Taxing job begins

The Nevada Legislature went into session this week, complete with prayers, oath-taking, music, family photos. It was an awful lot of anti-climactic pomp, given the fact that the 2013 Legislature actually began last month.

In 1998, Nevadans voted to reduce the length of legislative sessions to 120 days. In the ensuing years, not one has been that short. Lawmakers, some of whom supported the 120-day limit in the first place, knew it would probably be impossible to accomplish and so promptly began cheating on that limit in the second place. They began budget hearings in January, though the voter-approved constitutional amendment mandated a February start, a practice followed again this year when budget hearings began on Jan. 23, though the legislative session was supposed to start Feb. 4. Critics of the 120-day limit like Assemblymember Chris Giunchigliani (now a Clark County commissioner), disgusted by the hypocrisy involved, were harshly critical of the early start.

Not only did the legislators start their work early, they usually ended it late. Since the 120-day limit was imposed, special sessions have been needed for the lawmakers to complete their work in 2001, 2003, 2005 and 2007. In 2003, two special sessions were needed.

Another feature of the 1998 change was a requirement that the governor turn over his budget recommendations to the lawmakers in January. Since governors had traditionally delivered their required “condition of the state” reports to the Legislature the first week of the legislative session, that meant that the budget would get to the legislators and the public without the governor’s spin.

So beginning in 1999, governors moved their speeches back to January. And though they could have, as other governors did, sent the report to the lawmakers in written form, or delivered it verbally using new internet video technology, they instead hauled the entire membership of the Legislature up to Carson City in advance of the session for a one-night event, meaning the lawmakers’ travel and other expenses had to be paid. In every case, the governors included in the report cautions about how the state needed to watch its money.

Clock has started

But even jumping the gun on legislative business is not likely to make the 2013 session an easy one. The lawmakers face an initiative petition from state teachers that would create a 2 percent margins tax. They must act on it in the first 40 days of the legislative session.

Under the system proposed by the initiative petition, a business computes its margins by deducting the lesser of 70 percent of its total revenue or adding the costs of its durable goods purchases plus its pay costs. The 2 percent would be paid on the final computation, after $1 million in total earnings are deducted.

Legislating taxes has always been time consuming, even before the 20-day limit. With an initiative petition, the time is compressed even more. By March 15, they must act to either approve the initiative petition, reject it, ignore it, or propose an alternative.

If the Legislature approves the petition, it would go into effect in 2014. The first revenues would be produced in January 1915.

If the Legislature does not approve the petition, either by voting it down or rejectingit , it will go on the ballot for voters to decide its fate. If the Legislature proposes an alternative tax plan, it will go on the ballot alongside the initiative petition.

Forty days is a very short time to produce an alternative. The Legislature has been pressured for more than a decade to overhaul the state’s regressive, unpredictable tax system but the 120-day limit has made that virtually impossible. A report on the state’s tax system commissioned from Moody Analytics in 2009 as a step toward an overhaul backfired when Moody’s failed to complete the $253,000 study.

The pressure to revamp the state’s tax system is fueled by several factors—the difficulty in predicting revenues that can come from the current system, the instability of the mix of existing taxes, and the current heavy reliance on soaking the poor and middle class for taxes. Lawmakers have always made clear that the first two are their highest priorities.

All three of these concerns are driven by the state’s heavy reliance on sales taxes. Since that reliance was created in 1981, the state has experienced budget crises in 1981-82, 1990-91, 2001, and 2007 to the present time. Nevada is currently the in the worst economic condition of any state. A larger portion of the incomes of the poor and middle class are subject to sales taxes than those at the top of the economic system.

The reluctance state legislators have to deal with taxes is exacerbated by the fact that the sales tax has reached all-time highs, yet it remains the easiest well to tap. In 2012, White Pine County increased its sales tax. There is an effort now underway in Clark County to raise the sales tax for police purposes. Giunchigliani told a Las Vegas newspaper last week, “I won’t be supporting the sales tax change. Sales tax is regressive. We are already at 8.1 percent.” Washoe is at 7.725 percent.

While Sandoval said last month that “Nevada’s employers cannot afford higher taxes,” Giunchigilani and others say workers cannot afford higher taxes—and that they are more burdened than employers. Las Vegas columnist Patrick Coolican wrote last month that the sales tax contributes to a state economic climate in which “the poorest children have less opportunity to rise into the middle class—once considered an inarguable plank of the social contract—because they often attend mediocre, underfunded schools.”

As one study of Nevada taxation once reported, the rate of collection of the sales tax is so gradual, taxpayers do not realize how heavily they are being taxed. This makes it more politically palatable. There are few political downsides to relying on the sales tax. In addition, the business community prefers it over taxes that would hit companies and corporations, and lawmakers are always more responsive to the business community than to those who are most heavily burdened by sales taxes.

There is some sentiment at this year’s legislature for extending the sales tax to services as well as goods. A service tax is generally considered more progressive than the durable goods tax, depending on how it is written. The Nevada Legislature once considered a service tax that applied to auto repairs and barber and beauty shops but not to stock brokerages and legal services, which would have exacerbated the state’s regressiveness problem. Political analyst Fred Lokken said he has seen research that shows Nevada is not collecting a whole array of sales taxes on services that other states have.

“There is a billion dollars worth of fees on banks alone … that other states collect but Nevada doesn’t,” he said.

“I hear people asking, ‘Other places tax services. Why don’t we?’”

The usual Republicans-versus-Democrats dynamic is at play, though Assembly GOP floor leader Pat Hickey is trying to keep it down at the outset. In a letter to constituents, he wrote, “If Democrats decide, as they say they have, to debate Nevada’s tax structure from ‘day two,’ then Republicans should come to the table with both ears and minds wide open. However, if this session is truly to be marked by a new spirit of cooperation, then minority party members in both houses must feel welcome in bringing their recipes for policy solutions to the 77th Session’s bipartisan buffet.”

Gov. Sandoval has a no-new-taxes stance, but while his veto could stop a legislative alternative to the initiative petition, it cannot stop the initiative petition itself. The very existence of the petition forces the legislature to confront the tax problem or be left behind in deciding state tax policy.