>Thinking Beyond The Chains: Nevada, Revenue, Taxes, and Economic Development

>Those Nevadans who are locked and bound into sound bites concerning the financing of public services are in for a rough time during the next session of the State Legislature.

What Do We Have?

Nevada ranks 43rd nationally in terms of total tax liability. The Silver State has no state corporate income taxes, and no taxation on corporate earnings by banking institutions. The estate tax is connected to and limited by the federal estate tax, and there is no state inheritance tax.  There is no individual income tax, and property taxes are capped at $3.64 per $100 of assessed valuation. The maximum state sales tax rate is 7.5%. Business taxes are limited to 0.65% of gross wages less exemptions for health insurance plans, with more flexibility for those with payrolls under $250,000. [Eden]

State Gaming Taxes include an approximate 7.75% effective tax rate, with a 6.75% tax on gross gaming revenues and about 1 percent of taxes in fees. Nevada casinos have the lowest taxation rate in the nation, paying a maximum of about 9% to the Department of Taxation, which is definitely less than the 50% paid in Florida. Gaming revenue taxes are directed into the state’s general fund. [UNLV] The room tax was increased by 3% during the last session, [OCC] Nevada has approximately 150,000 rooms (including those added by the construction of CityCenter) with a 78.6% occupancy rate. [LVRJ]

State revenues are comprised of 27.1% from the sales tax, 24.2% from gaming, 13.3% from the Modified Business Tax, 8% from Insurance Premium taxation, 4.1% from the live entertainment tax, 3.4% from lodgings tax, 3.5% from tobacco taxation, 1.4% from liquor taxes, 1.3% from short term auto leases, 1.7% from RPIT, and 1.4% from minerals taxation. [B&P NV] All told, 67% of Nevada’s general fund revenues depend on consumer spending.

Nevada will collect $2,459,968,186 in revenues during FY 2010, about 2.5% better than earlier projections. [B&P NV] The state office of Budget and Planning expects sources amounting to $16,189,269,922 in FYs 2010 and 2011. [B&P NV pdf]  As much as some would like to massage it away, we had probably better assume that the State office of Budget and Planning is correct, and that Nevada will face a short fall of approximately $3 billion in FY 2011 related to four factors:
(1) Tax revenues coming in below those in prior fiscal years.
(2) The loss of one-time federal stimulus funds from ARRA.
(3) The expiration, on June 30, 2011, of $1 billion in temporary tax increases approved by the state legislature in 2009.
(4) The end of employee furloughs and the restoration of benefits cut in 2009 to “make the budget.” [Sunshine Fnd]

Where’s It Going?

If we put all education spending together (K-12, special programs, Higher Education) the projections are $3,598,651,097 or about 56.04% of the total expenditures. Commerce and Industry account for $78,100,494 (1.22%), Human Services account for $1,828,427,751 (28.48%), Public Safety accounts for $548, 788,632 (8.55%), Infrastructure accounts for $54,026,394 (0.84%0, and Special Purpose Agencies account for $10,249,413 (0.16%). [B&P NV pdf]

What Are The Issues?

Getting out of this bind is going to take more than knee jerk reactions to the current fiscal situation. Simplistic solutions presented in more flush times aren’t going to suffice because (1) there is always the peril of slicing off portions of the budget which merely serve to make other operations more expensive, and (2) there is the possibility of unintended consequences which serve short term needs but create long term losses.

For example, we could cut the Attorney General’s budget for enforcing statutes against Medicaid fraud, but likely find ourselves paying out more in fraudulent claims in the Human Services domain. We could eliminate IT equipment upgrades in the Secretary of State’s office — but what might be the result of creating longer delays in the issuance of state business licenses?  We could cut back on the personnel and equipment requests for the Department of Taxation, and then face the prospect of delayed or inadequately administered collection of  required revenues.  We might reduce funding for local responders in mental health services, and then find ourselves paying more for the cost of incarcerating the mentally ill.

The second major question requires more vision than eye-sight. Eye sight may imply that the largest portion of the budget, i.e. education, should take the largest cuts.  However, we know that there are four crucial components of any business decision to locate its operations: (1) workforce characteristics; (2) transportation infrastructure; (3) research facilities and expertise; and (4) market location. Let’s assume that Nevada would like very much to attract more businesses enterprises to this state — what would it take to do this?

There is, in fact, a form of “business geography” studied by the Brookings Institution, in which two factors listed above are elemental in the decision to locate enterprises. The Cohen Study (pdf) speaks to “cost sensitivity” as it relates to locating (or re-locating) company headquarters. Among the factors which are less “cost sensitive” than the key requirements are a “diverse professional employee base,” and a “strong educational system for employee’s children and continuing education opportunities.” This goes a long way toward explaining why the Research Triangle region in North Carolina (Raleigh, Durham, Chapel Hill) has been selected by many corporations for their base of operations. In terms of research and development, what companies want is proximity to major research universities — witness the number of pharmaceutical corporations located along Route 1 near Princeton, New Jersey.

Speaking to infrastructure needs, companies value a “good transportation system near major interstate highways,” access to all necessary basics like utilities, water treatment, and gas; and “a well educated workforce.” [Cohen pdf]  In all four of the categories of business operations (headquarters, research and development, back office, and manufacturing and distribution) the available of quality educational services in the community played a significant role.  We should also note that the level of taxation in an area is included in the “cost sensitivities” of the corporate decision making process, but that companies were less sensitive about the costs when the elements they sought to support their business operations were available.

We could, indeed, focus on the chimera of “low taxation” as the end and be all of attracting commercial enterprises, and companies may seek information about “low taxes,” but when the chips are all down on one of our green felt tables — what the companies are really looking for are communities with affordable utilities, adequate real estate, access to research institutions, efficient transportation systems, and an educated workforce. The bottom line is that we could, in fact, slash funding to support our educational systems, but in doing so we could as easily make this state less attractive to the very kind of economic diversity we say we want to establish.

There will be some crucial decisions made in the next session of the Nevada Legislature. If we are truly interested in improving our long term economic outlook, then we need to be exploring new alternatives in regard to how we finance our public domain. Instead of merely applying the incantation of “no new taxes” as if this would attract business enterprises by magic, we need to be focusing our attention on that which will generate new revenue streams in the future.  Put another way, we need to focus on spiraling upward — perhaps on the basis of believing that more investment in education and infrastructure will yield, in turn,  more investment from commercial enterprises in this state — instead of persisting in the unsustainable belief that less investment will somehow create more interest from the private sector.

A pessimist might dismiss this argument as ethereal, and resist the attraction of alternative thinking, but all that will come to us from this narrow perspective is the continuation of an unsustainable system in which two-thirds of our revenue in dependent upon the vacillations of consumer spending. We can do — and must do — better than this.

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