Who gets hit?
Nevada will be making changes in its tax system. Will it, for a change, consider fairness?
“Our economic books when I went to school said the sales tax was the most unfair tax possible because it did not tax upon the ability to pay,” said Assemblymember Don Crawford of Washoe County.
It was March 21, 1949, and a proposed sales tax was going down to defeat in the Nevada Legislature, which then was still meeting on the second floor of the state capitol.
For many years in Nevada, just proposing a sales tax was enough to end a political career. But the baby boom was bearing down on the state. Most U.S. troops were discharged in 1946, and the Nevada birthrate jumped 57 percent in the first five months of 1947 over the same period of 1946.
Crawford’s argument about regressiveness had always prevailed against the sales tax before, but teachers’ association leaders had long licked their lips over the notion of such a tax to fund education, even though the tax would hurt its own members. (In 1952, the U.S. Chamber of Commerce issued a report placing Nevada teacher salaries at an average of $3,209 a year, 17th in the nation.)
But other unions led the battle against the sales tax until 1955 when parents were marching on Carson City demanding tax hikes to deal with overcrowded schools. The teachers finally got the sales tax imposed when the alternative was business taxes. (A referendum to overturn the sales tax got on the ballot by citizen signature but failed to repeal the tax.) It applied only to goods, not services.
The 1955 sales tax may have been the start of the OPM (other people’s money) practice in the state—keeping taxes on residents low by trying to engineer taxes that are paid in part by tourists. Paying for government with other people’s money became a common routine.
Over the years, state legislators and county governments have returned to the sales tax well again and again until Nevada has one of the highest sales taxes in the nation. Politicians learned that it was a low-political-cost levy: The rate of collection is so gradual that people, particularly the working poor, have no idea how heavily they are being taxed. The influential book-length 1960 study Financing State and Local Government in Nevada called the sales tax a “sucker” tax.
And those hit hard by the sales tax have a low rate of showing up at the polls while those least affected by the sales tax are far more likely to make campaign contributions and hire lobbyists. Nevada politicians were gaining powerful incentives not to explore the issues of tax fairness that had once so dominated discussions of the state’s taxes.
“You don’t hear much of that in the halls of the legislature,” says Assembly Democratic whip Sheila Leslie of Washoe County. As the years passed, they found that no one ever seemed to complain about a high sales tax, even in 1981 when state legislators nearly doubled it in a single piece of legislation.
The fairness issues that were once frequently advanced in the legislature got little attention once the sales tax was in place, though a grassroots effort in the 1970s forced legislators to agree to remove the tax from food. Advocates of the sales tax claimed that the food change—and a few other exemptions, like prescription drugs— removed the regressiveness from the tax, but a major 1988 study reported, “Of the portion of the sales tax that is borne by Nevada resident consumers, the distribution is clearly regressive. That is, the burden increases as family incomes decrease. The fact that there are other regressively distributed taxes and virtually no progressively distributed levies makes it among the most vertically unfair in the nation.”
Note that it’s more than just the sales tax in Nevada’s tax structure that gives the state its reputation for soaking the poor.
One of the difficulties in assessing the fairness of Nevada’s tax structure is that it is such a patchwork. While individual taxes are known to be regressive, getting a handle on the cumulative fairness, or lack of it, is more difficult. Two weeks ago, the Progressive Leadership Alliance of Nevada released a report putting some numbers on Nevada’s regressiveness. Its analysts found that even with exemptions for food, drugs, prosthetics and so on, regressiveness is still present, with its impact falling off sharply the higher the income. Among the lowest 20 percent income group, those making $17,000 and less, the share of family income spent on the sales tax is 6.30 percent. By the time it reaches the folks at the top, impact is diminishing fast—less than a percentage point (0.60) spent on sales taxes among the top 1 percent ($297,000 and above).
That is not really a surprise. What was a surprise is that PLAN found the same factor at work among property taxpayers. Those making $17,000 and up pay 2 percent of their income on the property tax. This figure rises and falls a couple of times, then drops at the top—down to 1.20 percent among those making $297,000 and above.
In 1978, California voters enacted the property tax cut measure known as Proposition 13. It set off a property tax-cutting wave across the nation. Nevadans rejected a local version of the measure in second-round voting, but it still had impact—the state turned property taxes over to local governments but imposed caps that forced the counties to go to voters for major hikes. In 1981, the state went to heavier reliance on the sales tax, a fateful change that led to major budget crises every time there was an economic downturn—1981-82, 1991-92, 1998, and 2008-.
The problem is not just an unstable tax source like the sales tax. It is also that the tax is unpredictable. “In Nevada the reduction in revenue has been a constantly moving target,” according to the Nevada Taxpayers Association, a business group. “That’s made revenue forecasting and budget creation difficult at best.”
And eventually there was another problem with the sales tax. It was not producing the revenue it once did. As the economy evolved from one based on durable goods to one based on services and information, legislators had to keep raising the sales tax on goods to produce the same amount. It was a downward spiral—the state was getting an increasing share of a shrinking tax. At her last legislature in 1999, the late Assemblymember Jan Evans warned that the state faced an ongoing problem of “placing high reliance on … sales tax. That means durable goods when we know in the economy the real growth is not on durable goods but on services.”
The sales tax can be extended to services, which usually has the effect of making it more progressive, since many services are used only by the affluent (advertising agencies, lawyers, stockbrokers). But Nevada’s only experience with drafting a service tax was not encouraging—Assembly Taxation Committee member Lou Bergevin drafted a service tax that was regressive by making it apply only to services like car repairs and dry cleaning and sheltering the services used by upper income groups.
For now or for posterity?
The current Nevada Legislature is going to deal with the state’s tax structure. What’s not known is whether they will try to build a comprehensive new system designed to last for many years or just patch things together until 2011. Which way they go could determine whether they consider tax fairness. Since the state went to 120-day legislatures, lawmakers have had difficulty taking on major projects in a single session. In 2003, it took one regular session and two special sessions to process Gov. Kenny Guinn’s tax package, and Guinn’s hope that they would examine fairness was not realized. If legislators try to rebuild the tax structure this year, there’s a good chance they’ll skip over equity issues. Interestingly, they do sometimes examine issues of fairness to businesses.
Washoe County Sen. William Raggio, the Senate GOP leader, believes it would be prudent to do the best they can putting together a budget and temporary tax fix this year and then spend the next year and a half doing a tax review—he resists the term study on grounds that studies end up on shelves—and then do the job of rebuilding the tax system right in 2011. He’s not worried about the momentum for reform that exists now dissipating by then.
“I don’t see this situation getting better within three or four years,” he said, referring to the national economic troubles. “I think we’re going to be going through this downturn, you know, for a sustained period. This is my 37th year [as a senator]. This is the longest period of downturn in my recollection. The others were rather short-lived.”
But Speaker Barbara Barbary Buckley hopes the job can be done this year.
“I believe that the Legislature should do all it can in this 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.”
Assembly Democratic whip Sheila Leslie says she’s not convinced of the need for a study—or review or analysis, to use Raggio’s terms—at all. A massive 1988 study commissioned from the Urban Institute and Price Waterhouse is still viable, she says.
“I’ve been going back and reading the Price Waterhouse study and some of the other, you know, papers that have come out of the university, and they all seem to say essentially the same thing. So I’m not convinced that another study is really the answer. I think we already have the answers. What we’ve been lacking is the political courage to implement the answer. And it’s my hope that the pressure of this budget that has huge holes in it, including the slashing of higher education … that finally we’ll have the political will to implement some of those solutions, which, personally, I think include a broad-based business tax like a net profits tax. We don’t have a personal income tax, we don’t have a corporate income tax, we rely on gaming and sales tax, which takes a huge dive every time the economy falters. And I think the solutions are pretty apparent.”
Leslie acknowledges that the lawmakers could put off rebuilding the tax structure one more time and slap together another patchwork. They’ve gotten good at it—"There’s always that—a little bit of this, a little bit of that"—and at the attendant avoidance of politically difficult decisions. But she thinks that they need to act now, and that tax fairness can be part of the discussion.
“Lots of people talk about it, but … I think that’s a point that has been overlooked in the past, is whether it’s fair on the populace. I mean, sales tax—it’s easy, people understand it. But it’s one of the most regressive taxes there are and we rely heavily on it.”
Tax fairness is a big subject, and would be just one more thing lengthening any effort to do a comprehensive tax reform in a single legislature.
Everyone up to speed
In one sense, it is easy for legislative leaders to say that a comprehensive tax rebuilding can be done in one legislative session. Leslie and Buckley serve on the Assembly’s budget committee, and Leslie also sits on the taxation committee. They know the state’s tax structure inside and out and read fiscal studies for fun. But most legislators have not gone through that process.
Enactment of a new state tax structure rather than just a transition structure will require the votes of those who sit on elections or judiciary committees, do not have in-depth knowledge of the state budget and tax structure, and have not gone through the same learning process Buckley and Leslie have experienced. That’s one of the reasons the state has in the past relied on tax studies done during the interim period between legislatures—there was a major and thoroughgoing report waiting on lawmakers’ desks at the start of a legislative session to educate them. Can Buckley and Leslie accomplish the same thing within a 120-day session?
Economist Glen Atkinson, who has been studying the Nevada economy for decades, says it is possible for lawmakers to do the job in that time, but he doesn’t recommend it.
“I think, in general terms, you know, it’s not that difficult to see what the options are. There are only so many things that can be taxed. But there’s going to be a lot of diversions and details and so forth that makes it difficult for people … It’s like this stimulus package in Washington now. Everybody has their own little tweaks and so forth. … But if they tried to look at every option, they’d never get there.”
He agrees with Leslie that the Urban Institute/Price Waterhouse study remains useful.
“I’m not recommending that they do everything in one session, but I think it’s possible if they really want to work at it and cooperate, because that Price Waterhouse study is valuable.”
Atkinson says he suspects that the legislators will find themselves quickly zeroing in on a mining severance tax—a tax on mining output—and a business income tax. A progressive sales tax on services would be a good choice, he said, but may require a public vote.
Atkinson suggests putting together a two-year plan that is “hardwired with sunsets” to force lawmakers to return to the subject in 2011. That wouldn’t necessarily work—the legislature put a sunset on a sales tax hike in 1981 but then repealed the sunset instead of the hike.
It is all but mathematically certain that there are going to be new or increased taxes and possibly both. (Nevada currently has the second lowest tax burden in the nation, after Alaska, according to the Tax Foundation in D.C.) There is no way members of the Nevada Legislature are going to follow the executive budget recommendations, decimate the Nevada higher education system, and have to explain it to the voters in their districts. Similar statements can be made about many other state programs.
And even if legislators were willing to take the heat for tearing down state programs, they can’t necessarily do it under the law. Recently, a businessperson was asking Washoe Sen. Raggio why, when families and businesses were having to cut, government should not do the same?
“There’s a difference,” Raggio said. “The courts don’t step in when a private business doesn’t provide some service. The courts step in when the state doesn’t provide some essential services, i.e. prisons, mental health, Olstead decisions [compliance with the Americans with Disabilities Act], education. The private sector doesn’t face that consequence.”
In addition, of course, government has cut, many times, in the last year. In fact, the cuts have been so sweeping that it has probably made the downturn worse—cutting government spending often hampers economic growth.
At any rate, the need for taxes to keep needed public services going during hard times when they are needed most is essentially unavoidable. The real question is who gets taxed and whether lawmakers will avoid that fairness question yet again. The spiritual descendants of the 1950s groups that won enactment of the sales tax talked in 2005 about a lottery to raise money—another regressive revenue source (”Who should pay?” RN&R, Feb. 10, 2005). But that requires constitutional change and public votes, which will not happen rapidly if it happens at all. Betting on the come of a possible election outcome is not good fiscal planning.
Even if the legislative leaders are able to bring all members up to speed on these issues, that isn’t the only need in getting it done, Leslie says.
“I think we have the information to implement a fix. And whether we can get there this time or not, that’s a good question. But I don’t think we need another study to do that. I think we just need the political will to do it.”