CARSON CITY – A proposal to simplify, broaden and stabilize Nevada’s tax base by expanding and reducing the sales tax to include services from haircuts to legal advice is generating some support and plenty of questions from lawmakers and interest groups.
The proposal, presented Tuesday by Geoffrey Lawrence of the Nevada Policy Research Institute, would be revenue neutral and would lower the 6.85 percent state sales tax rate to 3.5 percent. As part of the proposal, the insurance premium tax and the payroll tax paid by businesses would be eliminated as well.
The NPRI proposal would even include food purchases as taxable items, but would also provide tax relief to residents up to the federal poverty line.
One potential challenge to the proposal is that voter approval might be required depending on how such a plan was drafted.
Lawrence, a fiscal policy analyst for NPRI, said his plan is intended to counter what is expected to be a call for a broad-based business tax by at least some members of the Legislature in 2011.
Lawmakers are facing a $3 billion shortfall and are awaiting a study of their own on how to respond to the anticipated revenue shortfall. The study by Moody’s Analytics funded by the Legislature’s Interim Finance Committee is due to lawmakers later this year.
Lawrence said his plan would stabilize and broaden Nevada’s tax base without further burdening Nevada’s taxpayers, and would also “strengthen our economy by eliminating the job-killing modified business tax.”
The NPRI study found that a corporate income tax is actually one of the least stable tax instruments available to state governments, and is significantly less stable than any tax instrument currently employed in Nevada. Adding a corporate income tax would therefore make the state’s tax structure more, not less, volatile, Lawrence says in his report titled, “One Sound State, Once Again: Comprehensive fiscal reforms to again make Nevada strong, prosperous and free.”
The study also calls for spending reforms, including a priority-based approach to budgeting and limits on spending increases tied to inflation and population growth.
Several lawmakers commenting on the report have questioned its usefulness given that it is revenue neutral at a time when the Legislature is anticipating a $3 billion hole in the next budget.
But the proposal is a long-term approach to resolving the state’s revenue and spending issues and is not meant to be a quick fix, said Lawrence. A broader sales tax would bring in increasing revenues at the 3.5 percent rate as the Nevada economy recovers.
Assemblyman Ed Goedhart, R-Amargosa Valley, said he likes the approach, which follows a flat tax model that he and many voters would support.
“I think most Americans are tired of all these loopholes and exceptions,” he said. “The twisting of tax regulations to benefit a powerful constituency or lobby.”
A straight 3.5 percent tax on consumption would be a stable form of revenue, Goedhart said. There should be no exceptions, he said.
His one objection to the proposal is the provision to provide tax relief to low income residents.
“The cost of government applies to everyone,” said Goedhart, a member of the Assembly Taxation Committee.
Goedhart said such a plan in Nevada could serve as a role model nationally and help generate support for a similar change to the federal income tax.
The Legislature also needs to impose spending controls and look at other reforms, from prevailing wage laws to meaningful changes to the state health insurance and public employee retirement plans, he said.
Assemblyman Tom Grady, R-Yerington, said the study contains valuable information the Legislature can use as it tries to resolve its budget problems next session. But details would have to be spelled out in legislation before any such proposal could win his support, he said.
There are a number of sales tax exemptions currently, such as the one for farm equipment purchases, said Grady, a member of the Assembly Taxation Committee. Surrounding states have exemptions for farm equipment and not offering the same here would put Nevada companies at a disadvantage, he said.
The NPRI research is solid and gives lawmakers a starting point for a tax discussion next session, Grady said.
Sen. Mike Schneider, D-Las Vegas, said the proposal as presented wouldn’t bring in more money even though the state is facing a major revenue shortfall. He also questioned whether such a major change to Nevada’s tax structure could be accomplished in the 120-day session when so many other pressing issues are also on the table.
Add in redistricting and all the new lawmakers in the Senate and Assembly and the task would be challenging, he said.
“It would be a major undertaking,” said Schneider, a member of the Senate Taxation Committee. “I just don’t think, with the way our session is designed, that we can get that work done.”
A special session would probably be the best way to tackle such an issue, but whoever is governor in 2011 probably won’t want to call lawmakers back in for such a task, Schneider said.
Assemblyman Paul Aizley, D-Las Vegas, questioned how a revenue neutral tax proposal would help solve the state’s budget problems. The budget for the next two years would typically be in the $6.5 billion range, but is expected to be about $3 billion short, he said.
In talking to voters, Aizley said he is asking what services they want protected and what cuts they are willing to accept. Most people wanted education protected, he said.
Aizley, a member of the Assembly Taxation Committee, said he would also need details of what services would be included in an expansion of the sales tax.
“People don’t know the implications,” he said. “I would not say yes to a services tax until it was spelled out what those services would include.”
Aizley also rejected the NPRI call for what he described as a “zero based” budgeting process for state agencies to use. It is time consuming and labor intensive to review every single program every two years when it is clear many programs will have to be continued, he said.
Assemblywoman Sheila Leslie, D-Reno, said it is encouraging that even a fiscally conservative group like NPRI is in agreement that the state needs to consider revising its tax structure. But any tax plan that is revenue neutral is not realistic given the $3 billion budget hole facing lawmakers next year, she said.
Leslie also suggested the proposal is not really broadening the tax base, since it is just expanding an existing levy to services such as haircuts or tax preparation.
“I don’t think it is broadening the tax base so much as it is taking out the volatility by taxing more things,” said Leslie, a member of the Assembly Taxation Committee.
By eliminating the payroll tax as part of the plan, it could be argued the tax base would actually be narrowed under the NPRI plan, she said.
“It would reduce the burden on business and increase the burden on the rest of us,” Leslie said. “I think the middle class already pays its fair share.”
The idea of taxing services has been discussed before, both in 2003 and 2009, she said. Such proposals always run into roadblocks when the groups to be included in the tax object, Leslie said.
Assemblywoman Peggy Pierce, D-Las Vegas, said she welcomes NPRI to the tax discussion, noting that for a long time the conservative voices in Nevada have suggested that no changes are needed.
But Pierce, who also serves on the Taxation Committee, said sales taxes are regressive and the state already has one of the most regressive tax systems in the nation.
“Making our tax system more regressive is not an improvement,” she said. “I’m not entirely opposed to looking at a sales tax on some services, but not as a substitute for a broad-based business tax.”
Nevada needs to look at how other states that adequately fund their programs and services raise tax revenue and then model itself after those states, Pierce said.
Carole Vilardo, president of the Nevada Taxpayer’s Association, said the proposal needs a great deal of fleshing out so that policymakers can know the implications of what such a change would mean to the state’s tax structure.
Any change to one portion of the sales tax rate, the 2 percent that goes to the state general fund, would need voter approval, she said. Vilardo also questioned whether such a proposal could have an effect on those portions of sales taxes pledged to pay off bonds.
“When you talk taxes, the devil is in the details,” she said.