By Ron Knecht and Geoffrey Lawrence
Nevada State Controller and Assistant Controller
This column reviews the new and increased taxes, totaling $700-million per year, passed recently by Nevada’s Legislature at the behest of Gov. Brian Sandoval.
This record tax package makes permanent some previous tax hikes (“sunset” taxes) that were originally billed as only temporary measures to help Nevada weather the Great Recession. These include sales taxes, payroll taxes, business licensing fees, and car registration fees. Sandoval and lawmakers also more than doubled taxes on cigarettes and raised business license fees to $500 annually for some firms, up from $100 six years ago.
The most important new tax, though, is the Commerce Tax, the fourth gross receipts tax (GRT) proposed for Nevada in twelve years. GRTs are very destructive taxes, especially to businesses that operate in competitive, low profit-margin industries. They even tax firms that are losing money. They can drive barely profitable companies into the red and even to bankruptcy.
Because GRTs are assessed at every stage of production, they have a large cumulative effect on complex goods like computers or solar panels. This harms not only high-tech firms that folks like Sandoval say they want to attract to Nevada, but also the consumers that buy from these industries. So, ironically, states such as Texas that have previously relied on GRTs are reducing them as Nevada is boarding this sinking ship.
Sandoval fought to implement a GRT twelve years ago, as Attorney General. A massive GRT proposed in 2003 was defeated by Assembly Republicans, including Knecht. In 2014, Nevada teacher unions proposed the next version, the Margins Tax, which voters defeated four-to-one in November. Sandoval then proposed another version, the Business License Fee, early this year. Then he switched to the Commerce Tax at the end of the 2015 legislative session and finally succeeded.
The GRTs Sandoval proposed this year are far more pernicious and destructive than the earlier versions because they use different rates and other terms for each industry. Although his proposals and the margins tax were all loosely based on the GRT from which Texas is retreating, the margins tax proposal at least would have allowed individual firms deductions that reflect their specific expenses.
The Commerce Tax groups businesses – except for gaming, which is exempt – together into one of 26 broad industry classifications. Then, it forces each sector to pay pre-determined rates applied to the gross receipts, regardless of their individual operating costs. Since every firm is unique and doesn’t conform to industrial averages, some will be hurt more than others.
Most importantly, however, with its different rates, the Commerce Tax creates a permanent feeding frenzy for the political classes – politicians, lobbyists, bureaucrats, government affairs specialists and other political fixers, etc. These political crony interests will profit for many years at the expense of businesses and other taxpayers whose productive actions in the private sector actually create real human wellbeing.
This is so because the rates, thresholds, exemptions, etc. applicable to each sector are subject in each future legislature to being changed to benefit favored businesses and to punish disfavored ones. So, business will have to pay ever more attention and spend ever more money on politics — money and attention that would otherwise be used to improve operating efficiency and deliver consumer benefit. Everyone will have to pony up dollars to the political classes every term because, as the saying goes: If you’re not at the table, you’re on the menu.
What does the GRT mean for a typical Nevada business? With a $4-million revenue threshold before it kicks in, it would seem to protect small business. However, if one person holds franchises from a hamburger chain at five locations and each one generates $1.5-million in annual sales (a typical figure), the owner would pay the tax on $3.5-million in revenues, even if the burger shops were legally separate companies. For a hyper-competitive industry like food service, this may well erase any profits and send the small-business owner into the red.
In past sessions, the tax-and-spend crowd tried to sell the notion that GRTs and other taxes it proposed were needed to diversify our tax base. They also claimed that various businesses need to pay more taxes to contribute a fair share, despite the fact that businesses of necessity merely pass on the tax burden to consumers via higher prices and to employees via lower pay and job cuts.
This time, they dropped those fictions, admitted that it’s all about again moving ever more money from the private sector to government, and went for the gold.