calculate. It’s also the only business tax available in Nevada.

• The vast majority of the Chamber’s businesses are small businesses, so when it comes time for the group to finally get behind some specific recommendations, it would be hard to see the group advocating for a reform that takes away the exemption for small business. It may be more philosophically consistent and pragmatic (if more people paid, revenue would be higher and the rate could be lowered), but plenty of small businesses have come to rely on that exemption.

Finally, the report addresses Nevada’s property tax system, which is surprisingly complex, with a formula base on the replacement cost method and factoring in depreciation. The group recommended using a market-value method of assessment, eliminating the depreciation calculation, and reforming property tax caps (passed in 2005 to deal with skyrocketing home values).

Among the important recommendations: Adjust the “split roll” property tax rates (currently 3 percent for owner-occupied residential property, and 8 percent for commercial property, although those numbers are skewed by other factors and could end up being less). But, as the Foundation correctly noted, the state’s constitution calls for taxes to be “uniform and equal,” and a split roll isn’t likely to meet that definition if it was ever challenged in court.

There are some good ideas in the Tax Foundation report: The Live Entertainment Tax is needlessly Byzantine, and makes little sense, and some of the largest events in the state are exempt. The split roll property tax is very likely unconstitutional. A single payroll tax rate makes sense for all businesses.

But other ideas are more problematic, not least of which is the expansion of the sales tax to services. While this may be an attractive option for business (especially with exemptions for goods and services purchased by business to be used in production of things that will ultimately be sold to the public), it’s not so great for consumers.

THE POLITICS

The question now is, what will Gov. Brian Sandoval do? He’s up first with ideas that have to be built into his budget and appear in his Jan. 15 State of the State address.

Sandoval acknowledged this weekend at the Western Governors Association summit that the dynamics of taxation changed considerably in November, when a red wave brought more members of the GOP to Carson City than anyone had anticipated. (The governor has yet to meet with some newer members of the Assembly Republican caucus, some of whom campaigned against tax increases.)

It’s safe to say that Sandoval has concluded that the state needs new revenue. (He repeated that assertion on Monday, following an Interim Finance Committee meeting, where it was reported that there’s a deficit in the current budget, not to mention the next biennium. “As my office continues building the budget for the next biennium, we must continue to look beyond our traditional revenue sources, which are not recovering at the same pace as the rest of our economy, toward funding mechanisms that compare and complement the growth of our changing economy,” the governor said in a statement.)

That implies he’s ready to bring a “funding mechanism” that the state currently doesn’t have, rather than simply modify the state’s existing taxes. That’s in direct contrast to the Tax Foundation, which declared in its report that “Nevada should consider fixing what is broken with the current system instead of pursuing a brand new tax to layer on top of the narrowly based, complex existing taxes.”

But what if even that’s simply not possible? What if the new Republican majority in the Assembly isn’t prepared to vote on a new tax? Might those lawmakers be amenable to a lesser solution, especially if it comes with the imprimatur of the Chamber? (They can take credit for lowering the rate, too, assuming that happens.) Or will they see that as so much sophistry and just say no to everything? If so, we could have a repeat of the disastrous 2003 session on our hands.

We’ll know by mid-January what the governor has finally decided. We may not know until much later into next year’s session what the final answer will be.

UPDATE: As if to underscore the nature of the tax study, this exchange took place on Twitter last night after the news of the Tax Foundation’s study broke:

Victor Joecks @VictorJoecks (the director of communications for the conservative Nevada Policy Research Institute think tank, which is even more anti-tax than the Tax Foundation).

Done in a revenue-neutral way, elements of @lvchamber’s tax study are similar 2 @NevadaPolicyRI’s tax reform proposal

And Henchman replied:

Joe Henchman @jdhenchman

@VictorJoecks @lvchamber @NevadaPolicyRI you guys were an inspiration – a lot of good ideas that deserved re airing

So there you have it! A lot of good ideas inspired by the Nevada Policy Research Institute, a group that has said there is no need whatsoever to raise taxes, even though the Economic Forum is predicting lower revenues for the next biennium.

Steve Sebelius is a Review-Journal political columnist. He blogs here at SlashPolitics.com. Follow him on Twitter (@SteveSebelius) or contact him at 702-387-5276 or SSebelius@reviewjournal.com.

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