Where’d the money go?

Sherry is a dry cleaner in Sparks. While handing over a bundle to a customer, she said, “I don’t understand. There was that big tax hike just a few years ago.”

She was talking about the way Democrats in the Nevada Legislature this year have been trying to raise more revenue by a tax hike such as a service tax. And she was referring to the tax increases passed just eight years ago, at the 2003 legislature.

For the last four months, as the debate in Carson City has gone on, many residents with memories of the monumental 2003 battle have asked why another tax increase is needed so soon, but the issue has been below the radar of state legislators.

After eliminating or freezing 2,500 state jobs, cutting $200 million in state spending, eliminating some state programs, reorganizing state government and making the worker injury insurance system a private concern in his first term, Gov. Kenny Guinn at the beginning of his second term proposed a major tax program that included five new or increased taxes intended to raise about a billion dollars just to keep existing programs at then-current levels. They included a 0.25 percent gross receipts tax on all business income and a 0.25 percentage point increase in the 6.25 percent gaming tax.

After that regular legislative session and two special sessions plus a trip to the state supreme court, lawmakers gave Guinn about 80 percent of the revenue he sought, though not necessarily from the sources he recommended. Nor did it achieve the tax fairness he had hoped. But it would, presumably, give the state more stable and predictable revenue sources that would reduce the impact of chronic budget crises the state had experienced since 1981, when state government went from heavy reliance on the property tax to the sales tax.

So why didn’t that 2003 tax program give Nevada state government greater resilience during the current recession? Why is another tax hike needed, at least according to Democrats, after such a large one just eight years ago? Why didn’t the last one see the state through?

We asked. And everyone we asked said it was because of the recession.

Assembly budget committee chair Debbie Smith: “Obviously the recession and the readjusting of the economy in Nevada has really affected our revenue. Gaming is not what it was. Construction is not what it was. So where we’ve been getting our revenue is not the same that it was five years ago, six years ago. So if you look at the revenue stream, it’s just not there, and I don’t think the economists who we’ve heard from think that we’re going to go back to those days, so there you go.”

Assembly Speaker John Oceguera: “I think part of the reason is that our economy has changed, and it’s not really a sales-based economy, it’s a service-based economy now. And our tax base is very narrow. We rely [in state government] on two things—sales and gaming. Obviously, when the economy in the whole country went down, so did sales and construction.”

Nevada Taxpayers Association executive director Carole Vilardo: “Because of the state of the economy. Nevada’s economy very much is based on tourism and construction. When you take a look at it, both of those industries suffered tremendously in the economic downturn. As a result, you did not have the same level of sales tax coming in, which is a major revenue source for not only state but local governments.”

Lobbyist Josh Griffin: “I think one of the reasons why it did not sustain the state has more to do with the current economy than it did with any flaws in that particular tax package. Are there ways to stabilize it more? Probably. But I think our current circumstance has far more to do with the recession that’s battering Nevada than it has to do with that particular tax package.”

But there’s a problem with saying that a recession caused the failing of a tax program that was in part supposed to protect the state from a recession.

In 2003, Griffin, was one of the “Three Gs”—three Republican assemblymembers who voted for the tax program that year (Geddes, Griffin and Gibbons). He believes that even if a different program had been enacted with different types of taxes, the current recession would still have overwhelmed it. Guinn originally proposed a gross receipts tax on businesses that would have produced nearly $1 billion in new taxes. But the legislators succumbed to lobbyist resistance and instead enacted a payroll tax—called the modified business tax—to produce an estimated $836 million. (Actually, it produced about $300 million more that that and Guinn—believing he needed to keep faith with voters that he would not raise more money than necessary—convinced legislators to return the excess to voters through a rebate.)

Griffin went on, “Meaning, let’s just say we had adopted a gross receipts tax or we had adopted something else. I still think the condition with 14 percent unemployment and the construction industry that’s sort of level—I think that has more to do with where we are in terms of the fiscal state the state is in.”

But most of those we spoke with say the gross receipts tax would have given the state more breathing room and a longer period when it had the ability to deal with the increase in demands on services such as Medicaid that hard times bring.

“If our tax base was a little broader, we wouldn’t have this problem every few years when we have a bid dip in the economy,” said Oceguera. “We started out with a broad based tax in 2003, got negotiated down to an MBT [modified business tax], which is really not a very good tax structure … But, you know, this process is that of one where you have to negotiate and compromise, and so we compromised down to something that probably wasn’t the absolute best way to go. But it was one that could get passed to get us through. Kind of similar to what you’re seeing here today, you know?”

Indeed, on July 22, 2003, when Gov. Guinn signed the new tax legislation into law, he said it was “not as broad based” as he had hoped.

Vilardo raises another problem—legislative unwillingness to pad the “rainy day fund.” She said the state “had such a stretch of good times” that it took that state of affairs for granted. Money that could have been set aside for hard times was often used on spending, such as one-shot appropriations. She thinks the Guinn rebate could have been added to the rainy day fund, too.

“The tax that you had the increase in stayed static once we went into the bad economy,” she said. “And so the other problem that you had is we’ve never, in my opinion, funded the rainy day fund properly. … And in a bad economy, more people who did not need social services … such as Medicaid now need those services. …What we’ve gotten used to is taking every cent that we get and spending it on programs without looking at the sustainability of the programs.”

But a year after his death, there is growing recognition that the tax program Guinn originally proposed would have been superior in this recession than the compromise that was eventually adopted.