Petition ruling a blow to business

The 2013 Legislature was expected to be like every recent session before it: Lots of talk about taxes and no action.

Now lawmakers have an urgent reason to pass business-friendly tax reform, and they have the Nevada Supreme Court and the state teachers union to thank for it.

On Thursday, justices reversed a lower court and upheld the Nevada State Education Association petition to create a new 2 percent margins tax on businesses. When they convene Monday, lawmakers will have 40 days to act on the measure. No one, not even the NSEA leadership itself, expects the Legislature to pass the initiative.

So the tax, which would be applied to all business revenue beyond $1 million (with some deductions), will go before voters in November 2014 and, if approved, take effect Jan. 1, 2015.

Which means Nevada businesses must prepare the possibility of a powerful kick to the groin 23 months from now. Which means employers in the state with the worst unemployment rate in the country - 20 percent when you include everyone who has stopped looking for work or is an underemployed part-timer - have another reason to play it safe, take no chances and hold the line on hiring.

It also means minority Republican lawmakers, whose votes are needed to pass any tax increase out of the Assembly and Senate, aren't going to back any tax increases beyond an extension of temporary rates in effect since 2009. The next general fund budget runs through June 2015. They won't pile additional levies into that spending plan when a separate monster tax hike - the margins tax, by itself, would suck an estimated $800 million per year out of the private sector - could arrive with six months left in the budget.

Nevada businesses already have been hit with a tax increase this year. One month ago, they started paying higher state and federal unemployment tax rates to help replenish Nevada's unemployment trust fund. And companies are bracing for the costs and burdens of Obamacare, which takes full effect in 11 months.

But this doesn't mean the tax reform debate is dead. If anything, the Democratic Party leaders who promised to begin re-examining the state's tax structure on Tuesday have reason to chart a new course, one that would satisfy their desire for a broader tax base while also providing struggling businesses with tax relief and an incentive to hire.

The 2013 Legislature must repeal the modified business tax and replace the revenue it generates with a tax on services.

The MBT is a tax on business payrolls that punishes companies for hiring workers and handing out pay raises. It is a tax on job creation.

Gov. Brian Sandoval built his executive budget around another two-year extension of a higher MBT, with a break that exempts a few thousand small businesses from the levy. He released this plan as fellow Republican governors from the Midwest and South proposed sweeping tax reforms to boost hiring and economic activity. In Oklahoma, Kansas, North Carolina, Indiana, New Mexico, Nebraska and Louisiana, governors have proposed cutting or eliminating personal and corporate income taxes and boosting sales tax collections by eliminating exemptions and expanding the levy to some services.

Taxes that target business revenue and personal income penalize investment and productivity. Taxes based on consumption, on the other hand, are rooted in individual choice. If you want to put people back to work and get them shopping again, the latter option is better than the former.

Although Nevada businesses have adapted to the MBT and learned to deal with it - like a person who manages to walk with an aching knee without limping - the prospect of sticking them with a margins tax, too, is a major economic policy problem for the state. Why in the world would any business consider relocating or expanding here when a large tax increase might take effect in January 2015?

"I'm very concerned that this is going to hinder the efforts of the governor and (Office of Economic Development Director) Steve Hill to attract more industry to Nevada," Senate Minority Leader Michael Roberson, R-Las Vegas, said. "Just the fact that this is going to be on the ballot in two years sends the wrong signal. What are we doing? If we get more employers in the state and get more people working again, we'll have more money for our schools and health and human services."

Indeed, when the Review-Journal editorial board conducted endorsement interviews with legislative candidates last fall, many said double-tapping employers would be disastrous in a state that desperately needs more jobs.

"The MBT and the margins tax both have merit," Sen. Kelvin Atkinson, D-North Las Vegas, told the Review-Journal last year. "But an MBT plus adding a 2 percent margins tax would be bad. You can't ask businesses to do both."

A revenue-neutral replacement tax on services wouldn't need to be rushed. It could be made to take effect in January 2014, so the state has time to establish protocols and affected businesses can plan and learn how to collect the levy. Or lawmakers could put the reforms on the 2014 ballot alongside the margins tax plan, as an alternative.

There would be calls for exemptions, for everything from child care to attorney fees. Keeping the services tax base as broad as possible, however, would allow a lower rate - and the possibility of reducing the state sales tax rate, too.

If lawmakers are going to debate the state's tax structure, they have to consider the damage the payroll tax and the margins tax, combined, would do to the state's economy. The only way to prevent that from happening: Eliminate one. And they can't kill the margins tax outright - they can only give voters the final say.

RIP, MBT.

Glenn Cook (gcook@reviewjournal. com) is a Review-Journal editorial writer.