Now what?

Mom and Pop’s, a restaurant across the street from the Nevada capitol, was nearly empty, though it was lunchtime, and the legislature was in special session. Both houses were working straight through lunch, plus they had food set up in the lounges so lawmakers did not need to leave their building.

Among those lunching at Mom and Pop’s was former state archivist Guy Louis Rocha, who thought the restaurant would be nearly empty anyway, the economy being what it is. At least it is still in business. All over town, businesses have closed.

A deputy attorney general passed Rocha’s table, and they chatted about Nevada’s “Sisyphus government.” Since the state shifted from property tax to sales tax reliance in 1981, the state has had budget crises about once every 10 years, building up programs and then seeing them decimated in the next recession. Rocha, who in speeches around the state has been talking about Nevada’s fiscal history and warning of the fragility of its economy, pointed out that this means lawmakers have had repeated chances to reform the tax structure and have not done so.

“After every budget crisis, they had a chance and avoided the hard decisions,” he said.

He recalled when the 1987 legislature commissioned a thorough-going study of the state tax structure by Price Waterhouse and the Urban Institute. The report was delivered to the 1989 legislature and ignored.

Back at the legislature, when those observations were mentioned to Speaker Barbara Buckley, she replied, “You skipped 2003. … Excuse me? Excuse me?”

In 2003, Gov. Kenny Guinn recommended $980 million in new taxes, mostly a business gross receipts tax. The legislature ended up approving about $800 million in a modified business tax and other fees and no assessment was done on whether this new patchwork was more stable or fair than the previous structure. Though it certainly stabilized the tax system, it has usually been described as a tax package or tax increase, not as tax reform. Las Vegas reporter David McGrath Schwartz wrote in 2007, “It was a Band-Aid, not a cure.”

Buckley argued that a tax task force set up by Gov. Guinn in advance of the 2003 legislature had served the same purpose that the earlier Price Waterhouse/Urban Institute study had served. “But there was two years of work that was put into that effort.”

Nevada Taxpayers Association director Carole Vilardo, one of the state’s top tax experts, agrees that while the advance work done for the 2003 legislature was very good and the legislators took a good broad look at the tax system, the final product can’t really be called reform, a term that carries an implication of progress and improvement.

With the results of the special session of the Nevada Legislature last week, state government may make it through to the regular 2011 session. Whether the recession will be over enough for the state to then begin rebuilding programs is not at all clear. What is clearer—and the special session underlined this—is that the state’s tax structure is not up to the tasks assigned to it. At least four times since 1981 the state has experienced major budget crises. Whether the legislature will do anything about the problem or ignore it as in 1989 is anyone’s guess, but if the players cannot even agree on what constitutes tax reform, the signs are not good.

Although Buckley thinks the 2003 legislature did the job, that doesn’t mean she thinks the tax structure was thereafter in good shape. In fact, she said last year that reform still needed doing.

“I believe that the legislature should do all it can in this [2009 legislative] session to overhaul our financial structure,” she said. “There is no reason that we cannot develop a plan to develop spending priorities with accountability, a budget stabilization fund financed through a forced savings account, and a thorough examination of revenue to ensure that it meets our needs as a state.”

The problem was that Nevada’s legislative sessions, shortened in 1998 to 120 days, have difficulty handling large tasks anymore. Sen. William Raggio, who chairs the Senate Finance Committee, didn’t even want to try. He wanted a study to be done between the 2009 and 2011 sessions so that when the lawmakers came back they would have a clear blueprint of what the tax structure contained and what the options for change are.

It was Raggio’s view that prevailed, but Gov. Jim Gibbons vetoed the $500,000 appropriation for the study. Gibbons characterized it as funding “to study further tax increases,” though the legislation contained no such guideline. In fact, Gibbons’ veto also prevented the study of further tax cuts. (The legislature had just lowered taxes for most businesses in the state.) The override vote on the veto will not be held until the 2011 session, but it will be moot because legislators got around the governor’s veto by funding the study through the Interim Finance Committee (IFC), which handles money matters when the full legislature is out of session.

After a bidding process, Moody’s Analytics was given the contract to do the Nevada study.

What should it contain? Vilardo said the study should at least look at ease of administration, equity, predictability and stability.

“The administrative provisions of tax should not cost you a lot of your revenue to do the collection for business,” she said. “They want something that is simple to comply with so they don’t need a myriad of attorneys to interpret what it should be or going to court because nobody ever interpreted what it was.”

The tax code should also be easy to understand, she said, and should not be expensive for businesses to comply with.

Nevada has experienced so many tax changes and patchworks over the years that no one has a clear view anymore of just how fair the state tax system is, and the Moody’s report is expected to provide such an assessment.

“You always want to look at the equity issue,” Vilardo said.

Predictability and stability are features the state tax system has not had for a long time, and the problem became worse after the state in 1981 went to heavy reliance on the sales tax. But the more stable taxes are, the more difficult the political decisions become. Property taxes gave the state decades of stable and predictable taxation, but today they are hazardous politically. Sales taxes are politically relatively painless—the rate of collection is so gradual that no one realizes how heavily they are being taxed, and those hit the hardest are rarely organized—but sales taxes are also difficult to forecast and are very unstable.

The Moody’s Analytics study is being overseen by a panel of Nevada “stakeholders,” local experts who will consult with Moody’s. But there has been controversy over whether the relatively conservative group reflects the state well. Assemblymember Pete Goicoechea, for one, thought there should be a farm representative.

And there is a certain amount of skepticism toward the Moody’s study. In November one conservative writer posted the message, “The IFC is conducting a tax study, which will be used to try and justify raising your taxes.”