It happens

It was sweltering. Januaries in Carson City are cold, of course, but the Nevada Assembly hall was jammed with bodies and television lights. Even on a weekday evening people traveled to the capitol for these occasions.

Gov. Robert List entered the hall to applause, as most governors do. He held in his hand the text of his 1981 message to the legislature. It contained a proposal that would have impact on the state for the next 32 years, and continues its work today.

“I call for a dramatic slash in property taxes and a massive program of tax reform,” he said. “I propose that we adopt a tax reform plan which will save property owners $150 million on property taxes the first year alone. Let us shift the tax burden to all the people who utilize state services through the sales tax. And finally I propose that we revise the gasoline tax system to enable the state to better meet the needs of the growing number of citizens.”

List called for a 65 to 75 percent cut in property taxes and a 64 percent increase in sales taxes, from 3.5 percent to 5.75 percent. His language was designed to sell with its talk of “reform.” One person’s reform is another’s regression. When List said the tax burden should be shifted onto “all the people who utilize state services through the sales tax,” he neglected to mention that the sale tax does not apply to services—and he wasn’t proposing to extend it that way.

The proposal was not a surprise, though List’s embrace of it was. He had promised not to raise the sale tax and had run for governor saying that the 3.5 percent sales tax should be lowered to 3 percent.

Two legislators—Republican Robert Rusk and Democrat Steve Coulter—were already promoting a similar plan before List’s message, but until the governor got behind it, its chances were uncertain at best.

After Democrats and the press took a fall, List won enactment of his tax package—and then literally within days, the state paid the price. Ever since, Nevada has been more vulnerable to economic downturns, less competitive with other states, hard pressed to stay ahead of the curve—and workers in the state have been soaked.

Soon, the latest Nevada legislature not to deal with the problem created in 1981 will adjourn and go home for two years, kicking that can down the road one more time.

It’s not as though the legislature didn’t know what was likely to happen with a high sales tax. It was warned before, during and after the 1981 legislative session.

In 1960, the Nevada Legislature commissioned a sweeping study of the state tax system. In a book-length report, Financing State and Local Government in Nevada—it became known as the Zubrow report, for its first-listed author—state policymakers were told they should never let the sales tax get too high.

A sales tax was new in Nevada. Until the postwar years, it was anathema in the state because of its regressiveness—that is, it hit the working poor harder than the wealthy. But then in the early 1950s, the baby boom hit the state’s schools, and parents were beating down the doors of the capitol demanding tax increases. Business leaders would not permit a business tax. Gambling, tobacco and income taxes were considered and rejected. Teachers’ leaders supported a sales tax in spite of the harm it would do to Nevada’s poorly paid teachers themselves, and a two cent sales tax went on the books in 1955.

Zubrow pointed out the regressiveness and also said that people did not know how heavily they were being taxed because collection of a sales tax is so gradual. This, the report said, “might be termed the ’sucker theory’ of taxation, and has no place in the formulation of a sound tax program.”

For a long time, the state respected that warning. The sales tax went up, but by the time of List’s proposal it was just 3.5 percent.

The context for 1981 was important. Just two days before List spoke, Ronald Reagan became president, shifting the frame of reference for political dialogue in the nation to the right.

More important, Nevadans themselves had just defeated a local version of California’s famed property tax-cutting Proposition 13. The measure, called Question Six in Nevada, was on both the 1978 and 1980 ballots. It was approved in 1978, after which the 1979 legislature passed some changes in tax policy to satisfy property owners. Then in second-round voting in 1980, Nevadans defeated Six.

List felt the state should do still more about property taxes, so he proposed the huge reduction. It was an easy call for a state governor—the state did not get property tax money. Local governments did. Clark County Commission chair Manny Cortez said, “I think he’s overreacting” to Question Six. In effect, List was giving victory to the losing side in the Question Six election.

Even a wounded governor—List was handicapped by scandal and by constantly changing his positions—has influence in the legislature. And he was aided by legislative Democrats, who didn’t like the high sales tax but weren’t willing to make a real fight against it. Lt. Gov. Myron Leavitt and others spoke out against the sales tax hike but didn’t go beyond that.

In addition, Nevada did not then have organizations that spoke for the working poor who would be victimized by the shift from property to sales tax reliance.

And press scrutiny of the shift (including mine) was poor. Only a few scattered news stories hinted at what would be ahead if the List plan was enacted.

So most of the fuses that were supposed to protect the public melted.

But there were a few people who spoke up, who not only objected but described exactly what would happen when List’s program passed. And no one listened.

They were economists.

On Feb. 2, 1981, the Reno Evening Gazette carried interviews with economists Glen Atkinson and Tom Cargill across the top of its front page.

Cargill spent a lot of time in public outreach, trying to relate economics to the public’s concerns. Atkinson was a specialist in public finance.

Cargill and another economist—gambling expert Bill Eadington—also testified at the Nevada Legislature on the tax shift.

In these forums, the economists anticipated virtually everything that later happened under the List plan.

• Property owners would receive a “windfall gain,” but low-income people who rented and paid sales taxes would be hit hard.

• Fluctuations in the unstable sales tax would make planning very difficult for local governments, and their spending would be determined at the state level.

• The cost of administering the property tax would remain but the money produced by the system would drop.

• The revenue for government services would be cut sharply just when it was needed most—when hard times come and people reduce their spending.

• The small counties whose residents drove to Henderson, Reno and Las Vegas to do major shopping would lose out on sales tax money.

• Cargill, Atkinson and Eadington said that of the three basic forms of taxation—income, property and sales—the sales tax is the least fair. Atkinson said a state income tax could be adjusted to the income level of the taxpayer.

The economists gave lawmakers everything they needed to foresee the impact of the sales tax hike on Nevada. But the Nevada Legislature reflects the voters who elect it, and there was an anti-intellectual strain among the legislators. “Experts” and “professors” were spoken of derisively. Of greater impact were political alliances and loyalties, beliefs and dogma, and the importance of cultivating property owners.

At the national level in the beginning of the Reagan administration, concepts like the Laffer curve and supply side economics were being tried because they fit political beliefs. The Nevada Legislature was dominated by business interests who were more likely to provide campaign support than the working poor. And fairness and equity in taxation were scarcely even mentioned at the 1981 legislature.

As List’s tax package moved toward approval, there was also talk of steps to ameliorate its impact.

For one, though it is little remembered today, the sales tax increase was supposed to be temporary. That’s because of the next item—an amendment to the Nevada Constitution to allow personal and commercial property to be taxed at different rates. Then business properties could be taxed at a higher rate and the sales tax done away with.

And there were proposals, including one in List’s message to the legislature, for renters to share in the large property tax cut. “The governor is committed and determined to find some means or a pass-through to renters,” said his press secretary, Bob Lewis.

None of those things ever came to pass. The legislators did indeed approve the constitutional amendment—until the sales tax hike went through. Then, at the 1983 legislature when the amendment had to be approved a second time, it was killed. List never proposed a renters pass-through. And the sales tax hike was anything but temporary.

After the legislators approved the List tax package and went home, the governor was left to reap the whirlwind. (Some legislators actually had second thoughts and tried, late in the legislative session, to repeal the sales tax hike only to be stymied by List’s veto threat. And a lawsuit by 51 taxpayers represented by lawyer and former Democratic lieutenant governor nominee John Foley also failed to stop the hike.)

Seldom has a new public policy gone so wrong so fast. The nation was headed into the most crippling recession since the war. Prompted by a sharp increase in the cost of oil during the Iranian revolution and tight money in the U.S., the take from the Nevada sales tax plunged. List cut spending once, twice, three times.

“When businesses must tighten their belts, government should do the same,” List said.

But that ignored the fact that one of the reasons people pay for a government in good times is so it will be there for them in bad times. List was slashing government just when it was needed. If government operates like a business, citizens get shafted.

The consequences were serious. By the end of List’s term of office—he was defeated for reelection by Richard Bryan, who promised to repeal the 1981 sales tax hike—the state had to pull back some money from the state pension system temporarily to pay its expenses.

When Bryan took office, he laid out a different philosophy of how government should work: “We have heard that in hard times, business tightens its belt. Government, we are told, should do the same. It is an appealing argument, and indeed when times are tough, government should cut expenses. Government cannot, however, avoid its responsibilities. When times are tough, business loses customers. When times are hard, government gains customers, and they are customers who cannot take their business elsewhere!”

The experience of the 1981 recession and the change in viewpoint in the executive office obviously called for restoring some predictability and stability to the tax system, but it never happened. Bryan proposed, and the legislature granted, a slight rise in the property tax but never tried to repeal the sales tax hike. So, chronic budget crises became a part of the Nevada routine.

Shortly after Bryan left office for a U.S. Senate seat in 1989, another recession hit. His successor, Acting Gov. Robert Miller, went through the same process List had—several rounds of cuts. Moreover, Miller took his cue from List, not from his fellow Democrat Bryan. When families and businesses must tighten their belts, Miller said, so should government.

As the state emerged from recession, Miller proposed nothing to prevent future budget crises. He served longer than any other governor, but did nothing about the problem.

As legislatures came and went, it became clear that the notion of following a taxation blueprint or model, as had been done with Zubrow, had fallen by the wayside. Most legislatures provided patchwork tax plans.

In 2001, there was another recession and another state budget crisis. This time, Gov. Kenny Guinn did not parrot platitudes. He just grimly went through the now-familiar ritual of cuts. But in 2003, he proposed a sweeping new tax program that he believed would make the tax system better. He hoped it would also be fairer. But it did not work the way he wanted. What he put in at one end of the pipeline didn’t look much like what the lawmakers took out at the other end. And he never proposed doing anything about the sales tax. The budget crises would continue.

The next one came in 2007, and this time the consequences were truly devastating. Republican Jim Gibbons had become governor, and he spent his first legislature trying to reduce the size of state government just as it was about to be needed by Nevadans. And this recession was the worst since 1981.

Gibbons, as a former legislator and airline pilot, had no experience in fiscal matters. He floundered, sometimes calling the legislature into session to help him (something List and Bryan never did), other times leaning heavily on his aides. At one press conference at the Nevada Agriculture Department in Reno, he began alone at the podium. As he was peppered with fiscal questions he couldn’t answer, he called aides to join him. By the end of the session, three of them were gathered around him to answer reporters’ questions.

Virtually his entire term of office was in recession. It would have tested the most capable executive, and Gibbons was hardly that. The damage to state programs was serious and substantial. Years of progress under governors and legislators of both parties were destroyed. Higher education was set back years, if not decades, and economic development became a higher mountain to climb as other small Western states responded more dynamically. That was the nature of these chronic crises. In some cases, the investments made in various programs is lost and when the recession is over the same investments must be made again in order to rebuild.

Gibbons was defeated for election and replaced by Brian Sandoval, who quixotically adopted part of Gibbons’ fiscal policy with a no-new-taxes pledge.

As the years passed, the sales tax became doubly hazardous. Its take declined. Because it applied to sales but not services, and Nevada’s economy was moving from goods to services, it was producing less money while still making government vulnerable in hard times. Extending it to services—which would have made it less regressive—never won legislative approval.

In 1989, a new study of Nevada taxation commissioned by the legislature from the Urban Institute and Price Waterhouse was delivered. Published by the University of Nevada Press as a book, A Fiscal Agenda for Nevada, it told legislators what they did not want to hear. For one thing, for those who had argued that the voter removal of the sales tax from food had eliminated the regressiveness, the report said the “current Nevada sales tax is in fact regressive.” Other reports agreed.

Chico State analyst Robert Morin in 1999: Nevada is characterized “by low levels of service provision, consistent under-estimation of revenues, over reliance on two primary sources of revenue (sales and gaming taxes), and the potential for fiscal problems linked to the state’s population growth.”

Institute on Taxation and Economic Policy/November 2009: “Ten states—Washington, Florida, South Dakota, Tennessee, Texas, Illinois, Arizona, Nevada, Pennsylvania and Alabama—are particularly regressive. These 10 states ask their poorest residents—those in the bottom 20 percent of the income scale—to pay up to six times as much of their income in taxes as they ask the wealthy to pay.”

But the Urban Institute/Price Waterhouse study gave the legislators time to deal with the problem. The result was that the 1989 legislature did nothing and subsequent legislatures were not told of the urgency of the report’s findings.

List gave the state one of the nation’s highest sales taxes. It remains there today. Only Minnesota, Arizona and California are higher. For 30 years, workers contemplating moving to Nevada have found the state on that list.

List later said, “I had no way of knowing a recession was coming.”

But recessions are always coming, and state tax systems are supposed to be geared not to flush times but to hard times. In the postwar years until 1981, there had been recessions in 1948-49, 1953-54, 1957-58, 1960-61, 1969-70, and 1973-75. Since the Nevada tax shift, they occurred in 1981-82, 1990-91, 2001, and beginning in 2007. Other states have entered recovery from the “Great Recession.” Nevada is still in recession, and this year’s legislature is likely to produce another patchwork.

In other words, state budget crises will continue as long as recessions do. The prescriptions given by the economists in 1981 and by the Urban Institute/Price Waterhouse study are still there, waiting for legislators to given them a higher priority than dogma, banalities, and political hedges.

In 2008, a year into the latest recession, Assemblymember James Settlemeyer said, “Just as families have to make sure they’re not spending as much, the state has to do the same.”