MINUTES OF THE meeting
of the
ASSEMBLY select Committee on State Revenue and Education Funding
Nineteenth Special Session
June 5, 2003
The Select Committee on State Revenue and Education Fundingwas called to order at 8:51 a.m., on Thursday, June 5, 2003. Chairman Morse Arberry Jr. presided in Room 4100 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Mr. Morse Arberry Jr., Chairman
Mr. David Parks, Vice Chairman
Mr. Bernie Anderson
Mr. Walter Andonov
Mrs. Sharron Angle
Mr. David Brown
Mrs. Vonne Chowning
Mrs. Dawn Gibbons
Ms. Chris Giunchigliani
Mr. Tom Grady
Mr. Josh Griffin
Mr. Lynn Hettrick
Ms. Sheila Leslie
Mr. John Marvel
Ms. Kathy McClain
Mr. Bob McCleary
Mr. Harry Mortenson
Mr. Richard Perkins
Ms. Peggy Pierce
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
None
STAFF MEMBERS PRESENT:
Mark Stevens, Assembly Fiscal Analyst
Ted Zuend, Deputy Fiscal Analyst
Susan Cherpeski, Committee Secretary
Lila Clark, Committee Secretary
Anne Bowen, Recording Secretary
OTHERS PRESENT:
Kenneth Lange, Member, Governor’s Task Force on Tax Policy in Nevada and Executive Director, Nevada State Education Association
Charles Chinnock, Executive Director, Department of Taxation
Jeremy Aguero, Chairman, Technical Advisory Committee to the Governor’s Task Force on Tax Policy in Nevada
Chairman Arberry called the meeting to order at 8:51 a.m. Roll was taken and all members were present. Chairman Arberry passed the gavel to Vice Chairman Parks.
Vice Chairman Parks announced the Committee would be following up on unfinished business from the previous day. He commented that the members should all have a handout from the Commerce Clearinghouse Handbook (Exhibit C), which gave an overview of the tax system for review. The Vice Chairman mentioned an 11-page document that had been e-mailed to Committee members the previous night by Carole Vilardo of the Nevada Taxpayers Association (Exhibit D). Mark Stevens, Assembly Fiscal Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, offered to make copies for any members who had not received the document.
Vice Chairman Parks stated that the Committee had not yet covered Sections 141 through 146 of the legal draft of the tax package, which concerned the proposed Legislative Committee on Taxation, Public Revenue, and Tax Policy. He asked Assemblywoman Giunchigliani to summarize Sections 141through 146 of the tax package.
Assemblywoman Giunchigliani directed the members’ attention to page 79 of the legal draft of the tax package, which had been included as an exhibit during the previous day’s meeting. She said the intent was to provide some kind of oversight or accountability to monitor the impacts and effectiveness of the new tax changes in order to determine what might need to be changed during the 2005 Legislative Session. The instrument of that oversight was to be the Legislative Committee on Taxation, Public Revenue, and Tax Policy. The members who were to constitute the committee were listed on page 79 of the legal draft, while the committee’s duties and authority, what the committee should review and study, were outlined beginning on page 81 of the legal draft.
The Legislative Committee on Taxation, Public Revenue, and Tax Policy would look at the specific taxes that would be collected in Nevada, the implementation of any taxes, the fiscal effects of the taxes, and the impacts of those taxes on residents and businesses in Nevada. The committee would also discuss the broad issue of tax policy again. Assemblywoman Giunchigliani reminded the Committee she had been the author of A.C.R. 1 of the 17th Special Session, which had created the Governor’s Task Force on Tax Policy in Nevada. A key component of that legislation had been a broad-based business tax. Ms. Giunchigliani asserted that a broad-based business tax necessarily had to be a part of the tax plan discussed by the Select Committee on State Revenue and Education Funding, or the Committee would have violated the intent of the restructuring of Nevada’s tax system to correct faults in current tax policy.
Assemblywoman Giunchigliani added that the duties of the proposed Legislative Committee on Taxation, Public Revenue, and Tax Policy would include conducting investigations and holding hearings, contracting with consultants, and applying for available grants. Ms. Giunchigliani said Section 145 of the tax package outlined the procedures the secretary of the committee would follow if the committee conducted investigations or held hearings. According to Ms. Giunchigliani, Section 145 stated that if a witness refused to attend or testify, that witness’s books or papers had to be made available. Section 145 also gave the committee subpoena power. Ms. Giunchigliani noted the legislative standing committees also had power of subpoena. She added that persons summoned to appear before the committee would be paid for their attendance and fees.
Assemblywoman Giunchigliani said she believed Sections 141 through 146 contained the only provisions for accountability in the tax package.
Vice Chairman Parks noted that three items had been added to the list of four items already on a handout from the previous day. Those three items were a tax on the net proceeds of minerals, a room tax, and a television satellite dish tax. Vice Chairman Parks asked if the Committee wished to discuss those additional revenue sources. Assemblyman Mortenson said he had no interest in discussing the satellite television dish tax. Mr. Mortenson expressed the opinion that the satellite dish tax represented an attempt on the part of the cable television industry to gain an advantage. Mr. Mortenson pointed out that the cable television industry used streets, sidewalks, and rights-of-way and paid a franchise fee for that benefit. Satellite companies, on the other hand, did not use those resources, and Mr. Mortenson said it would be unfair to tax the satellite television industry for something the industry did not use.
Vice Chairman Parks commented the Committee had not discussed the room tax much during the previous day’s meeting, but there had been a considerable amount of discussion on that topic in the hearings of the Assembly Committee on Taxation during the 72nd Legislative Session. He suggested that the Committee might want to discuss the room tax at greater length later in the day.
Assemblyman Griffin asked if Vice Chairman Parks was looking for free-flowing discussion at the current time on the taxes he had mentioned. The Vice Chairman replied he wished to find out if the Committee members were interested in discussing those taxes in any great detail as potentially viable revenue sources. Vice Chairman Parks said the Committee would discuss revenue sources that had been discussed at considerable length already and determine if those were sources the members wished to keep on the list of potential revenue sources.
Assemblyman Anderson noted there were 16 taxes and their revenue estimates listed on the handout from the previous day (Exhibit E), and asked if the Vice Chairman wished the Committee to go through the list and make a decision as to the desirability of each tax on the list. Vice Chairman Parks said he had been referring to the document from Carole Vilardo (Exhibit D), and he wished to follow that list.
Assemblyman Anderson stated that he had no problem with the cigarette stamp fee or the tobacco allowance. Vice Chairman Parks responded that there had been considerable discussion on the broad subject of passive revenue generators, which included the collection allowances for liquor tax, cigarette stamp fees, tobacco tax, and sales tax.
Ted Zuend, Deputy Fiscal Analyst, Fiscal Analysis Division, Legislative Counsel Bureau, said there had been proposals for electronic funds transfers and other measures that would make the collection of revenues more efficient. He did not believe they were in the current draft of the bill, but he said they could be incorporated into the bill. Mr. Zuend stated those measures, at least in theory, could generate more revenue, but there currently was no way to estimate those effects. Vice Chairman Parks recalled having seen previous draft language on the subject and suggested the Committee consider those passive generators as a revenue source.
Vice Chairman Parks asked for a show of hands on considering collection allowances as a revenue source. Everyone agreed. Chairman Arberry was not present at the time.
The next issue Vice Chairman Parks wished to address was the proposed $100 annual business license fee. Assemblyman Griffin said he had no problem with that fee, which had been discussed at length in previous hearings. Mr. Griffin mentioned the many e-mails all Committee members had received from direct marketers and disclosed for the record that his wife was a direct marketer for Creative Memories photo albums. Mr. Griffin commented that thousands of people in Nevada were involved in the direct marketing business for fun in their spare time and added that he believed an exemption for direct marketers was included in the bill, which was on its way from the Legal Division of the Legislative Counsel Bureau.
Mr. Zuend directed the Committee to page 53, Section 108, of the legal draft of the tax package, which specifically excluded direct sellers as defined in the unemployment insurance laws. Mr. Zuend stated that anyone exempt under the unemployment insurance laws would be exempt under the bill.
Assemblyman Hettrick said he had no problem with the tax, which he termed reasonable. However, he expressed concern regarding tiered ownership layers for businesses, such as a corporation with a limited liability corporation (LLC) within it with the same ownership. Mr. Hettrick said he would be interested in finding out if “cascading” would occur in such instances.
Mr. Zuend explained the fee would apply to sole proprietors with employees along with every business licensed with the Secretary of State. He surmised that if there were multiple business licenses or corporate certificates issued by the Secretary of State’s office, there would be multiple license fees. Mr. Zuend said cascading occurred currently, and there would continue to be cascading under the proposed legislation.
Vice Chairman Parks said he was a real estate licensee and would pay the fee on that license, but he also did consulting work that was separate from the real estate business. He noted that he might be required to pay twice because of his two occupations.
Assemblyman Mortenson asked if he were correct in inferring from Mr. Zuend’s explanation that a sole proprietor with no employees would be exempt. Mr. Zuend said the fee would apply to any sole proprietor, other than a direct seller, who filed a Schedule C with the Internal Revenue Service. Mr. Zuend explained that Schedule C was a Profit and Loss From Business statement filed with a Form 1040 tax return by a sole proprietor.
Vice Chairman Parks asked for a show of hands on the business license fee. Assemblywomen McClain and Angle, and Assemblyman Hettrick were opposed. Assemblyman Arberry was not present.
Vice Chairman Parks proceeded to item 6 on the list in Exhibit D, which was the live entertainment tax. Assemblyman Griffin noted there had been discussion about exempting automobile racing events at the Las Vegas Motor Speedway from the tax. Mr. Griffin requested and received confirmation that boxing was taxed under a separate provision. Because of the discretionary way in which locations were chosen for automobile races, and because of the large numbers of spectators such events drew to Nevada, Mr. Griffin asked the Committee to consider an exemption or lower rate for the Las Vegas Motor Speedway.
Vice Chairman Parks noted that issues involving exemptions could be problematic. He urged concentrating on broad concepts during the current meeting and waiting until later to work out the quirks and details of the various taxes. Vice Chairman Parks explained there were several 4 percent fees and a $1 fee already placed on tickets for boxing events, and that was the reason boxing was exempt from the live entertainment tax.
Assemblywoman Giunchigliani voiced support for the live entertainment tax, but cautioned the Committee to be very careful of all the exemptions that certain groups might want. Ms. Giunchigliani noted that the Las Vegas Motor Speedway did not already pay a special fee as boxing did. She commented that more attention could be paid to those who would be double taxed. Ms. Giunchigliani said that could be discussed in more detail that afternoon.
Assemblywoman Chowning said she wanted to be sure the fees and percentages for boxing added up to the same amount as the live entertainment tax, since boxing was the same type of venue that had to compete with other states. Mrs. Chowning wanted to make sure the Las Vegas Motor Speedway was not taxed more than boxing. Vice Chairman Parks stated that the rather elaborate system of fees and taxes on boxing added up to more than 8 percent.
Assemblyman Mortenson had been wondering how the fees and taxes on boxing compared to the live entertainment tax. He asked Vice Chairman Parks if boxing was taxed at a higher rate than the live entertainment tax. The Vice Chairman said the taxes and fees on boxing appeared to be slightly less than the proposed tax on live entertainment. Reading from the statute related to taxes on boxing, Vice Chairman Parks said Section 1 dealt with a tax of 4 percent tax of each dollar or fraction thereof, based on the face value of tickets sold or given away. Another tax consisted of 4 percent of the gross receipts from the event plus 3 percent of the first $1 million and 1 percent of the next $2 million. He commented that the taxes were designed to hit the promoter of the event as well as the admissions. Vice Chairman Parks noted there was an additional fee of $1 for each ticket sold to a live boxing or wrestling contest, match, or exhibition. He added that, in the event gross receipts were less than $500,000, the fee would be less.
Assemblyman Mortenson suggested the Committee consider no exemptions whatsoever, but rather a credit against the live entertainment tax for any other tax that might be paid. That way, he said if they had paid a lower tax, they would then make up the difference. Vice Chairman Parks asked that the Committee consider such details later on in the day and, for the moment, concentrate on the overall merits of the proposed taxes as revenue sources.
Vice Chairman Parks asked for a show of hands on the live entertainment tax. Assemblywoman Angle was opposed. Chairman Arberry was not present.
The next item addressed by Vice Chairman Parks was the cigarette tax in general and not the specific rate of that tax.
Vice Chairman Parks asked for a show of hands on the cigarette tax. There was no opposition. Chairman Arberry was not present.
Vice Chairman Parks asked for a show of hands on the liquor tax. There was no opposition. Chairman Arberry was not present.
Vice Chairman Parks asked for a show of hands on the gaming tax. Assemblywoman Angle was in opposition. Chairman Arberry was not present.
Vice Chairman Parks proceeded to the restricted slot tax. Assemblywoman Chowning asked for clarification on whether he meant the general concept or the proposed rates. Vice Chairman Parks reiterated he wanted to find out the whether the Committee approved of the general concepts.
Vice Chairman Parks asked for a show of hands on the restricted slot tax. Assemblywoman Angle and Assemblymen McCleary and Marvel were in opposition. Chairman Arberry was not present.
Vice Chairman Parks next addressed the Secretary of State fees, which would be contained in A.B. 436.
Vice Chairman Parks asked for a show of hands on the Secretary of State fees. Assemblywomen Angle and Gibbons were in opposition. Chairman Arberry was not present.
Vice Chairman Parks moved on to the business license tax. Assemblyman Griffin commented that it appeared the business license tax was being treated as a cash flow issue. Mr. Griffin expressed a desire to get rid of the business license tax, but said he would vote to keep it open while the Committee was deciding what business tax would be best. Vice Chairman Parks commented that many members probably were resistant to the proposed increase in the business license tax, but noted that the tax would probably have to be maintained as an established revenue source, at least through the upcoming biennium as other revenue sources were being implemented. Assemblyman Marvel expressed his opinion that the business license tax should be phased out once another business tax was in place. Vice Chairman Parks concurred.
Assemblywoman Giunchigliani observed that the Committee members all seemed to be in agreement on the issue of phasing out the business license tax. She pointed out that was part of the intent as stated in the document. Ms. Giunchigliani expressed a desire for the Committee to avoid getting bogged down with details at the current time and to save detailed discussion for later in the day. According to Ms. Giunchigliani, the first year of a tax was vital to ensuring that the cash flow it provided fit the budget. She suggested the business license tax could be phased out after the new taxes and tax increases had been phased in.
Assemblywoman Gibbons stated she had no wish to burden businesses any more than they were already burdened, however, as long as small businesses with gross receipts of $3 million or less were not being overburdened, perhaps the Legislature could look at increasing gaming taxes and combining or eliminating the business license tax and Secretary of State fees.
Vice Chairman Parks asked for a show of hands on the business license tax. Assemblymen Hettrick, Andonov, and Marvel, and Assemblywomen Angle and Gibbons were in opposition. Chairman Arberry was not present.
Assemblyman Griffin said he would vote to include a bank franchise fee in the discussion of an overall business tax because some business taxes might not be appropriate for banks. Mr. Griffin believed the bank franchise fee had originally come about because banks were difficult to include in the unified business tax. Vice Chairman Parks noted that, according to testimony given the previous day, several federal banking laws forced states to deal with banks differently from other businesses.
Assemblyman Grady stated he would vote for the bank franchise fee that morning in order to keep it in the discussion, but said he was not excited about it. Mr. Grady noted someone representing the banking industry would be in to testify that afternoon.
Assemblywoman Leslie said she agreed with Assemblyman Griffin. She pointed out that banks paid a franchise fee or corporate tax in every one of Nevada’s neighboring states. Ms. Leslie expressed hope that banks would not be allowed to continue paying nothing in Nevada. Vice Chairman Parks said he felt there was a general approval, if not strong approval, for keeping the bank franchise fee in the discussion.
Vice Chairman Parks asked for a show of hands on the bank franchise fee. Assemblywoman Angle was in opposition. Assemblyman Marvel abstained. Chairman Arberry was not present.
Vice Chairman Parks asked for a show of hands on the real estate transfer tax. Assemblywomen Angle and Gibbons and Assemblyman Andonov were in opposition. Chairman Arberry was not present.
Assemblywoman Chowning stated she would support the real estate transfer tax, but stressed she wanted to see that a transaction fee was enacted regarding the exemptions that had been removed the previous day. Vice Chairman Parks said the Legal Division of the Legislative Counsel Bureau had reviewed that issue a month before and had looked at potential language for such a fee. He said that could be resurrected.
Vice Chairman Parks proceeded to the unified business tax. Assemblyman Griffin claimed the unified business tax was the most controversial of all the proposed taxes. Mr. Griffin said he understood from previous discussions and from the actions of the Senate that there were three different taxes that would be considered broad-based business taxes. Those would be the unified business tax, the corporate profits tax or net income tax, and a payroll tax. He understood that all three of those taxes had been voted down in the Senate, but were still active and alive in discussions.
Although he realized it was controversial, Assemblyman Griffin wanted to keep the unified business tax open for discussion. Mr. Griffin noted that the Assembly Committee on Taxation had the opportunity to discuss the unified business tax in detail, but he had not yet heard enough about a net profits tax to be able to choose between the two taxes.
Assemblyman McCleary said although he recognized a need for a broad-based business tax, he had never been excited about either the gross receipts tax or the unified business tax. He stated that he would be more excited about a net profits tax. Mr. McCleary said he would support whichever of the three the Committee decided upon, but he wanted to voice his preference for the net profits tax.
Assemblywoman Giunchigliani explained that although the Senate had decided against a gross receipts tax, they were still considering the payroll tax and the net profits tax. She said the net profits tax and the unified business tax still allowed the possibility of a broad-based business tax, which, in her opinion, was vital to fixing the faults in Nevada’s existing tax structure. Vice Chairman Parks agreed with Ms. Giunchigliani that the Committee needed to keep some proposal alive in the way of a broad-based business tax.
Assemblyman Griffin made it clear that he had not meant he was in favor of implementing all three broad-based business taxes, or even that the Committee needed to look at all three. He had simply meant they should keep the three taxes alive so they would be able to choose between the three of them after more detailed discussion.
Vice Chairman Parks asked for a show of hands on the unified business tax. Assemblymen Hettrick, Andonov, Grady, and Marvel, and Assemblywomen Angle and Gibbons were in opposition. Chairman Arberry was not present.
Vice Chairman Parks announced that concluded the 12 taxes listed on the handout (Exhibit D). Next, the Committee would look at additional items on the list on another handout from the previous day (Exhibit E), plus 3 more items that had been added since (Exhibit F). The first of those items was the services tax.
Assemblywoman Giunchigliani stated that she did not currently support a sales tax on services, although she might support it sometime in the future. She asked if the services tax referred to would include professional services or if it would merely be a sales tax on services. Vice Chairman Parks replied that discussion up to that point had been about a sales tax on services across all service categories, including dry cleaning, haircuts, and auto repair.
Vice Chairman Parks announced Mr. Stevens had a multipage handout for the Committee entitled “Nevada Services Tax Base Estimate – 2005.” He asked the Committee if there was any interest in a services tax.
Assemblyman Hettrick stated he had offered a proposal earlier that included a phased-in services tax with exemptions for many personal expenses and the like. He thought the Legislature ultimately had to realize services were becoming a huge percentage of Nevada’s economy while other revenues were shrinking proportionately. Mr. Hettrick asserted that if the Legislature chose to ignore the fastest-growing segment of the economy, they would eventually have to do another overhaul of the tax system. Mr. Hettrick acknowledged there was currently no appetite for a services tax, but said it was shortsighted to think there would not eventually be a need for a services tax.
Vice Chairman Parks stated the services tax was one of the revenue sources the Committee would have to discuss and consider further at a later time. Assemblywoman Chowning stated she saw the problem with the services tax being that it would hit the people least able to be hit. Also, she pointed out that bringing independent contractors under the services tax would create a situation where people would be double taxed. Mrs. Chowning said she could not support a services tax until the issue of double taxation had been worked out.
Assemblyman McCleary stated he had been in the automotive business for years, and people in the automotive industry had resale cards on file that allowed them to buy parts from other people without paying sales tax because they would pass the sales tax on. He said the same thing could be done with services if someone was passing a service on that would ultimately be taxed at the end. Vice Chairman Parks agreed.
The commercial lease tax was the next tax addressed. Vice Chairman Parks asked for a show of hands on the service tax and the commercial lease tax. There was no appetite for or interest in a service tax or commercial lease tax.
The next tax on the list was the net profits tax. Vice Chairman Parks remarked it was a potential broad-based business tax, as was the unified business tax, although the net profits tax might be more difficult to implement as far as reporting requirements. Also, he noted that the rate for the net profits tax would have to be substantially higher than the rate for the unified business tax.
Assemblywoman Leslie stated she definitely wanted to keep the net profits tax on the table for discussion. She said she had read draft language prepared by legal staff during the 72nd Legislative Session, and the net profits tax seemed like a good compromise answer to the broad-based business tax. Ms. Leslie said there were problems with the net profits tax, as there were with any tax, and it might take longer to get revenue coming in, but she noted that many other states had been able to implement a net profits tax. She commented that businesses that lied about their net profits would also be lying to the federal government.
Assemblyman McCleary agreed with Ms. Leslie. He said people could cheat on any tax they wanted to. Mr. McCleary said he had understood that the intent was to go after bigger businesses with the broad-based business tax. He pointed out that businesses had accounting standards, and they had shareholders they had to answer to. He said there would always be people who would cheat or get around any tax that was created. Mr. McCleary expressed his opinion that the net profits tax was the fairest overall, although it would be perhaps the most challenging to implement.
Assemblyman Griffin asked if the Committee members would have the opportunity that afternoon to address the proposed broad-based business taxes as a policy area. He said he had some questions for Carole Vilardo. Vice Chairman Parks said he was certain they would have that opportunity. The Vice Chairman expressed hope that some of the issues that had been “beaten to death” could be considered very quickly, but said the net profits tax was one issue that should be discussed in greater depth.
Vice Chairman Parks asked for a show of hands on the net profits tax. Assemblywomen Angle and Gibbons were in opposition. Chairman Arberry was not present.
The next item Vice Chairman Parks addressed was the payroll tax. He noted that several current revenue sources were assessed on the number of employees a business had but not specifically on payroll.
Vice Chairman Parks asked for a show of hands on the payroll tax. Assemblymen Anderson, Brown, Grady, McCleary, Mortenson, Parks, Assemblyman Perkins, and Assemblywomen Chowning, Giunchigliani, Leslie, McClain, and Pierce were in opposition. Chairman Arberry was not present.
Vice Chairman Parks next addressed the mining tax. Assemblyman Marvel said he was not sure just how the proposed mining tax was supposed to work. As nothing concrete had been presented about the mining tax, Mr. Marvel stated he was not in favor of the tax. Vice Chairman Parks said the Committee was aware there were legal restrictions on the proceeds of mines. The question would then be, “What kind of structure would the tax take?” Vice Chairman Parks pointed out that the mining industry would be subject to a broad-based business tax.
Assemblyman Griffin voiced his opposition to the mining tax even being considered. Mr. Griffin did not believe the mining industry would be exempt from any broad-based business tax.
Assemblywoman Giunchigliani quoted the mining industry as saying, “Mining works for Nevada.” However, she noted that the mining industry currently did not pay tax on its proceeds, and statutory changes would be needed before those proceeds could be taxed. Ms. Giunchigliani said she believed Chairman Arberry wanted the Committee to review that situation so every business that claimed to be in support of a broad-based business tax would be included. She said she was comforted by Vice Chairman Parks’ statement that mining would be subject to the unified business tax. However, due to the proceeds issue, Ms. Giunchigliani wondered what they would actually be paying on.
Vice Chairman Parks asked for a show of hands on the mining tax. Assemblymen Hettrick, Andonov, Marvel, Griffin, and Grady, and Assemblywomen Angle and Gibbons were in opposition. Chairman Arberry was not present.
Assemblyman Perkins said he agreed with Assemblyman Griffin’s idea that the net profits tax and the mining tax be considered separately if the mining industry would not be included in the broad-based business tax. He stated that, for the mining industry, the issue was either the mining tax or the broad-based business tax, but not both. He told Vice Chairman Parks to count his vote one way or the other. Vice Chairman Parks said the issue would have to be left hanging until the Committee was given more specific information.
Assemblywoman Gibbons suggested the bank franchise fee was in the same position as far as being an either/or situation. Responding to Vice Chairman Parks’ request for clarification, Mrs. Gibbons stated that if the Committee agreed to a payroll tax, she would not support a bank franchise fee. She was opposed to double-taxing the banks.
Vice Chairman Parks proceeded to the room tax. He commented that an advantage of a room tax was the ease of assessing and collecting it. Assemblywoman Chowning stated she thought the room tax should remain on the table for discussion. She commented she did not want to enact any tax so egregious as to inhibit tourists, Nevada’s major source of economy, but the $3‑per-room energy charge that had been put in place—inappropriately, in Mrs. Chowning’s opinion, as the charge had actually been a result of California’s energy problems—had not destroyed Nevada’s economy. Vice Chairman Parks explained that the energy charge had been a surcharge levied across the country.
Assemblyman Marvel stated that the room tax was one of the few sources of revenue available to local governments. Therefore, he was reluctant to have the state get involved in that area.
Assemblywoman Angle said she liked the idea of a flat fee per room. She claimed the room tax would tax tourists rather than locals. Mrs. Angle wanted the room tax left on the table for discussion as long as it was a flat fee and not a percentage.
Assemblyman Perkins commented that the Committee needed to remember the goal that had been set for the Governor’s Task Force on Tax Policy in Nevada, which was to broaden the tax base and reduce the state’s dependence on one sector of the economy, and said that while a room tax was worthy of discussion, he did not want to put all the state’s eggs in one basket. He expressed concern that if too much reliance were placed on tourism, Nevada would be vulnerable to dips in the national economy that might cause reductions in tourism. Assemblyman Perkins amplified Assemblyman Marvel’s concern about a state room tax, saying the Committee should delineate what programs were the responsibility of local government and which were the responsibility of the state, then look at what revenue sources were available at each level. He asserted that a graying of those lines could result in a messy situation.
Assemblyman Mortenson agreed with Assemblyman Perkins that the state should not keep hitting only one industry. However, he believed the room tax should stay on the table, not as a replacement for a broad-based business tax, but as a possible interim cash flow mechanism in case the Legislature enacted a tax or taxes requiring a long period to implement. Mr. Mortenson agreed with Assemblyman Marvel that the room tax had been a resource for local government, although he added the state did get part of it. Mr. Mortenson noted a flat room tax was more stable than a percentage. He pointed out that the room tax had dropped 8.5 percent at the end of 2001, but that a flat room tax would only have dropped 2 percent.
Assemblywoman Gibbons mentioned she served on the board of the Reno-Sparks Convention and Visitors Authority. Mrs. Gibbons asserted the Reno-Sparks area’s room tax was the highest in the state, and said the area had a hard time supporting the Reno-Sparks Convention Center. She made it clear that, with the economy down, there was no way she could support the room tax in any form.
For the benefit of Committee members who had not served on the money committees during the 72nd Legislative Session, Assemblyman Griffin said there had been presentations during the session by the Governor and the presidents of the Reno-Sparks Convention and Visitor’s Authority and the Las Vegas Convention and Visitors Authority. He stated Nevada, especially Las Vegas, would be facing marketing challenges in the coming years, and a room tax was one of the few sources of revenue available where the state could do collective marketing. Mr. Griffin added the Lieutenant Governor had mentioned marketing to Asia and the market potential that existed in Asia for Las Vegas and Nevada as a whole. Mr. Griffin asserted that any money that went into the General Fund from room tax would be money that was not available for marketing Nevada or building new facilities to attract visitors. Mr. Griffin felt the room tax should be left open for discussion but wanted Committee members to be aware of some of the issues involved.
Vice Chairman Parks commented that while there might not be strong support for a room tax, he felt it was an option that should be kept on the table.
Vice Chairman Parks asked for a show of hands on the room tax. Assemblyman Marvel and Assemblywoman Gibbons were in opposition. Chairman Arberry was not present.
Vice Chairman Parks next addressed the satellite television dish assessment. He said he would have a hard time figuring out how and against whom such a tax would be levied. Assemblyman Mortenson asked if the satellite dish assessment would be a franchise tax and asked what the proposed rate was.
Mr. Zuend said it was his understanding that the satellite television dish fee would be a franchise fee levied on the consumers but collected by the satellite providers. It would be equal to the rate imposed on cable television. For example, Mr. Zuend said there was a 5 percent fee on cable television in Clark County, so there would be a corresponding 5 percent fee on direct television sales and dish network sales in Clark County.
Assemblyman Mortenson asserted that the reason the cable television industry paid a fee was because they used the telephone poles and rights-of-way under streets and sidewalks throughout urban and rural areas, and they paid for that privilege. Satellite television, on the other hand, did not use those resources. Mr. Mortenson commented he thought the state would be picking the pockets of constituents if a fee were levied on satellite television equivalent to that on cable television. He voiced the opinion the satellite television dish fee was an attempt by one industry to wrongfully disadvantage another industry. Mr. Mortenson stated he was against the satellite television dish fee.
Assemblywoman Giunchigliani asked if the issue was that one industry paid a franchise fee while the other industry did not, therefore creating an unequal playing field. Mr. Zuend replied that was the claim of the cable companies. However, he added Mr. Mortenson was right in that cable companies had right-of-way rights while satellite companies did not. Mr. Zuend said the proposal would, in effect, ask satellite television companies to pay a fee simply to level the playing field by matching the fee paid by the cable companies for an actual benefit.
Vice Chairman Parks noted that, for a revenue source that would not generate a lot of revenue, the satellite television dish proposal had certainly generated a lot of discussion. Assemblyman Griffin pointed out that the cable and satellite television companies would both be paying whatever broad-based business tax was enacted. Mr. Griffin was not opposed to keeping the satellite television dish fee open for discussion.
Assemblywoman McClain noted that cable television companies paid large amounts of money for the rights-of-way, and she asked how much the satellite television companies paid for the satellites. Vice Chairman Parks said it cost roughly $20 million to put a satellite in orbit. Ms. McClain asked if the satellite television dish tax would be on the sale of the satellite dish or on the monthly fee. Mr. Zuend replied that it would be on the monthly fee.
Assemblyman Hettrick said the satellite companies paid the same fees and taxes as other companies, including license fees, business license tax, and sales tax, and would pay whatever broad-based business tax was enacted. He echoed Assemblyman Mortenson’s argument that cable television companies paid fees for the use of rights-of-way that were separate from what satellite television companies paid or used. Mr. Hettrick reiterated that both types of television service providers paid equally on all other taxes and fees.
Assemblywoman Leslie agreed with Assemblyman Griffin that, in the interest of keeping the proceedings from bogging down, she was willing to be in the minority and let the issue of satellite television dish fees go and move on to issues that really mattered. Vice Chairman Parks announced the proposals that were no longer on the table for discussion were for the services tax, the commercial lease tax, the payroll tax, the minerals tax, the satellite television dish tax, the property tax, and the local schools support tax.
Assemblywoman Giunchigliani stated that, according to the Price Waterhouse study done in the 1980s, the sales tax was the most regressive tax, hitting middle- and low-income people more than any other tax. At the time of the study, Price Waterhouse had recommended that Nevada lower its sales tax rate and broaden the sales tax service base. As the Committee had no appetite for doing that, Ms. Giunchigliani did not think the Committee should consider increasing the local schools support tax, which was a regressive tax that would hit local citizens and would not broaden the tax base.
Assemblyman Griffin asked if increasing the local schools support tax was intended as part of the long-term solution or merely as a cash flow solution. Vice Chairman Parks replied it could be either or both. Mr. Griffin remarked that, for the purposes of keeping the proposal on the table, he saw it more as a cash flow issue.
There was no interest in a satellite tax, property tax, or local schools support tax.
Vice Chairman Parks called a recess at 10:13 a.m. At 10:52 a.m., Vice Chairman Parks called the meeting of the Assembly Select Committee on State Revenue and Education Funding back to order and then recessed the meeting until 12:30 p.m. because of the 11:00 a.m. Floor Session.
The meeting of the Assembly Select Committee on State Revenue and Education Funding was called back to order at 12:48 p.m. Vice Chairman Parks drew the Committee’s attention to a chart showing how both Houses stood on different tax proposals (Exhibit G). He commented that the chart fairly accurately reflected the feelings expressed by the Committee that morning. Vice Chairman Parks observed that one thing brought out by the morning’s discussion had been a net profits tax and how it would differ from a gross receipts tax or a unified business tax. He suggested the Committee take a few minutes to look at the issue of a net profits tax.
Mr. Zuend explained that a profits tax was widely used throughout the United States. He thought 44 or 45 states currently had some form of profits tax, virtually all of which used U.S. income tax forms that were submitted by businesses as a base. Mr. Zuend stressed that though the forms seemed simple because they were only several couple pages long, a lot of detail was involved in computing the tax. A business started with its gross receipts and, after deducting a number of line items, arrived at its taxable income at the corporate level. That taxable income was then used to determine the business’s tax. The amount of taxable income would likely also be the basis for a state tax, which would be required by law to be apportioned in a fair and equitable manner.
Typically, Mr. Zuend explained, states used one, two, or three apportionment factors to determine what state-attributable income was. The first factor was sales, the second was property, and the third was payroll. Mr. Zuend said he believed there were approximately ten states that still weighted those three factors equally. More states were going to systems that used only sales or weighted sales twice as heavily as the other factors, largely for reasons of economic development. Once the state taxable income had been calculated, the tax rate would be applied to that amount.
Mr. Zuend explained that although every business submitted forms to the federal government, only the C corporations paid a corporate income tax at the federal level. For the sole proprietors, there was the federal form Schedule C, Profit or Loss From Business, which required much the same computations as figuring the corporate income tax. At the bottom of the Schedule C was a line for profit or loss, which would then be entered, for federal tax purposes, on the Form 1040. Mr. Zuend conjectured that was the line that would be used for state income tax purposes if it were applied at the sole proprietorship level. If a sole proprietor had a multi-state operation, that would have to be apportioned before getting to the state-attributable income.
Mr. Zuend said there were also forms to be submitted for S corporations and partnerships, and those forms also had lines showing “ordinary income,” which was very similar to taxable income on the corporate form. Those forms could also be used as the starting point for determining Nevada taxable income. If the net profits tax was enacted, whatever rate was chosen by the Legislature would be applied to the taxable income shown on the federal forms.
Mr. Zuend noted that the process of determining the state taxable net income was fairly straightforward. He was sure many people were familiar with the federal forms involved, at least the Schedule C for sole proprietors. Mr. Zuend noted that Nevada might want to carry its net profits tax to the sole proprietor level. He noted the reason it was not taxed under business income at the federal level was that it was reported as personal income on the Form 1040.
Mr. Zuend said there were several states that taxed below the C corporation level or that also applied a tax to S corporations separate from their personal income tax. The one state he was aware of, though, that taxed all forms of business was New Hampshire. New Hampshire, he said, had separate forms for each type of organization, whether it was a C corporation, an S corporation, a sole proprietorship, or a partnership. They began with either taxable income in the case of the corporation, net profit in the case of the sole proprietorship, or ordinary income in the case of partnerships or S corporations.
Mr. Zuend noted that New Hampshire applied an 8.5 percent tax on business profits. New Hampshire, like Nevada, did not have a personal income tax. In addition, New Hampshire did not have a sales tax. New Hampshire, he pointed out, had found some creative ways to generate revenue. According to Mr. Zuend, New Hampshire had federal taxable income before net operating loss deductions and special deductions, so there were some add-backs. He said he believed that would be contemplated in Nevada as well, plus some other deductions that were required. Mr. Zuend said a state could not simply take a straight apportionment from the taxable income. There were some additions and subtractions necessary in order to arrive at taxable income.
Mr. Zuend said New Hampshire taxed every business except those with a gross income under $50,000. The net income of those businesses would be much lower than $50,000, and the tax on that net income would most likely not be worth collecting.
Assemblywoman Giunchigliani asked if businesses would receive a tax credit after they filed if Nevada taxed their profits. Mr. Zuend replied that profits taxes that had been paid would be deductible, and said that the state taxes paid were a standard federal deduction. Some states, he added, actually allowed a deduction for a portion of federal taxes paid, but that was not mandatory. Mr. Zuend said he believed businesses would have to deal with that on their federal forms.
Assemblyman Griffin said if he remembered right, one of the objectives of the Governor’s Task Force on Tax Policy in Nevada was a broad-based business tax. He believed the Task Force had tried to identify businesses or sections of the economy that had an impact on the state’s economy and services by virtue of doing business in Nevada and that needed to be paying more. He asked if a profits tax would accomplish that goal of making those businesses that needed to pay more actually pay more.
Mr. Zuend responded by saying a corporate profits tax was mainly paid by large, publicly traded corporations. If those were the businesses that were seen as underpaying, then Mr. Zuend said a net profits tax would accomplish that goal. Assemblyman Griffin stated he did not believe anyone was underpaying, but he remembered that was a goal of A.C.R. 1 of the 17th Special Session.
Assemblywoman Giunchigliani said she thought the Governor’s Task Force on Tax Policy in Nevada had considered a net profits tax as a broad-based business tax. However, not knowing the amount of revenue a net profits tax could raise in that time frame, the Task Force had decided to recommend a gross receipts tax instead.
Assemblywoman Pierce noted that 47 states had some sort of net profits tax. She wondered whether there was a consensus of how a net profits tax should be structured or were there 47 different ways of doing it. Vice Chairman Parks said he would guess there were 47 ways of doing a net profits tax. Mr. Zuend indicated that nearly every state with a net profits tax uniformly used federal reporting as a basis for the tax. Each state, based on its own political environment, made changes and accepted or rejected some deductions the federal government allowed or disallowed, but the tax was based on what businesses reported to the federal government, except as allocated to the state.
Assemblywoman Pierce asked if there was a consensus on the changes the states made to the amount reported to the federal government. Mr. Zuend said he thought most states went their own way. Some gave a special credit to certain industries in that state, some liked to hit an industry harder. As an example, Mr. Zuend cited the fact that California imposed a higher rate of corporate tax on the banking industry than on other industries. Other states imposed a lower rate on the banking industry. South Dakota, he said, had no corporate income tax, but did impose a franchise tax on banks.
Assemblyman Griffin repeated a remark made by Carole Vilardo at an earlier hearing that whatever tax the Legislature adopted should be reflective of Nevada’s economy. Mr. Griffin said that was hard to do. He wondered if profitability was reflective of the economy. Mr. Griffin observed that some of the proposed taxes were reflective of the economy, but others, such as the cigarette tax, were simply aimed at raising revenue. Mr. Griffin voiced the opinion that the Legislature was admittedly trying to raise revenue, but the Legislature was also trying to find a tax structure that was reflective of the economy and could move and grow with the economy.
Assemblywoman Leslie added to Mr. Griffin’s comments the idea that whatever tax package was imposed would have to be fair. She found it significant that 47 other states had a net profits or corporate tax, but Nevada was one of three that did not. Ms. Leslie said she had heard the net profits tax criticized for its volatility; when profits were down, the state’s expenses usually went up. She said Medicaid and welfare were currently as high as they were because so many people had lost their jobs and business profits could be expected to be down.
Ms. Leslie asked what the state should do. She said there had been mention of setting aside 15 percent and asked Mr. Zuend to explain that.
Mr. Zuend replied that 47 states had a net profits tax, and 47 states ran into trouble almost every time the numbers went down. Every time the issue of a net profits tax in Nevada had come up in the past, staff had pointed out that the state would have to anticipate economic conditions, which it currently did not do very well with sales tax or gaming tax that were much less volatile. If a net profits tax were to be an important part of the state’s revenue picture, the Legislature would be prudent to adopt a program to set aside some of the revenues to balance unanticipated shortfalls.
Based on information compiled by Jeremy Aguero, Mr. Zuend suggested that perhaps setting aside 15 percent would protect the state. Once the Economic Forum had made its revenue forecast, the Legislature would impose a restriction on the Governor’s spending, allowing him to spend only 85 percent of that revenue. Any amount above that would be put into a Profits Tax Stabilization Account that could be used as needed by the Governor to offset shortfalls—if the Board of Examiners, the Interim Finance Committee, or whoever else had been designated by the Legislature, determined corporate profits tax revenues were not coming in as expected during the course of a biennium.
Mr. Zuend noted the state would not want to continue to overtax taxpayers. If at some point the fund went higher than 30 percent of the total annual amount of revenue expected—if $200 million had been expected, then once the fund exceeded $60 million—the state could do something else with it. The state could determine whether spending 85 percent was appropriate and, if necessary, could change that percentage. The excess money could be placed in the Rainy Day Fund, or the money could be used for one-shot expenditures or capital improvement projects. Mr. Zuend pointed out since it would be one-shot money, it should not be put into the full spending stream. He said that would be a prudent approach for the Legislature to take.
Assemblywoman Giunchigliani noted the course of action suggested by Mr. Zuend would be necessary just to deal with the potential volatility of the net profits tax. She asked if the unified business tax would also be that volatile. Mr. Zuend believed the unified business tax would not be as volatile. He suggested the volatility of the unified business tax would be similar to that of the sales tax, where actual revenues might vary by 4 or 5 percent from projected levels. Revenues from the net profits tax, on the other hand, could vary as much as 30 percent from projections.
Assemblywoman Giunchigliani remarked that there was an ease to implementing a net profits tax, but the downside was the volatility of the tax. She asked for confirmation that Mr. Zuend was not advocating raising taxes merely to build up the Rainy Day Fund, which she thought would be irresponsible. Mr. Zuend assured her he suggested the Profits Tax Stabilization Fund to do just what it said: stabilize the net profits tax. However, letting that fund grow too large would not be desirable, and if the Rainy Day Fund was not fully funded, as it might have been only in 1995, surplus funds from the Profits Tax Stabilization Fund could be placed in the Rainy Day Fund. When the Legislature next met, a determination could be made as to whether to lower the net profits tax rate, lower the percentage to be put in reserve, or perhaps lower the property tax.
Assemblywoman Giunchigliani noted that page 144, Section 188, of the bill draft mentioned a Fund to Stabilize the Operation of the State Government to ensure no one was overtaxed. Ms. Giunchigliani said she understood that section to mean that if the revenue for a fiscal year exceeded a certain percentage of projected revenue for that fiscal year, the excess revenue would be placed in the Fund to Stabilize the Operation of the State Government. The Legislature could then consider lowering the tax rate. She noted that provided a protection against overtaxation, no matter what tax the Legislature might choose to enact.
Mr. Stevens responded that, according to Section 188 of the bill draft, if total revenues were in excess of 107 percent of what had been projected by the Legislature, then the excess would be transferred to the Fund to Stabilize the Operation of the State Government (Rainy Day Fund). If the Rainy Day Fund reached its maximum limit of 10 percent of General Fund appropriations, which would be roughly $230 million, then the additional funds would go to the Fund to Reduce Taxes. Assemblywoman Giunchigliani suggested the Legislature might want to consider lowering that 10 percent amount allowed in the Rainy Day Fund, as she thought that amount was too high. Ms. Giunchigliani said she would rather look at lowering taxes than have $230 million in the Rainy Day Fund because, in her opinion, people should not be paying taxes to put $230 million in the Rainy Day Fund. She thought statutorily changing the Rainy Day Fund to 5 percent would be more reasonable.
Vice Chairman Parks asked Kenneth Lange, who was a member of the Governor’s Task Force on Tax Policy in Nevada, to come forward to provide information. Kenneth Lange, Executive Director, Nevada State Education Association, informed the Committee that prior to the issuance of the Task Force’s report, the members of the Governor’s Task Force on Tax Policy in Nevada had carried a petition on a net profits tax. Without debating the relative merits of that, Mr. Lange said there were a number of reasons why the Task Force had selected a net profits tax over many of the other taxes that were available to carry in petition form.
Mr. Lange said that essentially, the Task Force had found the net profits tax had a high degree of exportability; 52 percent of that tax would be paid by businesses located outside Nevada but doing business in Nevada. The net profits tax was a relatively progressive tax in terms of where it fell when it finally trickled through the system, with businesses with over $100,000 in net profits carrying the largest share of the tax burden. The Task Force had found through extensive polling that the net profits tax also had a high level of political palatability. People believed, at the core of the debate, that if a business was making a profit, it ought to be able to contribute to the public good out of that money. While that could be debated at a policy level, and had been debated at length, there seemed to be a fundamental understanding that the net profits tax had an element of fairness to it. The Task Force also surveyed other states and determined that, at a 5 percent rate, Nevada would be competitive with the 47 other states that collected a business tax. Mr. Lange stated that, from an economic development standpoint, remaining attractive to business was important.
Mr. Lange admitted that a net profits tax was more volatile and less stable than a gross receipts tax, a personal income tax, or a property tax, but he stressed that the net profits tax had to be put in the context of how big a percentage of the total revenue it was expected to be. If the net profits tax were to comprise 8 percent of total revenue, Mr. Lange wondered if its volatility—if it were to fluctuate 15–33 percent fluctuation, which Mr. Lange noted had been the amount of variation in other states in the past few years—could be accommodated.
Mr. Lange stated the members of the Governor’s Task Force on Tax Policy in Nevada felt that revenue reporting for the net profits tax could be made simple, although “simple” was a relative term. For the Department of Taxation, having to shift from collecting quarterly to collecting monthly with different filing and reporting issues would be more complex. For businesses, the Task Force had envisioned a one-page form that could be used to report the number from the businesses’ federal income tax forms.
Mr. Lange said the reasons for deciding to recommend the gross receipts tax over the net profits tax were the stability factor and the fact that the net profits tax had been the object of much criticism. He added that he had wanted to look at another source of revenue that would do much the same thing as the net profits tax. Mr. Lange said he was not going to argue for or against the tax, as that was up to the Legislature, but he wanted to give the Committee an overview of the rationale behind the recommendations of the Governor’s Task Force on Tax Policy in Nevada. Whether or not the Task Force felt the net profits tax was fair, they had thought the public could support it and believed they understood it.
Assemblywoman Pierce asked what the range of net profits tax rates was in the states that had such a tax. Mr. Lange surmised the rates ranged from 5 percent to 10 percent from state to state. Mr. Zuend stated that he had a chart (Exhibit H) showing the rates in all the states, except Texas, that had a net profits or corporate income tax. Mr. Zuend pointed out that North Dakota’s rates began at 3 percent and went up to 10.5 percent. He noted that, although most states had flat rates, a few had graduated rates. Mississippi’s rate was 3 percent to 5 percent. Maine’s low-end rate was 3.5 percent. Mr. Zuend listed a few states that had some of the highest rates, including North Dakota’s high-end rate, California, Maine’s high-end rate, New Jersey, New Hampshire, and Vermont. He offered to make the rate chart available to all Committee members.
Assemblywoman Giunchigliani said she had heard different rates discussed and asked if there were any figures available to show how much revenue different rates would generate in Nevada. Mr. Stevens replied that estimated revenue generated by a 5 percent rate would be approximately $160 million. With a 15 percent holdback for the Stabilization Fund, that would generate roughly $136 million.
Assemblywoman Giunchigliani next inquired about the implementation time for a net profits tax. Mr. Stevens said the Department of Taxation had assumed an implementation date of January 2005. Mr. Zuend explained that, due to the volume of accounts, it would behoove the Department of Taxation to wait until January 2005, when their new information system would be in place, to begin collecting the tax.
Assemblywoman Giunchigliani said the unified business tax had been projected to begin phasing in on January 1, 2004. She noted the net profits tax would not generate as much revenue. Ms. Giunchigliani asked what the 15 percent rate for the holdback was based on. Mr. Stevens said the legislators could choose whatever rate they wished depending on how much money they felt should be in reserve when revenues went down. Mr. Zuend explained that the Rainy Day Fund was for use in overall scenarios where the state budget got into trouble. Use of the Rainy Day Fund would require the Governor calling the Legislature back into session. Mr. Zuend pointed out that while the net profits tax could go down considerably, other revenues, which were not as volatile, could have gone down much less, if at all. He pointed out that there were also leads and lags in the cash flow of the net profits tax due to loss carry-forwards and other things that occurred in corporate profits tax. Mr. Zuend said there might actually be a surge of revenue at the beginning of a downturn, with revenues going down shortly thereafter.
Assemblywoman Giunchigliani said she had no problem with the unified business tax, but she still liked the net profits tax. However, she said she was concerned because the Committee had to make up another $60 million in revenue. Mr. Stevens stated staff had calculated roughly $32 million per percent of tax rate without any revenue being held back. He noted that any holdback would have to be subtracted from that amount. Another thing not taken into consideration in calculating that $32 million was the cost of collecting the tax. Mr. Stevens said money had been set aside for that purpose if it was, in fact, necessary.
Assemblyman Perkins suggested that, considering the implementation schedules and other information given to the Committee by the Department of Taxation, and after an interim committee had reviewed the issues, the Legislature could come back to the 2005 Legislative Session with firmer holdback provisions and firmer vehicles by which to address the volatility of a net profits tax. Assemblyman Perkins pointed out that would give the legislators that much more time to study the issues, find another state with an economy similar to Nevada’s that had a net profits tax, and address some of the finer details. He noted they currently had very little time. Also, if the Department of Taxation could not implement the net profits tax until January 2005, and the next legislative session would begin in February 2005, waiting until the 2005 Legislative Session to pass the tax would not actually delay its implementation very long.
Assemblyman Griffin wanted to be clear on whether a 1 percent net profits tax rate would generate $32 million per year. He also asked if that $32 million included holdbacks. Mr. Zuend replied that $32 million was 100 percent of the revenue that would be generated, without holdbacks taken into account. Mr. Zuend noted that his proposal for a 15 percent holdback was only a proposal. His suggestion was to determine the budget, and any revenue in excess of that budgeted amount would be the initial money placed in the Stabilization Fund. Mr. Griffin asked for a copy of the chart showing the different states’ net profits tax rates.
Assemblyman Hettrick stated that if a net profits tax were to be implemented in January 2005, he said the entire budget that had already been passed would have to be entirely funded from other sources during the 18 months before the implementation of the net profits tax. If 30 percent of the revenues generated by the net profits tax in the first six months of 2005 were held back, the net profits revenue would amount to practically nothing in the coming biennium. Mr. Hettrick also recalled a letter from Charles Chinnock, Executive Director, Nevada Department of Taxation, saying the Department would not be able to handle the workload if more than a couple of new taxes were imposed. Mr. Hettrick pointed out that the real estate transfer tax, bank franchise fee, and state room tax that had been proposed were all new taxes at the state level. He commented that the legislators were in a situation of “damned if you do and damned if you don’t.”
Assemblyman Perkins stated that the plan on the table at the end of the 72nd Legislative Session required some sort of bridge taxing. He said the legislators had always known that if they were going to launch a new tax, the implementation would take some time. Assemblyman Perkins observed that an increase in an existing tax would require virtually no extra work. He said the tax plan with the net profits tax would differ little from the plan with the unified business tax, although the unified business tax would, admittedly, generate more revenue during the coming biennium than the net profits tax would. Either plan, though, would require bridge taxes, temporary increases in existing taxes, to get through the coming biennium.
Vice Chairman Parks announced he had just received an e-mail from Guy Hobbs, Chairman of the Governor’s Task Force on Tax Policy in Nevada, who had been listening to the meeting on the Internet. Mr. Hobbs said the Task Force had not endorsed or recommended a net profits tax. The reasons for that included its lack of stability, higher comparative administrative costs, the ability of some types of businesses to avoid the tax, relative difficulty in projecting revenues, and a relatively uneven playing field for publicly traded businesses versus other types of businesses.
Vice Chairman Parks suggested reviewing the revenues agreed upon by the Committee members earlier in the day. He commented that, without knowing what decisions were going to be made concerning the larger revenues, it was hard to lock in a rate for other revenues.
Assemblyman Perkins commented he thought the Senate had done some of that earlier in the day. He said the actions of the Assembly were not driven by the Senate’s actions, still, for purposes of discussion, it could be helpful to know what the Senate had done and use that as a starting point for discussion. That could save them the trouble of having to resolve issues later that they could already be in agreement. Assemblyman Perkins said he did not have access to the numbers and percentages the Senate had agreed on, and he did not know how long it would take to acquire that information.
Mr. Stevens said he and Mr. Zuend had been in the Assembly Committee meeting or going over figures together all day, and the Senate fiscal analysts had been with the Senate, so they had not been able to speak with each other since before the meetings began. Mr. Stevens was not sure just where the Senate stood on particular items, but if the Senate analysts were out of their meeting, he and Mr. Zuend could go across the street and compile that information fairly quickly. Vice Chairman Parks asked if it would be possible to request a brief summary of the Senate actions via e-mail.
Vice Chairman Parks recessed the meeting until 2:00 p.m.
The meeting of the Assembly Select Committee on State Revenue and Education Funding reconvened at 2:35 p.m. Vice Chairman Parks expressed his desire to review what had happened in the Senate regarding passive revenue generators.
Mr. Stevens reported that staff had been asked to go back and determine what had happened in the Senate thus far, so the Committee would have that information when it came to making a decision in each of the areas it had been working on. He referred the Committee to a handout (Exhibit I) entitled “Estimated Revenue Generated from Increase in Rates of Selected Taxes,” which listed actions proposed by the Senate and the resulting revenues. Mr. Stevens indicated he was going to compare the first four items, which were reductions in collection allowances, also known as passive revenue generators, for cigarettes, other tobacco, liquor, and sales tax.
Mr. Stevens commented that the Assembly had been looking at reducing the collection allowances for the other tobacco tax, liquor tax, and sales tax to zero. The cigarette tax would be reduced to 0.5 percent to compensate businesses for the cigarette process. The Senate, though, had chosen to allow a 0.5 percent allowance in each of those four areas. Referring to the chart (Exhibit I), Mr. Stevens called attention to the amount of money that would be retained compared to the information the Committee had been utilizing. In number 1, the cigarette stamp fees of $3.2 million and $3.8 million were slightly different from the figure of $3.5 million the Assembly had been using for each fiscal year. The $100,000 for the other tobacco allowance remained the same, although Mr. Stevens said he would need to double-check to see if the figure appeared to be the same due to rounding, as it had been just over $100,000 and now it was a little under $100,000.
Vice Chairman Parks interrupted and commented that the rationale for allowing the retention of a portion of the collection allowance for the cigarette stamp fee was the fact that a stamp had to be physically placed on each pack of cigarettes. The collection allowance for the stamp fee was to compensate businesses for having to affix that tax stamp, whereas no stamps were placed on other tobacco products. Mr. Stevens agreed with that explanation.
The amount listed for the liquor tax on the Assembly’s sheet (Exhibit D) was $800,000 per year. On the Senate’s sheet (Exhibit I) that amount was $900,000 per year. Mr. Stevens explained that the difference was due to the Senate having increased the liquor tax 89 percent, which was the amount that had been recommended by the Governor’s Task Force on Tax Policy in Nevada, while the Assembly only proposed to increase the liquor tax by 50 percent.
Reducing the sales tax collection allowance to 0.5 percent would generate $10.7 million in the first year and $11.3 million in the second year. Mr. Stevens pointed out that, in the area of passive revenue generators, there would be a loss of revenue if the Assembly Committee followed the Senate’s actions.
Assemblyman McCleary asked if sales tax was the local school support tax (LSST) listed in the chart. Mr. Stevens answered in the affirmative and directed Mr. McCleary to number 4 on the Assembly sheet (Exhibit D), the reduced state LSST (local school support tax) retainer allowance. On the Senate sheet (Exhibit I), that was listed as a reduction in the retailer sales tax allowance. Mr. Stevens added that the 2.25 percent local school support tax was deposited into the Distributive School Account. Right now, businesses were retaining 1.25 percent, which the Assembly proposed reducing to zero and the Senate proposed reducing to 0.5 percent.
Assemblyman Anderson noted the biggest difference would be in the reduction of the LSST allowance, which reflected a loss of about $10 million if a 0.5 percent allowance were retained. Mr. Stevens opined that the Assembly number might be $1 million too high, meaning the $19.2 million figure on the Assembly’s chart probably should have been reduced to $18.2 million. The difference, according to the numbers on the charts, was roughly $9 million or $10 million dollars, while it should have been around $8 million or $9 million. Mr. Anderson commented that in the second part that same dollar amount appeared again, $8.2 million.
Vice Chairman Parks urged Mr. Stevens to go all the way through the list and then try to answer questions. Upon completion of that presentation, the Committee would come back and see where they were.
Mr. Stevens said item number 5 was the business license fee. The Assembly had proposed a fee of $100 per year, which would generate $23.5 million in the first year. The Senate had chosen a $50 annual fee, which Mr. Stevens said would generate $11.8 million in additional General Fund revenue by imposing that business license fee on an annual basis.
On the live entertainment tax, item number 6, the Senate had proposed the same action as the Assembly, which would result in an increase of $47.9 million in the first year of the biennium and $81.1 million in the second year.
The Assembly’s proposed increase in the cigarette tax of $0.65 per pack was projected to bring in $95.8 million in the first year and $99 million in the second year. The Senate proposal called for a $0.25 increase per pack in the first year of the biennium and an additional $0.15 increase in the second year of the biennium, which would bring in $39.8 million the first year and $62.9 million the second year. The difference would be a significant amount of money.
Mr. Stevens said item number 9 was the liquor tax. The Assembly had proposed a 50 percent increase. The Senate had proposed an 89 percent increase, which was the amount recommended by the Governor’s Task Force on Tax Policy in Nevada. In that instance, the Senate’s proposal was actually a gain from the Assembly’s proposal.
Item number 11 was the restricted slot tax, which Mr. Stevens noted the Committee discussed briefly the previous day. The Assembly had proposed a 33 percent increase the first year, increasing to 50 percent the second year. The Senate had retained a 33 percent increase in each year.
On the matter of Secretary of State fees, Mr. Stevens noted that, according to the Assembly’s chart (Exhibit D), the Assembly’s proposal would generate $14.8 million in the first year and $17.3 million in the second year. On the Senate’s chart (Exhibit I) the amount was higher—$21 million and $25.5 million. He asked Mr. Zuend to elaborate. Mr. Zuend explained that the Senate had restored the $125 annual renewal fee in conjunction with the reduction in the business license fee. Most of the revenue lost because of a lower business license fee, at least three-quarters of it, would be regained because of the higher Secretary of State fee on all the registrations.
Assemblyman Anderson noted the Committee was returning to the original numbers that had been projected the first time the Committee looked at the Secretary of State fees. That would be reason for the difference between $85 and the return to $125 again. Mr. Zuend noted that was correct.
Mr. Stevens stated those were all the changes the Senate had taken action on at that point in time.
Assemblyman Griffin commented that the way projections had always been made regarding how much revenue was going to be raised was by assuming if the rate on a tax was raised, the same quantity of transactions was going to continue to occur. He referred to e-mail or testimony regarding the liquor tax, which had indicated there was a measurable market of out-of-state people who purchased their liquor in Nevada because the tax rate was lower than in neighboring states, specifically California and Oregon. Mr. Griffin commented that he and Assemblywoman McClain had talked about this issue, and Ms. McClain had talked about the issue publicly in regard to the tobacco tax as well, in terms of lost revenue. Mr. Griffin said he just wanted to make sure the Committee was aware that, as a result of raising the tax, the level of economic activity that Nevada was currently enjoying because the tax was so low might drop after the tax was raised. He wanted the Committee to keep that possibility in mind. Mr. Griffin thought that might have been why he liked the 50 percent rate.
Mr. Zuend stated that, although adjustments had been made for cigarettes, adjustments had not been made for liquor taxes. He said the reason for that was the liquor tax was not all that great a portion of the final price of the product. The fact that the sales tax was usually much more than the liquor tax had to be taken into account. For example, the liquor tax on a beer was $0.04 per six‑pack. Mr. Zuend said it would be hard to argue that people were coming across the border to buy six-packs of beer for $0.04 less. He pointed out that California already had a much lower wine tax than Nevada, which covered Nevada’s $0.40 rate and part of the $0.75 rate on fortified wines and such. California currently had a higher rate on hard liquors and the cordials, such as liqueurs and schnapps. Mr. Zuend said he did not know that Nevada was getting much less competitive relative to California under either scenario.
Assemblyman Griffin stated that he had relatives in Oregon who bought liquor in large quantities and noticed an appreciable difference. He added that perhaps the large quantities made the savings more apparent.
Assemblyman Marvel asked Mr. Stevens whether the Senate would be considering other taxes. Mr. Stevens said the Senate was probably in committee at this time reviewing other areas on the chart (Exhibit I) that had not been filled in yet.
Vice Chairman Parks asked Mr. Stevens to explain the difference, if any, between the cigarette tax noted at the bottom of the Senate’s chart (Exhibit I) and item number 7 on the same chart. Mr. Stevens guessed that the Senate was taking a look at increasing the cigarette tax from its original proposal. He admitted that was speculation on his part since he had not asked the Senate about that particular item. The Assembly proposal was for a $0.65 increase, and the Senate was at $0.25. If the Senate added that additional $0.25, the Senate would be at $0.50, but the Senate would be over the Assembly’s proposed $0.65 if it added another $0.25 in the second year.
Referring to the chart that came from the Senate, Assemblywoman Giunchigliani noted that items 6 and 19 were the two areas where the Assembly and the Senate definitely agreed. At least on the live entertainment, the 10 percent rate the Senate had proposed on taxable allowances was similar to what the Assembly had proposed. Ms. Giunchigliani noted that both the Senate and the Assembly preferred a net profits tax over a unified business tax, although she considered the Senate’s proposed 1 percent rate ridiculous. Mr. Stevens indicated that if he was reading the Senate’s chart (Exhibit I) correctly, the $155.5 million was the total fiscal year collection, not the revenue from the net profits tax.
Assemblywoman Giunchigliani suggested the Committee members discuss whether they wanted to go with a unified business tax or a net profits tax. After that decision had been made, the Committee could come to a consensus regarding rates and what revenue would be generated. Ms. Giunchigliani said the Legislature had an $869 million budget to fund and it was time to consider how to get to that $869 million figure.
Assemblywoman Giunchigliani stated that, although some people still wanted the unified business tax, most seemed to prefer the net profits tax. She suggested that a 5 percent to 6 percent rate might be best. Ms. Giunchigliani asked if the Committee felt comfortable with the 15 percent holdback on the net profits, since the amount of fluctuation was unknown.
Assemblywoman Pierce wanted to be sure the 15 percent holdback referred to keeping 15 percent of the revenue each year in another account. Assemblywoman Giunchigliani said that was correct. The 15 percent would not go into the Rainy Day Fund. Ms. Giunchigliani said she understood the holdback was actually allocated for the budget. Mr. Stevens commented that the 15 percent of income would be retained in the Stabilization Fund that could be utilized more easily than the current Rainy Day Fund. The holdback funds could be utilized to cover any shortfalls that might occur if that revenue source had been over-projected.
Assemblywoman Giunchigliani said a letter had been circulated (Exhibit J) to the effect that the Department of Taxation might not be able to get the net profits tax up and running, although it was believed to be easier to collect than the unified business tax. Ms. Giunchigliani wondered if a phase-in approach similar to the one that had been considered for the unified business tax might be possible. The implementation could start in January 2004 with a limited number of businesses and then phase-in the remaining businesses later.
Assemblywoman Giunchigliani asked what the purpose would be of having the tax begin one month before the next legislative session. She stressed it would make better sense to have the tax in place for awhile so the Legislative Committee on Taxation, Public Revenue, and Tax Policy, created in Section 141 of the bill draft, would have some feedback to give the Legislature. Vice Chairman Parks concurred with that approach. The Vice Chairman pointed out the Committee was talking about larger corporations that had stringent requirements for their filing and reporting through federal tax forms. Those were the corporations that would have less flexibility in the way that they could report or avoid reporting revenues.
Assemblywoman Chowning observed that the unified business tax was projected to generate approximately $195 million, while a 5 percent net profits tax with a 15 percent holdback would generate roughly $136 million. Mrs. Chowning explained that subtracting the 15 percent holdback from the $160 million generated by a 5 percent net profits tax resulted in a balance of $136 million. Consequently, the Committee was comparing $195 million to $136 million, which was a difference of roughly $60 million. Mr. Stevens agreed that was true if the tax was implemented in July 2004. Mrs. Chowning said the Committee had to think of a way to fill that $60 million gap.
Assemblyman Brown stated that he felt more comfortable with the net profits tax than the uniform business tax or the gross receipts tax. One of his concerns with a gross receipts tax or a unified business tax was a business’s ability to pay. Although he had not served on the Assembly Committee on Taxation during the regular session and so had not heard all of the testimony on the issue, Mr. Brown felt the Committee was considering taking a significant departure from what had been testified to. He did not believe there had been a hearing on the net profits tax. While the Governor’s Task Force on Tax Policy in Nevada had discussed the matter at length, Mr. Brown said the net profits tax had not been part of the Task Force’s recommendation. He asked if there was any documentation or analysis of the Task Force’s discussions on the subject.
Assemblywoman Giunchigliani told Mr. Brown the Committee had discussed the net profits tax earlier in the day. She regretted he had not been present to participate. Ms. Giunchigliani added that the net profits tax had been discussed throughout the session, but just dismissed at some point. She said it had been part of the 23 amendments that the Senate had considered. While the Committee had been trying to come to a consensus that morning, Ms. Giunchigliani said there had been those who still favored the unified business tax. Ms. Giunchigliani noted there were those in the Assembly and the Senate who, out of a wish for compromise and seeing the direction the Senate was going, would agree to return to the net profits tax.
Assemblywoman Giunchigliani said the Legislature had spent 120 days dealing with every possible kind of tax. Each member was aware there was no such thing as a fair tax. The Legislature was attempting to determine the fairest tax that was easy to implement, broadened the tax base, and fixed the flaws in the current tax structure. The Legislature was currently at the point where it needed to start making some decisions. Ms. Giunchigliani stated the net profits tax was common, being present in 47 states; it was not new. Businesses were apparently quite comfortable paying a net profits tax in other places. Ms. Giunchigliani stated that business in Nevada should step up to the plate. If people were not comfortable with the net profits tax, the alternative was the unified business tax. Assemblyman Brown voiced the opinion that the morning hearing had been a “gloss over.”
Assemblyman Griffin stated that, in the discussions and iterations of the unified business tax, the Committee had accomplished much toward getting rid of double taxation and cascading. He asked whether the Committee would continue to explore allowances or deductions from the corporate profits tax against the real property transfer tax, which had been included in discussions of the unified business tax. Mr. Griffin said the Committee wanted to make sure that it avoided hitting one or two industries more than once. While a net profits tax would not cascade or pyramid the way a gross receipts tax or unified business tax would, Mr. Griffin pointed out a net profits tax could still pyramid in industries where there were several layers building up to a final product. He said he did not know if the Committee had addressed that, although the Committee had addressed a lot of those concerns when it discussed the unified business tax.
Mr. Griffin said he wanted to be sure the Committee continued to address the issue of cascading in terms of a net profits tax or a unified business tax. Vice Chairman Parks said his intent was to continue discussion of both the cascading effect and the pass-through effect, regardless of whether the tax being discussed was a 5 percent net profits tax, a 0.25 percent gross receipts tax, or a 1 percent unified business tax. The Vice Chairman observed that those issues would not go away and would create major complications in the way certain industries handled their products.
Assemblyman Perkins noted there were a number of ways the Committee could proceed. He said he had received some updated information from Mr. Aguero on stabilization mechanisms for a net profits tax that were different from those the Committee had discussed so far. He said he had asked Mr. Aguero to brief the Committee. Mr. Aguero had also been asked by the Senate Majority Leader to brief the Senate Committee. Assemblyman Perkins suggested that it might be helpful if, after Mr. Aguero had briefed the Senate Committee, he could come and brief the Assembly Committee.
Assemblyman Perkins said he did not want to put the Committee’s discussion on hold, but he said Mr. Aguero’s briefing might have a material effect on the members’ feelings about net profits or other issues. Assemblyman Perkins suggested there might be other issues relative to other revenues that could be addressed while the Committee awaited Mr. Aguero’s arrival. Assemblyman Perkins said he had been impressed by Mr. Aguero’s information, but did not have the expertise to pass that information on to the Committee. However, he thought the information was worth having Mr. Aguero brief the Committee. Vice Chairman Parks said that would be acceptable.
Assemblyman Andonov asked for clarification as to whether the money that would go into the Stabilization Fund would be 15 percent of the revenues raised or 15 percent of the entire General Fund. Assemblywoman Giunchigliani replied it was only 15 percent of the net profits tax. Mr. Andonov noted that if $200 million was projected coming from the net profits tax, $30 million would be set aside. Ms. Giunchigliani agreed.
Assemblyman Andonov asked if the Stabilization Fund would supplant the Rainy Day Fund. Assemblywoman Giunchigliani answered that the Rainy Day Fund would remain in place. She believed there was a trigger mechanism included in the bill. The 15 percent would go into the Stabilization Fund, which was newly created in the bill. An overview of how the rates would work, what impact the taxes would have on businesses, and so forth would be in the bill. Ms. Giunchigliani understood that the purposes for which the Legislature could allocate those funds would be established. Ms. Giunchigliani indicated that staff had said the money in the Stabilization Fund would be a bit of protection against shortfalls, but should not be included in the General Fund. Instead, it should be used for the capital improvement projects or one-shot expenditures.
Assemblyman Andonov asked if the triggering mechanism was based on the amount of revenues raised. Mr. Stevens said he thought the trigger mechanism was designed to function if revenues from the net profits tax had been over-projected. The Stabilization Fund could be utilized to make up that shortfall. If there was money in the Stabilization Fund and the net profits tax revenues were lower than had been projected, the Stabilization Fund could be tapped more easily than the Rainy Day Fund to make up for that difference immediately.
In response to Assemblyman Andonov’s question about legislative oversight, Mr. Stevens said if the Stabilization Fund moved forward, staff would need to draft some language for the Committee members to review to see exactly how that would be done. It could be done in any manner the members wished.
Assemblyman McCleary asked if the net profits tax exceeded projections, taking into account the 15 percent being held for unforeseeable circumstances, would everything above the projections go into the Rainy Day Fund automatically.
Mr. Stevens stated if General Fund revenues were 7 percent over-projected, those revenues would be retained in the General Fund. If those revenues were over 7 percent of the projections, then that excess amount would go into the Rainy Day Fund. Once the Rainy Day Fund reached its maximum limit, which was 10 percent of General Fund appropriations at its maximum limit, then the excess would go into another fund that would be used to reduce taxes.
Vice Chairman Parks suggested that while the Committee was waiting to receive more information, the members could go back through the Assembly’s list of potential revenue sources and see whether members could concur with the Senate. In the interest of time, he suggested the Committee consider the passive revenue generators. The Senate had chosen to allow for the collection allowances in all four of those respective areas. Vice Chairman Parks asked how the Committee members felt about the Senate’s idea.
Assemblyman Anderson stated he was always disappointed that the Legislature permitted collection allowances to take place. He said if those dollars could be made up in some other area, he would not have any problem with what was being proposed. Mr. Anderson said he was a little perplexed by what had been proposed for the cigarette tax in the second half of the biennium, which made no sense to him. For the Senate to end up with a $0.50 increase in the first year of the biennium and a $0.40 increase in the second year did not make sense. Vice Chairman Parks said that in previous testimony the Committee heard that 27 states offered some kind of collection allowance. The concept was not unique to Nevada.
Assemblywoman McClain recalled that when the Committee addressed these passive revenue generators, part of the concept had been to leave the cigarette stamp fee because the manufacturers place the stamp on the cigarette packs. The general idea, though, had been to eliminate the collection allowances and later to provide incentives to file electronically. Ms. McClain said she would like to eliminate the collection allowances.
Vice Chairman Parks acknowledged the presence of Charles Chinnock, Executive Director of the Nevada Department of Taxation. He suggested the Committee return momentarily to the discussion of the net profits tax and ask Mr. Chinnock to give the Committee his best guess as to the possibility of implementing a net profits tax in July 2004.
Charles Chinnock, Executive Director, Nevada Department of Taxation, said that when the Department had considered the net profits tax and looked at all the issues involved, it had believed that January 1, 2005, would be a reasonable date to implement the net profits tax. The Department of Taxation expressed concerns about implementing the tax on January 1, 2004. An implementation date of July 1, 2004, gave the Department of Taxation a little more time to complete the regulations that would be needed. The one difficulty Mr. Chinnock foresaw was that the Department of Taxation could not have the new information technology in place by July 1, 2004. An implementation date of January 1, 2005, would allow the Department of Taxation enough time to have the new information technology in place.
Mr. Chinnock said that the taxes that had been discussed with implementation scheduled for January 1, 2004, or earlier, would have to be implemented using the Department’s current ACES (Automated Collection Enforcement System) technology. When the Department of Taxation had looked at the net profits tax, the staff had been concerned whether it could accommodate that tax with the current technology, not only in getting to the actual net profits figure that should be used, but especially having to program any deductions or additions to that number. Mr. Chinnock said he did not know if that answered the question, but an implementation date of July 2004 was still a little early, although it gave the Department of Taxation more time dates than proposed earlier. In the case of the net profits tax, the Department’s information technology was the problem.
Vice Chairman Parks inquired about the possibility of imposing the net profits tax on businesses with profits above a certain level and he wondered if that limited number of businesses could start paying the tax six months earlier than the other businesses. He asked if that would be at all advantageous.
Mr. Chinnock emphasized that the issue became who had to file. Often with a net profits tax, he said, everyone was asked to file either through a business license or some other document that the Department would send out. That would help in reducing the number of returns that had to be processed. As far as discovery, Mr. Chinnock stated the Department of Taxation would still have to send the returns to a larger number of people to be sure that everyone was included. Vice Chairman Parks said he understood that.
Assemblywoman Giunchigliani commented that she understood that the Department of Taxation required staffing, among other things. Referring to the letter from the Department of Taxation (Exhibit J), Ms. Giunchigliani noted that 118,000 of the 210,000 businesses were sole proprietors and it was not the intent to include them in the tax. Ms. Giunchigliani asked if there were a way, perhaps by creating a $1 million threshold, to look at the largest payers of net profits tax that would be the first group to phase in. Ms. Giunchigliani said that provision would be similar to the recommendation for the unified business tax, which would limit the first phase of implementation to 3,000 businesses. Mr. Chinnock thought if the number of businesses could be narrowed down, the Department of Taxation could manage a smaller target audience.
Assemblywoman Giunchigliani suggested that working with a smaller group of businesses would allow the Department of Taxation to work out the bugs in the system as it obtained equipment and such. She asked Mr. Chinnock to figure out what threshold—$1 million, $2 million, or whatever—would provide a small enough group for the Department to handle comfortably, and that the Committee could take up for discussion. Mr. Chinnock agreed to do that.
Vice Chairman Parks asked the Committee to go back to the collection allowances. Assemblywoman Giunchigliani asked if he was referring to the items and rates on the Assembly’s original document (Exhibit D). Vice Chairman Parks noted he was working from both that document and the document from the Senate that had been provided by staff that afternoon (Exhibit I).
Assemblywoman Giunchigliani noted it was good to know where the Senate stood, but she thought the Committee should work off of the Assembly document. Ms. Giunchigliani pointed out that the Committee did not want to create a huge, negative impact because it did not know how much revenue a net profits tax or unified business tax or some combination of the two might generate. Ms. Giunchigliani said the Committee should look at the rates that had been suggested where there was some consensus and see if the members were still comfortable with those rates. Vice Chairman Parks agreed to that. Ms. Giunchigliani referred the Committee to the document (Exhibit D) that included reducing the cigarette stamp fee to 0.5 percent.
Vice Chairman Parks observed that the only difference was the Senate had put a collection allowance back in for the liquor tax, other tobacco tax, and sales tax. He stated the Committee could take the collection allowance for the cigarette tax off the table since the Assembly and the Senate were in agreement on that. No further discussion on that issue was necessary. Ms. Giunchigliani said issues on which the Assembly and the Senate were in agreement could be set aside and the Committee could go back to those items that had not yet been agreed upon in the Assembly let alone with the Senate.
Assemblyman Hettrick asked the members to compare the Assembly’s document with the Senate’s document. He noted that the Assembly proposal was to reduce the collection allowance for other tobacco to zero, which was supposed to generate $100,000 in each year of the coming biennium. The Senate’s figures showed that reducing the collection allowance for other tobacco to 0.5 percent would also generate $100,000 in each year of the biennium. The Assembly chart said that reducing the collection allowance for the liquor tax to zero would generate $800,000 in each year of the coming biennium, while the Senate’s figures showed that reducing the collection allowance on the liquor tax to 0.5 percent would generate $900,000 in each year of the biennium.
Mr. Stevens explained the Senate’s figure of $900,000 for the liquor tax collection allowance might be due to a problem in the numbers for the cigarette tax. If the cigarette tax were lowered, that would tend to lower the amount received from the reduction of the stamp fee. The Senate had raised the liquor tax from 50 percent to 89 percent, so that would mean the retention was worth more. Mr. Stevens said the revenue generated by reducing the collection allowance for other tobacco had been a little over $100,000 and now it was a little under $100,000, but it still rounded to $100,000. Mr. Zuend stated that the revenue generated by reducing the collection allowance for the other tobacco tax was currently roughly $6 million, 2 percent of which was $120,000. Three-quarters of that was $90,000, so both indeed did round to $100,000.
Vice Chairman Parks emphasized that the decision in front of the Committee was whether to retain a 0.5 percent collection allowance in any of those three categories or to stay with the current position, which was to reduce them to zero. Assemblywoman Leslie suggested that the Committee remain at its current position. She felt that the Assembly numbers were better, and she did not want to reduce those numbers at this time.
Assemblyman Brown asked if Ms. Leslie’s recommendation was to remain at zero. Mr. Brown said he felt the collection delivery function was provided. He acknowledged that the Committee had collection allowances for tobacco at 2 percent and liquor at 3 percent; he certainly did not have any heartburn with the Senate’s numbers of 0.5 percent. Assemblyman Marvel concurred with Mr. Brown. Mr. Marvel said there actually was a cost for the cigarette people to place the stamp on the cigarettes and there should be some consideration given to them. Vice Chairman Parks noted that the Assembly position was that the sellers of cigarettes had already been given a collection allowance because of the mechanics of placing that stamp. The question therefore was what to do about the other three categories. Mr. Marvel stated that the cigarette people incurred more labor cost. Vice Chairman Parks agreed.
Vice Chairman Parks said the Committee needed to move on, and asked if there were any further thoughts on the matter. He entertained a motion.
ASSEMBLYWOMAN GIUNCHIGLIANI MOVED TO RETAIN THE STAMP FEE, BUT REDUCE THE TOBACCO ALLOWANCE, THE LIQUOR TAX, AND THE LOCAL SCHOOL SUPPORT TAX RETAIL ALLOWANCE TO ZERO.
ASSEMBLYWOMAN McCLAIN SECONDED THE MOTION.
Assemblyman Hettrick asked for confirmation that the motion was to leave the collection allowances as they were in the Assembly’s current proposal. Vice Chairman Parks confirmed that and added that the Committee wanted something to take to the Senate for discussion.
THE MOTION CARRIED WITH ASSEMBLYMAN BROWN VOTING NO. (Chairman Arberry was not present for the vote.)
Vice Chairman Parks announced the next item was the business license fee. The Senate had proposed a $50 annual fee, whereas the Assembly’s proposed annual fee was $100. Vice Chairman Parks entertained a motion.
ASSEMBLYMAN McCLEARY MOVED TO KEEP THE ANNUAL $100 BUSINESS LICENSE FEE IN THE ASSEMBLY PLAN.
ASSEMBLYWOMAN GIUNCHIGLIANI SECONDED THE MOTION.
Assemblywoman Gibbons suggested that, since the motions were for consideration, it might be easier for the Committee to take the highest numbers in all areas and see what they added up to. That way, the Committee could see where its tax plan stood in terms of how much total revenue it might generate and how that compared to the amount needed to finance the budget.
Assemblywoman Giunchigliani agreed that was an excellent point. Ms. Giunchigliani thought the Assembly numbers were a little more than those of the Senate. Since the Committee was attempting to build a consensus of agreement, Mrs. Gibbons’ suggestion made good sense. Ms. Giunchigliani asked if the maker of the motion would also include an exemption for sole proprietors and direct sellers. She emphasized that the Committee wanted to make sure that language was in the bill.
Vice Chairman Parks said that had already been done. Assemblywoman Giunchigliani agreed, but added the Committee needed to make sure it was clear that was the intent. Assemblyman McCleary said that would be his intent.
Assemblyman Andonov asked if the business license fee was a brand-new licensing fee. Mr. Stevens stated that currently a business paid a one-time $25 fee. This proposal would change that to a $100 annual fee. Mr. Andonov asked how many other business license fees were required, for example, in Reno, Washoe County, Henderson, or North Las Vegas. Vice Chairman Parks stated that each of the local municipalities had a business license fee, which varied from entity to entity. It was conceivable that a person could have a $50 business license fee from one of the cities as well as the $100 fee from the state. Mr. Andonov questioned whether there could also be a county fee. Vice Chairman Parks said there could be, but the fee was not usually duplicated. In other words, a business in Clark County would have a Clark County fee. Businesses that operated in multiple jurisdictions normally had the courtesy of another jurisdiction. Those businesses had a “home” jurisdiction, and other entities might require a $10 registration fee at most.
Assemblyman Andonov asked if any consideration had been given to standardizing the licensing fees in Nevada. He stated that one of the goals of the Legislature was to help diversify the Nevada economy to make the revenue base more broad-based. One way of accomplishing that would be to provide minimum regulations; an attractive, stable tax base; strong education; and such things. Businesses always liked to have as simple a regulatory environment and licensing environment as possible. If a business wanted to move into Henderson, North Las Vegas, or Reno, the state would want to provide an attractive environment, part of which should be to have a standard licensing procedure. Mr. Andonov said he had heard from businesses, and had experienced first-hand, that the current licensing process was fairly complex. Vice Chairman Parks said that for most anyone going into business, learning where they had to go, what they had to do, who they had to report to, and all could be challenging.
Assemblywoman Giunchigliani recalled that a bill proposed eight years ago would have required the Department of Taxation to develop one form that all businesses had to fill out, both local and state, to simplify that process which may have gotten lost to some extent. Ms. Giunchigliani said simplicity should be part of any legislation the Legislature dealt with, and any consideration of legislation involving taxes or fees ought to also include discussion of electronic filing.
Assemblywoman Giunchigliani noted that Douglas County had no business license fees. In Henderson, there could be 5 such fees. In North Las Vegas, the city could have 12. Since the Committee did not know what was required in each municipality, it would be a good idea to obtain a true picture to ensure that Nevada did not “nickel and dime” businesses to death. Sole proprietors or small mom-and-pop businesses often had to hire someone to fill out the necessary paperwork. Ms. Giunchigliani said she thought Assemblyman Andonov’s suggestion was valid. She suggested the Committee come up with language that would ensure there was one form that all businesses would use.
Assemblyman Mortenson said he could answer at least part of Mr. Andonov’s question. In Clark County, the business license fee was based on the gross and was paid every six months with a minimum of $25 every half year or $50 per year. There had been an $85-per-year filing fee for officers in the state, but there was a proposal to increase that to $125. There was currently a $25 one-time state business license fee, but there was a proposal to change that to a $100-per-year fee.
Assemblyman Brown stated that in Henderson the business license fee was $100 every six months. There was a simple form, but a business had to pay $200 per year for a business license. Mr. Brown said he had no problem going to an annual fee, but he thought going from a $25 one-time fee to a $100 annual fee, when there were city or county fees as well, was a significant difference. He commented that he would go with the $50 annual fee proposed by the Senate.
Assemblyman Hettrick understood that several counties had business license fees that resulted in a large number based on a complicated formula involving square footage, number of employees, gross, and size of signage. Mr. Hettrick said he agreed with Mr. Brown that going from a $25 one-time fee to a $100 annual fee was a big deal for a business coming to Nevada, given the other taxes a business had to pay as a flat rate up front.
Vice Chairman Parks entertained a motion.
ASSEMBLYMAN McCLEARY MOVED TO MAKE THE BUSINESS LICENSE FEE A $100 ANNUAL FEE AND TO EXEMPT SOLE PROPRIETORS, DIRECT SELLERS, AND INDIVIDUALS.
ASSEMBLYWOMAN GIUNCHIGLIANI SECONDED THE MOTION.
THE MOTION CARRIED WITH ASSEMBLYWOMAN ANGLE, ASSEMBLYMEN ANDONOV, BROWN, GRADY, HETTRICK, AND MARVEL VOTING NO. (Chairman Arberry was not present for the vote.)
Assemblyman Griffin asked if the vote was to decide between
a $100 or
$50 fee. Mr. Griffin said he knew the
motion was for a $100 fee, but asked if the alternative to go to $50 had been
considered. Vice Chairman Parks
indicated that the Committee was attempting to put something together so that
could be moved forward into further negotiations with the Senate. Assemblywoman Giunchigliani interjected that
part of what the Committee was doing was seeing what total resulted from the
various proposed rates so that any revenue shortages could be addressed.
Vice Chairman Parks said the next item was the live entertainment tax. He noted there did not seem to be any real opposition; the Assembly and the Senate had both proposed a 10 percent rate.
Assemblyman Andonov stated a concern that had not been addressed previously involved the assumption that this tax was going to be paid by tourists, non-Nevadans who came to enjoy Nevada’s live entertainment. Mr. Andonov felt this was a significant tax, and he wanted assurance that the locals would not be hit hard by this tax. He said he had previously asked if there had been any analysis done in the Assembly Committee on Taxation or elsewhere as to what percentage of the $47 million in the first year and $81 million in the second year would be borne by Nevadans as opposed to tourists. Vice Chairman Parks responded that this tax would also be levied against residents of the state. However, the significant revenue would be generated from tourists. Assemblywoman Giunchigliani agreed the majority of the live entertainment tax would be borne by tourists, but added that residents would have to pay if they chose to attend live entertainment. Ms. Giunchigliani suggested some language be added to the bill to ensure escort services were included in the definition of live entertainment.
Assemblywoman Giunchigliani brought up the issue of exemptions for boxing, the speedway, and various other groups. She said staff was still trying to ensure the exemptions were equal. If boxing was going to be exempt, then the Committee needed to make sure that what boxing did pay was equivalent to the live entertainment tax in order to avoid creating another discrepancy. If boxing was only paying 5 percent, then that needed to be adjusted to equal what the other groups would be required to pay. Ms. Giunchigliani said staff was awaiting information on what motor speedways paid in other states to give them an idea what an appropriate rate for the entertainment tax or an equivalent tax might be to charge the Las Vegas Motor Speedway.
Assemblywoman Giunchigliani said the 10 percent rate on the live entertainment tax had been reviewed in both Houses, so the Committee could move forward on that part, pending additional information to clarify those issues mentioned.
Assemblyman Grady commented that there had been some concern on how the live entertainment tax would affect Nevada’s convention authorities and the people attending such events. He asked if there had been any discussion or input from the convention authorities on how this might affect conventions coming into town. Vice Chairman Parks did not recall having heard any testimony from the convention authorities. The Vice Chairman said trade shows were currently exempt in statute, but that the exemption had not been included in the current bill draft. He understood that the Legal Division was working on that, and when the Committee received a second or subsequent draft, the issue of the exemption for trade shows would require review.
Assemblywoman Chowning stressed that certain businesses competed nationally for venues. Since Nevada exempted boxing, the Legislature needed to ensure that events like automobile races and the rodeo, any events that Nevada could lose to other states, were treated on the same level as boxing. Assemblyman Griffin said he would support establishing a 10 percent rate for the live entertainment tax, but he echoed what Ms. Giunchigliani had said regarding possible amendments to address exemptions. Mr. Griffin told Committee members that the speedway had the opportunity to generate 140,000 people or more per day. Mr. Griffin asked the Committee to consider options to consider the speedway separately from other live entertainment.
Assemblyman Hettrick stated he would support keeping the live entertainment tax on the Assembly’s list, but he thought it had changed significantly from the original entertainment/amusement tax about which the Committee had heard testimony. Mr. Hettrick wanted to reserve the ability to read the actual language when the Committee received the changes. He said an amendment could come, and members needed to reserve the ability to change their minds based on any future amendments. Vice Chairman Parks agreed and said the Committee was basically moving concepts forward to try to build a consensus of agreement among the committee members.
ASSEMBLYWOMAN GIUNCHIGLIANI MOVED TO ACCEPT THE CONCEPT OF THE LIVE ENTERTAINMENT TAX AT 10 PERCENT WITH QUALIFICATIONS, ESCORT SERVICES, AND TRADE SHOW EXEMPTIONS.
ASSEMBLYWOMAN LESLIE SECONDED THE MOTION.
Assemblywoman Pierce asked if the Committee was going to consider those issues that had been addressed. Vice Chairman Parks verified that and said the Committee was simply moving the proposal for a live entertainment tax forward.
Assemblywoman McClain stated that, rather than singling out escort services, the Committee needed to define live entertainment in such a way as to incorporate escort services in order to avoid trouble.
Vice Chairman Parks called for the vote.
THE MOTION CARRIED. (Chairman Arberry was not present for the vote.)
Assemblyman Mortenson recalled the Committee had heard how difficult it would be to tax the escort services. He asked if escort services were not just corporations regardless of their business and if the escort services would be hit with whatever corporate tax was instituted. Mr. Mortenson wanted to know if, in general, the escort services paid the corporation part of their money and whether that would end up on the tax rolls.
Mr. Zuend said he was not an expert on escort services, but if the escort service was incorporated and showed a profit as a corporation, the escort service would be subject to the tax or whatever other option was chosen. Mr. Zuend stated the broader the tax, the clearer the escort services’ tax liability would be. He noted there were ways to avoid paying a net profits tax depending on such considerations as how the business was structured. The escort services would be subject to the tax unless they found a way to avoid it.
Assemblyman Mortenson stressed that, as the Assembly proceeded through negotiations with the Senate, he hoped the Committee would be sure not to eventually start taxing nonprofit organizations or credit unions. Vice Chairman Parks pointed out that there were already ample exemptions in the bill draft for both nonprofit corporations and credit unions.
Vice Chairman Parks proceeded to the cigarette tax. The recommendation of the Assembly was to increase the rate by $0.65 per pack. Currently the rate was $0.35; a $0.65 increase would bring it to $1 per pack. The Senate recommendation was for a $0.25 increase in the first year and a $0.15 increase in the second year. Assemblyman Anderson noted if the Senate was proposing an additional $0.25 in both years of the biennium as indicated at the bottom of the page (Exhibit I), it would appear that the rate increase would be $0.50 in the first year of the biennium and $0.40 in the second year. Vice Chairman Parks explained that, in the Senate’s proposal, the rate would be going from $0.35 to $0.60 in the first year and then would increase to $0.75 in the second year. The note at the bottom of the page of Exhibit I related to an alternate consideration of a $0.25 increase in each of the fiscal years. Mr. Anderson said he had understood that the resultant rate would be $0.50 in the second year.
Assemblywoman Gibbons suggested that since the Committee had such a long way to go to get to $869.1 million, for purposes of consideration, the Committee propose an increase of $1.30 per pack for each year, doubling what the Assembly had in its original figures. Mrs. Gibbons noted that $1.30 would only be for purposes of review to see how it affected the total.
Assemblyman Perkins commented that at some point in time the Committee would end up pricing Nevada higher than the surrounding states. The tax would end up reducing sales because people would go elsewhere to purchase cigarettes. At some point the tax level would actually be counterproductive. Assemblyman Perkins thought $0.65 per pack was a solid level to move forward with. While he appreciated Mrs. Gibbons’ suggestion, he said he was fearful that at $1.35 per pack the sales would be reduced so much that Nevada would not realize the revenue in the first place.
Vice Chairman Parks entertained a motion.
ASSEMBLYMAN PERKINS MOVED TO KEEP THE CIGARETTE TAX INCREASE AT $0.65 PER PACK.
ASSEMBLYWOMAN GIBBONS SECONDED THE MOTION.
THE MOTION CARRIED WITH ASSEMBLYMEN HETTRICK VOTING NO. (Chairman Arberry was not present for the vote.)
Vice Chairman Parks said the next item on the Assembly list was the liquor tax. The Assembly’s recommendation was to increase rates by 50 percent, while the Senate recommended an 89 percent increase. The 89 percent was roughly the change in the consumer price index since the last increase. Assemblywoman Gibbons recommended that, for purposes of getting to the amount of revenue necessary to fund the budget, the Committee go with the Senate proposal for an 89 percent increase.
Vice Chairman Parks entertained a motion.
ASSEMBLYWOMAN GIBBONS MOVED TO INCREASE THE LIQUOR TAX BY 89 PERCENT.
ASSEMBLYMAN McCLEARY SECONDED THE MOTION.
Vice Chairman Parks remarked that the Committee had a motion made by Mrs. Gibbons and seconded by Mr. McCleary to follow the Senate’s lead as well as that of the Governor’s Task Force on Tax Policy in Nevada.
Assemblyman Perkins noted that when the 50 percent increase had been discussed, it had been favored over increases of 89 percent or even 100 percent because Nevada was a net exporter of alcoholic beverages, particularly in the northern part of the state relative to northern California, Oregon, and other areas. There was concern that an increase of 89 percent or 100 percent would reduce those sales and thus not bring in the projected amount of revenue. Assemblyman Perkins favored the 50 percent increase over an 89 percent or 100 percent increase. Assemblyman Perkins said that, unlike the cigarette tax, where $0.05 per pack would generate quite a bit, a 50 percent increase in the liquor tax would not generate very much additional revenue.
Assemblyman Marvel agreed with the Assemblyman. He said people came from Washington, Oregon, and Idaho into towns like Winnemucca and bought large quantities of liquor. Assemblyman Griffin also agreed. He said he thought Nevada would not see revenues change very much for just those reasons. Nevada was a net exporter. Consequently, Mr. Griffin said he would vote no on the motion, realizing that if the motion failed he would suggest that the Committee go back to the original Assembly recommendation.
Vice Chairman Parks called for a voice vote and then a show of hands.
THE MOTION FAILED WITH ASSEMBLYWOMEN CHOWNING, GIUNCHIGLIANI, AND PIERCE, ASSEMBLYMEN ANDERSON, ANDONOV, BROWN, GRADY, GRIFFIN, MARVEL, MORTENSON, PARKS, AND ASSEMBLYMAN PERKINS VOTING NO. (Chairman Arberry was not present for the vote.)
Vice Chairman Parks concluded that the recommendation going forward would remain at 50 percent.
The next item on the Assembly list was the gaming tax increase. Vice Chairman Parks said the rate of increase would be 0.25 percent in all three categories effective July 1, 2003, followed by an additional 0.25 percent increase effective July 1, 2004. He said he did not believe that the Senate had taken action on the gaming tax.
Assemblyman Perkins said he was actually comfortable with the Assembly proposal—a 0.25 percent increase the first year of the biennium and another 0.25 percent increase the second year—particularly since whatever broad-based business tax was imposed would affect all the gaming companies on their non-gaming revenues. That would again bring in additional monies from those businesses, as would the other taxes that would affect gaming, such as the liquor tax and the live entertainment tax. Assemblyman Perkins said gaming needed to pay more. He asserted that the 0.25 percent increase in each year of the biennium would be a very healthy increase that would combine with other taxes gaming would pay to provide substantial revenue for the state.
Vice Chairman Parks entertained a motion.
ASSEMBLYMAN PERKINS MOVED TO INCREASE THE GAMING TAX BY 0.25 PERCENT EFFECTIVE JULY 1, 2003, FOLLOWED BY ANOTHER 0.25 PERCENT INCREASE EFFECTIVE JULY 1, 2004.
ASSEMBLYMAN MORTENSON SECONDED THE MOTION.
Assemblywoman Giunchigliani commented that there was a 0.25 percent increase in the first year and then the increase was doubled in the second year. Vice Chairman Parks agreed there was a second 0.25 percent in the second year. Assemblywoman Giunchigliani noted gaming would be hit by a 0.50 percent increase plus the broad-based business tax. Vice Chairman Parks indicated there was no intent to exempt gaming from other broad-based business taxes.
With no further questions, Vice Chairman Parks called for a voice vote.
THE MOTION CARRIED. (Chairman Arberry was not present for the vote.)
Vice Chairman Parks said the next item was the restricted slot tax. The Assembly’s recommendation was to increase the rate by 33 percent in the first year and 50 percent in the second year of the biennium. That would not be 50 percent in addition to the 33 percent; it would be 50 percent over and above the current rate. The restricted slot tax was currently $61. A 33 percent increase would take it to $81, and then the 50 percent increase would take it to $92. Assemblywoman Pierce asked if the increase would be 33 percent the first year over what it was today, and then the second year the increase would be 50 percent over what it was today. Vice Chairman Parks said that was correct. It would not be a 50 percent increase on top of the 33 percent increase, effective July 1.
Assemblyman Marvel said that, based on testimony he had heard the previous day, he would be more comfortable going with the Senate’s recommendation. He said he thought Nevada would see a lot of machines taken out if the Assembly recommendation was followed.
Vice Chairman Parks entertained a motion.
ASSEMBLYMAN MARVEL MOVED TO ACCEPT THE SENATE’S RECOMMENDATION TO INCREASE THE RESTRICTED SLOT TAX BY 33 PERCENT.
ASSEMBLYWOMAN GIBBONS SECONDED THE MOTION.
Assemblyman Hettrick said he thought the most compelling part of that testimony was that the restricted slot operators had come forward and said they would pay the 33 percent both years. The Committee had accepted a proposal for a 0.25 percent increase on big gaming, which brought the rate up to 4 percent on the upper tier. Mr. Hettrick said he did not see how the Committee could propose to tax the small slot operators with an increase of 33 percent one year and 50 percent the next when big gaming’s tax was increased only 0.25 percent. Mr. Hettrick said that was totally unfair. The small slot operators had stepped up and offered to pay a 33 percent increase, and he said he could not support anything above 33 percent.
Vice Chairman Parks reminded the Committee the motion was to go with the Senate’s 33 percent increase. Assemblyman Mortenson noted it was a very small amount of tax that Nevada would not collect by remaining at 33 percent. If this increase put people out of business, the Legislature might just reduce that tax.
Vice Chairman Parks called for a vote.
THE MOTION CARRIED. (Chairman Arberry was not present for the vote.)
Vice Chairman Parks announced the Committee would proceed to the Secretary of State fees. These were the fees established in Assembly Bill 536 of the 72nd Legislative Session. He said he did not know if any clarification was required.
Mr. Zuend commented that the Senate proposal would increase the Secretary of State’s annual fee by $40 from $85 to $125 per year. The Assembly Committee had proposed a $100 annual fee and an $85 Secretary of State fee. The Senate had proposed a $50 annual and $125 Secretary of State fee. Most of either fee would be generated from the registrations at the Office of the Secretary of State.
Assemblyman Anderson indicated that those dollars were predominately renewals, yet the largest part of it was going to hit the smaller businesses, many of which were dormant, being kept alive just in case the owners wanted them. Mr. Anderson said this proposal did those small businesses a disservice. He said he knew there were many of them in existence, and he felt Nevada would lose some of those people who were no longer going to keep those licenses current. Even though moving from $85 to $125 might not seem like a big deal, there would be some loss of revenue as small businesses ducked out the door.
Assemblyman Mortenson agreed with Mr. Anderson and moved that the Committee retain the Assembly position on that particular tax. Mr. Mortenson said he had talked to those people who were responsible for coming up with the numbers. He remarked that if those taxes were plotted in a straight line, they formed a trend line that showed the tax clearly penalized the small businesses. He reported that the people he talked to said they wanted to hit the small businesses disproportionately hard because there were so many of them. Mr. Mortenson said he did not think that was good policy.
Assemblywoman Giunchigliani said if Mr. Mortenson’s motion was to stay with the Assembly numbers and not the Senate’s, she would second the motion. Ms. Giunchigliani said the Committee had to remember that smaller businesses would also be hit with the BLT (business license tax), which was part of the reason the Assembly had gone back in conference and lowered that dollar amount. If Nevada was trying to stay as equitable as possible, Ms. Giunchigliani said she thought this motion would be more appropriate.
Vice Chairman Parks accepted the motion.
ASSEMBLYMAN MORTENSON MOVED TO KEEP THE ASSEMBLY PLAN ON THE SECRETARY OF STATE FEES.
ASSEMBLYWOMAN GIUNCHIGLIANI SECONDED THE MOTION.
THE MOTION CARRIED. (Chairman Arberry and Assemblywoman Gibbons were not present for the vote.)
Vice Chairman Parks announced the next item to be discussed was the business license tax. He said it was believed that since the business license tax was an existing tax, it could be used as a bridge tax.
Assemblywoman Giunchigliani suggested not setting a figure for the business license tax until it was determined what was needed for the bridge tax. Then, at some point, it could be rolled back and eliminated in the near future. She commented that the Committee did not know yet, based upon the broad-based tax, whether a bridge tax was going to be needed. Vice Chairman Parks said that was a great idea. He suggested skipping over the business license tax and proceeding to the bank franchise fee. The Vice Chairman stated that the Assembly’s recommendation for a bank franchise fee rate was 5 percent.
Assemblywoman Leslie commented that she thought the Committee needed to hear what Mr. Aguero was going to say about the business tax. She pointed out that the Committee had heard from Ms. Mendy Elliott, Director of Community and Governmental Relations for Wells Fargo Bank, Nevada, that the banks wanted to be treated the same as other businesses. She suggested that if the Committee agreed to a 5 or 6 percent rate on the net profits tax, the same amount be used for the bank franchise fee. Ms. Leslie said the Committee really needed to know what Mr. Aguero had to say and should wait for his presentation.
Vice Chairman Parks agreed and suggested proceeding to the real estate transfer tax. He said he did not think that was tied to anything else.
Assemblyman Griffin commented that he was comfortable supporting the real estate transfer tax at the proposed rate, reserving judgment for what other business taxes might be adopted and how those taxes might be deductible.
Assemblyman McCleary asked whether the real estate transfer tax included the $100,000 exemption. Vice Chairman Parks stated that it did. Mr. McCleary said he had concerns because the real estate transfer tax would hit the people he represented. He asked if the Committee could consider raising the deductible to $150,000 to $200,000.
Vice Chairman Parks interjected that he did not believe that the Senate had decided on anything definite, at least as of the latest printing. He thought it was certainly possible to adjust the $100,000 deductible. He reminded the members that he had provided an estimate as to what the fiscal impact would be on a typical $200,000 home. Vice Chairman Parks opened the Floor for discussion.
Assemblyman Griffin said he could not remember all the details but he did remember that when the Committee had started creating those exemptions, the real estate transfer tax had appeared much more difficult to collect. Currently there was an easy mechanism in place to collect those taxes at the local level, but those local agencies were not equipped to adjust for all the exemptions. He said he was not necessarily saying no to the proposal, but he thought the Committee needed to be cautious if creating exemptions could become problematic.
Vice Chairman Parks noted that the guru of the real property transfer tax, Robert Spencer from the Clark County Recorder’s Office, had sent several e-mails. Since he had not had an opportunity to read them, he suggested holding this item for a period of time.
Assemblywoman Giunchigliani asked Mr. Hettrick to talk about his research, since he had actually brought this concept forward, to explain for those members who had not served on the Assembly Committee on Taxation the pros and cons regarding exemptions: whether exemptions were necessary, what rates would be appropriate, and how many people would be affected. Ms. Giunchigliani noted that many members represented older neighborhoods, which tended to include older, less-expensive homes. While she understood Assemblyman McCleary’s concern, Ms. Giunchigliani said the Committee was trying to consider the ease and simplicity of collection as well.
Assemblyman Hettrick said Mr. Spencer, in his e-mail, had outlined two state revenue possibilities. First, exempt the $100,000 and charge the $1.88 per $500 of assessed valuation that was currently proposed, which would raise $2.4 million a month and $28.8 million a year. If there was no exemption and the rate was lowered to $1.10, that would raise $4.4 million a month and $53 million a year. Mr. Spencer had pointed out that a huge number of the transfers were on properties below $100,000, which, in many cases, were time-shares costing less than $100,000, but which were being purchased by relatively affluent people. Mr. Hettrick reminded Committee members that a person would not pay the real property transfer tax unless he or she bought property. Seniors who had decided to live out their lives in their homes were never going to pay the real property transfer tax. The appreciation on their homes in Nevada would most likely more than pay the taxes over the period of time those seniors lived there.
Mr. Hettrick stated that less affluent people did not tend to buy and sell homes frequently, so they would pay the real property transfer tax even if it proved somewhat of a burden. While Mr. Hettrick recognized Mr. McCleary’s concern, he noted that issue had been reviewed as well. The people represented by Mr. McCleary would not pay the tax very frequently. The current $1.88 rate recommended by the Assembly would amount to a tax of $376 per $100,000, which would probably be less than the cost of the appraisal and was negotiable between the buyer and the seller. Mr. Hettrick said he thought ease of collection outweighed the other issues because there were many real estate transactions conducted for many reasons. A substantial number of those transactions might be lots for development that sold for less than $100,000. Mr. Hettrick noted there were many factors to take into consideration.
Assemblyman McCleary stated that a lot of his concerns had been eased by comments from the Committee. He offered to make a motion for the $100,000 cap.
Assemblyman Hettrick reiterated that if the Committee recommended the $1.88 rate with a $100,000 exemption, it would raise $28.8 million a year. If the Committee recommended the $1.10 rate with no exemption, it would raise $53 million. Revenue would almost double with a lower rate if there were no exemptions. Mr. Hettrick claimed collection of the tax would be cleaner and easier if the tax were flat rate. Mr. Hettrick noted that the $1.10 rate was the amount that Mr. Spencer had used.
Assemblyman McCleary withdrew his original motion with the intention of amending it.
Assemblyman Brown said that, like Mr. Griffin, he was interested in seeing how the real estate transfer tax might interact with other taxes. Mr. Brown admitted the real estate transfer tax had never been his favorite tax, and he wanted to look at it in the whole scheme of the tax package. For the purposes of moving forward, Mr. Brown said he would vote in favor of the proposed real estate transfer tax with the reservation that he wanted to see the interaction it had with other taxes.
Assemblywoman Chowning said she felt strongly that the exemptions did not need to be kept in but that there needed to be a transaction fee charged in some cases instead of the real property transfer tax. When recording a title from one joint tenant to another, or trying to clear something up because the words “as joint tenants” were not included, a person should not have to pay the transfer tax, but a $150 or $200 transaction fee would certainly be appropriate. If property was valued at $100,000 or more and the words “as joint tenants” had not been included in the documents, if a person went back to simply make that type of change, that would not constitute a sale. Such a transaction was not a sale, so that person should not have to pay the $700 transfer tax. However, Mrs. Chowning felt a transaction fee would be appropriate.
Assemblywoman Chowning said the state would not lose much money by instituting that transaction fee because most of the money derived from the transfer tax was indeed from sales. She stated she was not comfortable with simply exempting those transactions, as that would keep the state from collecting a huge amount of money, which would not be appropriate. She commented that those transactions were not even defined correctly in the bill draft because one person was not transferring and selling his or her interest to another person. Mrs. Chowning said she would be comfortable with the motion so long as the Committee kept in mind that there would be a transaction fee charged instead of a transfer tax in those situations where there was no actual sale.
Vice Chairman Parks commented there were probably numerous pieces of property that currently had been recorded where the title listed the names of both the husband and wife as opposed to joint tenancy, which influenced the rights of survivorship. Assemblywoman Chowning agreed and added that there might be a title between spouses, or there might be a title to and from a trust without consideration. She cited, as a common example, an Hispanic couple where the husband had two last names because he carried both his father’s and his mother’s last names, while the wife only had one name. In the United States names such as the husband’s were often recorded erroneously because men in the U.S. were expected to use just their father’s last names. When the couple discovered the mistake and went to change it, that was not a sale of the interest to the other person, it was simply a change in the way the title read. In such cases, there should be a transaction fee of perhaps $150.
Mr. Zuend commented that he did not believe that the proposed amendments on page 70 of the bill draft would change that. One exemption, subsection 1 that had to do with corporations, had been eliminated by the amendments, as had the old subsection 10, which had been another exemption for business transactions. Subsection 5, concerning transfers of title to community property without consideration, had been eliminated because it was redundant. The former subsection 4, regarding transfers of title without consideration from one joint tenant or tenant in common, to one or more remaining joint tenants or tenants in common, had been left in, as had the former subsection 6, regarding a transfer of title between spouses, which he assumed would mean any transfer of title between spouses. Mr. Zuend believed subsection 5 (formerly subsection 8), concerning a transfer of title to or from a trust without consideration, had been changed simply to clarify the language. The old subsections 14, 15, and 16, concerning exemptions for transfers to foundations and corporations had been eliminated. Mr. Zuend did not believe that the elimination of language in lines 11 through 22, page 70, concerning transfers of title between spouses or to or from a trust, actually changed anything in regard to the transfers of title.
Vice Chairman Parks asked the Committee to split the issues. He wanted to address the rate and the level of exemption and then revisit the exemptions. He noted there was still some work to be done in that area.
Assemblywoman Giunchigliani thought the motion currently was to accept the real estate transfer tax at the $1.10 rate without the $100,000 exemption. Vice Chairman Parks clarified that the rate was being changed from $1.88 to $1.10 per $500 of assessed valuation.
Assemblywoman Giunchigliani asked when the real estate transfer tax could be implemented. Mr. Zuend replied that the problem for the recorders had been the exemption. He believed that the tax could be implemented at least as early as October 1, 2003, and perhaps even earlier, which would provide three more months of revenue. Ms. Giunchigliani said that would make good sense as it could help on the balance sheet.
ASSEMBLYMAN McCLEARY MOVED TO RECOMMEND A REAL ESTATE TRANSFER TAX WITH NO EXEMPTIONS AND A LOWER RATE OF $1.10 PER $500 TO BE IMPLEMENTED ON OCTOBER 1, 2003.
ASSEMBLYWOMAN GIUNCHIGLIANI SECONDED THE MOTION.
Assemblyman Mortenson asked why the exemptions were being taken out. He said the Committee had just finished saying the exemptions were reasonable and rational.
Assemblyman Grady noted he still had some concerns. To be absolutely certain, he reiterated that the Committee was talking about a $1.10 rate and excluding a dollar exemption, but not the exemptions that were in the bill. Vice Chairman Parks said that was correct and added that the exemptions would be a separate consideration. He asked if there were any further questions on the motion.
Assemblywoman Angle noted that the Committee would be voting on the real estate transfer tax in order to move the process along. A yes vote would not mean the members agreed with the tax. Vice Chairman Parks agreed that was correct. He said the Committee would soon finish the business of the day and then obtain a revised tally sheet.
Assemblywoman Chowning reiterated that the rate would be $1.10, with the $100,000 exemption removed. She emphasized that the draft had removed the exemptions, but the exemptions needed to be put back in. Vice Chairman Parks reiterated that was a separate consideration.
Vice Chairman Parks called for a vote.
THE MOTION CARRIED WITH ASSEMBLYMAN ANDONOV VOTING NO. (Chairman Arberry was not present for the vote.)
Vice Chairman Parks said the Committee needed more input before addressing the exemptions. He suggested holding off at that point so that the members could obtain further clarification before they attempted any further discussion.
Assemblyman Anderson asked if Mrs. Chowning’s suggestion was for a new or additional source of revenue that was not currently being applied that would apply to properties that would fall into an unusual category, including such things as a spouse’s name having been left off the deed or transfer. He said it sounded like that was the case.
Vice Chairman Parks observed that if the Committee deleted exemptions, obviously there would be a greater amount of revenue. He said he did not think the members currently had a good handle on exactly what that amount would be, but they could make some projections. Vice Chairman Parks noted some information for the month of April and some preliminary information for the month of May had been received from the Clark County Recorder’s Office, but the information was not in such detail that the Committee could make broad assumptions. The Vice Chairman believed it might be counterproductive to try to make such assumptions as a full body, so he said he thought the Committee needed to have several members review the information from the Clark County Recorder, look at the other data gathered, and then come back.
Assemblywoman Giunchigliani suggested in the meantime the Committee members look at pages 70 through 72 of the bill draft concerning exemptions. She said it appeared that the deletion of subsections 1 and 10 represented real changes, while the changes to subsections 4, 5, and 6 were simply legal cleanup. The transfer of title for territory, transfer between ownership of real property, consideration of joint tenancy, title between spouses, and such would be retained. Ms. Giunchigliani commented that the only other real changes were the old subsections 14, 15, and 16, which had been suggested for deletion, but which the members might want to take some time to think about. She said she thought those were the portions the members needed to read through and then when the Committee came back the members would have a better idea of what was being discussed.
Vice Chairman Parks said he agreed entirely. He announced the Committee would take a recess but asked that the members remain close by to return as soon as Mr. Aguero was available to testify. Vice Chairman Parks recessed the Committee at 4:30 p.m.
The meeting of the Assembly Select Committee on State Revenue and Education Funding reconvened at 5:48 p.m. Vice Chairman Parks recalled that before the Committee had recessed, the members had a number of questions on several of the possible revenue sources. At that time, Mr. Aguero had been making a presentation to the Senate. Vice Chairman Parks announced that Mr. Aguero was present to make a similar presentation to the Committee.
Jeremy Aguero, former Chairman of the Technical Advisory Committee to the Governor’s Task Force on Tax Policy in Nevada, said he was not currently speaking in that capacity. He stated he was appearing at the request of Assemblyman Perkins and Senator Raggio. Mr. Aguero said he had worked with a number of people to build an economic framework around a compromise plan, which he would discuss with the Committee from a mechanical standpoint.
The tax proposal that Mr. Aguero presented, which had been coined the Nevada business and franchise tax, was essentially an integration of a number of tax ideas and tax alternatives. It had three layers that each functioned differently and served a purpose. Mr. Aguero said he planned to walk through each of the three layers, much as a taxpayer would walk through the layers in determining his or her own tax liability. Mr. Aguero said he would have a handout ready for both the Assembly and Senate Committees at 9:00 a.m. the next day.
The first tier Mr. Aguero discussed was a franchise tax that would levy a flat fee on a business based on the amount of economic activity that business had in the state of Nevada. The fee would range from nothing for businesses with $20,000 or less of gross economic activity to $10,000 a year for businesses with $10 million or more of gross economic activity.
|
Gross Economic Activity Per Year |
Tax Liability Per Quarter |
|
|
|
|
$0 to $20,000 |
$0 |
|
$20,001 to $50,000 |
$150 |
|
$50,001 to $100,000 |
$200 |
|
$100,001 to $500,000 |
$250 |
|
$500,001 to $1,000,000 |
$325 |
|
$1,000,001 to $1,500,000 |
$375 |
|
$1,500,001 to $2,500,000 |
$625 |
|
$2,500,001 to $5,000,000 |
$750 |
|
$5,000,001 to $10,000,000 |
$1,250 |
|
Over $10 million |
$2,500 |
Mr. Aguero reiterated that the franchise tax was the first step in the tax regime. The tax was also a stabilizing factor because it was based on business entities existing in the state of Nevada. The tax graduated upward. The total revenue yield on the franchise tax was estimated at roughly $102 million per year. This was the minimum tax that every business in the state of Nevada would be required to pay.
The second tier was a business profits tax, or net income tax. It would be very similar, in many cases identical, to what businesses paid to the federal government each year. Total gross business income in the state of Nevada was estimated at $3.7 billion. However, the idea was to have a graduated tax, much as our personal income tax graduated. The more a business made, the more a business would pay.
|
Net Profit / Income Per Year |
Tax Liability |
|
|
|
|
$0 to $50,000 |
3 percent |
|
$50,001 to $100,000 |
5 percent |
|
Over $100,000 |
7 percent |
The net profits tax would generate a gross of $250 million per year. From the gross, a number of adjustments would be made, which fell into one of three categories. The first category would be adjustments to businesses that currently were required to pay an industry-specific tax. Those industries included mining, insurance, construction, and gaming. The way the net profits tax would work was that those companies would be required to effectively bifurcate their income tax statement so they could attribute some portion of their income to the portion of their business to which they already paid the industry-specific tax. They would be required to pay the net profits tax based on the balance.
For example, the gaming industry had roughly $18 billion of economic activity. Approximately $9 billion of that came from gaming activity; the other $9 billion came from everything else—food, beverage, rooms, entertainment, and the like. Because the gaming establishments already paid a tax on their gross gaming revenue, they would be allowed to exclude that revenue and the income associated with it from the profits tax. The gaming establishments would be required to allocate a portion of their expenditures and net income to the other $9 billion in economic activity, and they would pay the net profits tax on that just like any other business. The same would be true of mining, insurance, or construction.
Mr. Aguero stated that the construction industry had raised some questions over the past 24 hours concerning the real property transfer tax and its effect on a company that generated its revenue and profit based on the sale of real property upon which it paid the real property transfer tax. Mr. Aguero noted that the real property transfer tax had joint and separable liability, which meant that either the seller or buyer could pay that tax. Where the construction companies themselves paid the tax, they would be allowed to exclude that portion of their business activity and a proportional amount of their income associated with that business activity. That was the first adjustment, which was for businesses that paid an industry-specific tax.
The second adjustment was a tax credit for the amount paid on the flat franchise tax. If a business paid $800 under the franchise tax, that business would be allowed to claim that as a credit against whatever net profits tax liability it accrued. Therefore, if the net profits tax liability was $1,000 but the business had paid $500 in franchise fees, it would be allowed to credit that against the tax liability and pay only the additional $500. All businesses would pay a franchise fee, which was a flat fee. Those businesses that had net income liability in excess of whatever they had paid in franchise fees would then pay a net income tax.
The third tier limited how much a business would pay in the net income tax to 0.25 percent of its gross business receipts. Taking into account all the deductions, credits, and other adjustments, the business profits tax yield was estimated to be roughly $131.3 million, bringing the estimated total yield for the regime as a whole to $233 million.
Assemblyman Mortenson stated that, in regard to gaming and the gaming-related businesses like the hotel rooms and such, he saw gaming as the casino and saw the hotel as a separate business. Mr. Mortenson asked whether gaming would be able to take a credit for the gaming tax that had been paid and apply it against earnings that were made in the hotel area. Mr. Aguero responded that gaming would be required to separate those two operations.
Assemblyman Anderson asked for clarification on the limiting 0.25 percent of the gross revenue, which would bring in $131 million. Mr. Aguero responded that there were many types of businesses, but one of the two types that had been discussed the most were the high volume, low profit businesses, such as auto dealers, petroleum distributors, and grocery stores. A tax on gross receipts would have a disparate impact on those businesses. The plan Mr. Aguero had just presented would allow those companies to pay the business profit tax. They would pay 3 percent, 5 percent, or 7 percent on their net profits. The amount they would pay on their profits, however, would be limited to 0.25 percent of their gross. That was not going to help those auto dealers, petroleum distributors, or grocery stores because they were going to pay less under the profits tax anyway.
Mr. Aguero gave an example of the other type of business that had been discussed: a law firm that did $1 million in total sales and brought $500,000 of that to the bottom line. In doing so, if that law firm had to pay 7 percent that the state as a profits tax, that would be much higher than 0.25 percent of the firm’s gross receipt. Therefore, the firm would pay the lesser of the two. Mr. Aguero said the $131 million number he had quoted had been the combination of the revenue generated by the business profits tax after the mining adjustment, the gaming adjustment, the insurance adjustment, and the construction adjustment to credit for flat franchise tax paid, and the total revenue cap of 0.25 percent. Mr. Aguero said that resulted in the $131 million figure.
Assemblyman Anderson said that resulted in a net gain of $233 million in additional revenues, to which Mr. Aguero agreed. Mr. Anderson noted that adding the $102 million from the franchise tax to the $250 million from the basic profits tax less the adjustments would result in $352 million, and then the $131 million was backed out from that, yielding a final result of $233 million. Mr. Aguero agreed. Mr. Anderson said he had wanted to verify he was doing his math correctly.
Assemblyman Hettrick said he had problems with the way the different tax brackets worked. In the first taxable bracket of the franchise fee, gross business activity of $20,000 would be taxed at $600, which amounted to 3 percent. At the $50,000 gross activity level, the tax would only amount to 1.2 percent. The business with gross receipts of $20,000 would pay 2.5 times the rate the business making $50,000 would pay because of the way the tax bracket was written. Mr. Hettrick noted that the franchise tax would be paid on the gross whether there was a profit or not. He said he understood that one could assume that as businesses got into the higher numbers, those that were making huge grosses would also have net profits and would catch up. Mr. Hettrick pointed out that at the $10 million per year bracket, the $10,000 fee only amounted to 0.1 percent. The business with gross receipts of $20,000 would be paying 3 percent, and might not be any more profitable than the business with gross receipts of $10 million. Mr. Hettrick declared the proposal unfair. For the brackets for gross receipts of $1.5 million and up, using the high side, the tax rate was 0.1 percent. He questioned why the rate was not 0.1 percent throughout all the brackets. Mr. Hettrick said the tax might as well just charge a percentage on the gross receipts; the brackets would not work. Mr. Aguero said he had simply been asked to bring the numbers. He agreed with Mr. Hettrick about the mathematics, but said that was really all he could comment on.
Assemblyman Hettrick reiterated his concerns. In case somebody did not understand, a business would be taxed at a 3 percent rate, or $600, on a gross of $20,000, whether or not the business was profitable. A company grossing $10 million might have zero profits. Amazon.Com, Inc., who had testified before the Committee that they had very high revenues but no profits, would only be paying 0.1 percent. Mr. Hettrick said the disparity would not work.
Assemblywoman Giunchigliani said she had assumed the intent was to establish a floor and a ceiling. The franchise fee was what everyone would pay across- the-board regardless of other considerations. Within the overall structure was the net profits tax, which was based on profitability. Ms. Giunchigliani speculated that, regardless of what might be charged on the side, the taxes would balance themselves within the floor and the ceiling to some extent. Mr. Aguero said he thought that had been the intention. There was a floor and a ceiling in the regime, and those were important elements. He said he could not comment on the philosophy behind the proposal.
Assemblywoman Giunchigliani asked whether the total of $233 million was the annual amount. Mr. Aguero confirmed it was. Ms. Giunchigliani said she understood what Assemblyman Hettrick was saying, but had not seen where this piece was only 2 percent, 3 percent, or 4 percent. She said the funding within would recognize those businesses that were profitable based on their economic activity. Ms. Giunchigliani said she had read someplace that could also be determined by physical activity and asked if that was the correct terminology versus economic activity.
Mr. Aguero responded that what type of economic nexus was required to establish and give state jurisdiction to do that would depend on what type of tax was being imposed. With regard to progressivity, which was the other element of the question, Mr. Aguero believed that the net profits tax was a progressive element. He reported that in the state of Utah, for example, 54 percent of taxable income, or tax profit, was attributable to fewer than 1 percent of businesses. The same was true in California. The idea was that the very largest businesses would carry the burden.
Assemblyman Hettrick asked for clarification. He noted that a $50,000 business, taxed at 3 percent, would pay $1,500 on its net profits. The first tier on the net profits tax went up to $50,000. Mr. Hettrick asked if that represented the actual net profit, and Mr. Aguero said that was correct. Mr. Hettrick added that a $100,000 business with a $50,000 net profit, or 50 percent profit, would pay an $800 franchise fee and would owe $1,500 on the net profits tax, but asked if the business would subtract or offset the $800 from the $1,500.
Mr. Aguero responded that offsetting it or subtracting it would work the same. He assumed the franchise tax would be charged quarterly and balanced off as an adjustment annually when the business paid its federal income tax. Mr. Aguero said he thought that would be the most efficient way.
Assemblyman Hettrick restated his question. He said the business owed $1,500 on the $50,000 net profit. He asked whether the business would subtract the $800 and only owe $700 or would still owe the $1,500 and not the $800. Mr. Aguero responded that the business would owe the $1,500. The $800 provided the floor.
Assemblyman Hettrick said, in terms of collection, the net had all the same problems that a net profits tax had regarding calculation for out-of-state or multi-state operations. A certified public accountant would need to come in and calculate all kinds of things to figure out what was owed and which was the best way for the business to go. Nothing would preclude a business dividing up ownership, putting part of the business in an LLC (limited liability company), or some such thing.
Mr. Aguero said in response to the question regarding whether the net profit element would have the administrative difficulty of a net income tax, the answer was yes. He stated he had not run the proposal past Mr. Chinnock and the Department of Taxation with regard to that. Mr. Aguero said he was not qualified to answer the second part of Assemblyman Hettrick’s question regarding how an accountant would deal with everything.
Assemblyman Hettrick commented the tax brackets favored big business too much. Mr. Hettrick reiterated he did not understand why the 0.1 percent rate was not used throughout all the brackets if that was going to be the rate at the top. He commented that the rate should just be 0.1 percent on the actual gross, which brought it right back to the gross receipts tax.
Assemblyman Grady complimented Mr. Aguero on bringing something forward. He said he understood that Mr. Aguero was the messenger, but he said this appeared as a full employment act for the accounting industry. Mr. Grady supposed that, since Mr. Aguero had not run the plan by the Department of Taxation, he had no idea what would be required to implement the plan or how many people it would take to administer it. Mr. Aguero admitted he did not know.
Assemblyman Mortenson asked who chose the numbers that would charge a lower tax rate to the bigger companies and a bigger tax rate to the smaller companies. Mr. Aguero said a number of people had contributed to the creation of the plan. He said he could not point at any one individual who said, “This is the tax that folks from $50,000 to $100,000 would pay.” He said it would be disingenuous of him to say that, as it was not the case. With regard to the second portion of the question about the progressivity versus regressivity, Mr. Aguero said he could not deny the fact that the franchise tax in and of itself had a regressive element to it, but the net profits tax had a very progressive element to it. Those two things taken together, he believed, at least attempted to balance those two competing interests. He reiterated that questions of policy were outside his purview.
Assemblywoman Leslie said as she understood the plan, it was basically a net profits tax modified in a way that would address the volatility of the pure net profits tax. Mr. Aguero agreed. He said the plan addressed much of the volatility of a net profits tax on both ends. It restricted how low a net profits tax could go by establishing a floor, and it restricted how high a net profits tax could go in good times by establishing a cap at 0.25 percent. Assemblywoman Leslie said she liked the plan.
Assemblywoman McClain asked if Mr. Aguero had said the insurance premium taxes were an adjustment to the net profits. Mr. Aguero responded in the affirmative. He said what would happen was that an insurance company would separate any business associated with the actual sales of insurance from any other portion of its business activity.
Assemblywoman McClain asked whether the insurance premium tax was paid by the consumer and not by the company. Mr. Aguero said that was an excellent question.
Vice Chairman Parks asked if any consideration had been given to a potential implementation date. Mr. Aguero responded that he thought the objective was to implement the franchise fee portion as soon as possible. He said it was hoped that the business profits tax could come online on January 1, 2005, or earlier. He deferred to Mr. Chinnock on that matter.
Assemblyman Brown asked if the real property transfer tax was akin to the insurance premium tax in that it would be passed on. Mr. Aguero said he thought it was different from the insurance in that there was joint and separable liability involved in the real estate transfer tax. The seller and buyer could negotiate who paid it. To the extent that the industry paid the tax, businesses would be allowed to exclude those portions of their revenues and thus that portion of their income. In the contrary example, to the extent that the seller forced the tax on the buyer, the seller would not be able to do the same, and therefore it would bring all those revenues back under the plan he had discussed.
Vice Chairman Parks noted that Mr. Aguero had been invited back to the Senate at 8 a.m. the next day to prove some examples of how this plan would impact businesses. Mr. Aguero responded that he would try to have a worksheet showing how the tax regime would work. He said he would do his best to have some examples as well.
Assemblywoman Gibbons announced she would not currently consider the tax plan Mr. Aguero had presented. She said she did not understand the different elements of the plan, did not understand how it worked, and so did not feel comfortable with it. Mrs. Gibbons announced she would not be interested in the plan at all.
Assemblywoman Giunchigliani said that she did not think anyone would be voting that night, so the members would have some time to ponder the concept. She pointed out that the Committee had been dealing with the volatility of the net profits tax the last couple of days. This plan, she thought, was a compromise based on discussions in both Houses. Ms. Giunchigliani said the plan was not a new concept to her, but was simply a new approach on how to implement the tax.
Assemblywoman Giunchigliani asked Mr. Aguero if a business in the $100,000 to $500,000 bracket of the franchise tax would pay $250 each quarter. Mr. Aguero responded that a business would pay a certain amount only when it fell within that bracket. Ms. Giunchigliani hypothesized a business with gross activity of $50,000 to $100,000. She asked what would happen if the business exceeded the $1.5 million threshold in the fourth quarter. Mr. Aguero said that could be approached in one of two ways. The first was to allow someone to look at the previous year and apply the tax based on the previous year. The second would be to allow someone to account for the business’s gross activity in each quarter. He thought that would be a question of administration and fairness and was really a policy question. Ms. Giunchigliani commented that the percentage wasn’t that different if looked at quarterly. Mr. Aguero agreed.
Assemblywoman Giunchigliani questioned the graduated process—3 percent, 5 percent, and 7 percent. A business would pay 3 percent on the first $50,000, but once it hit $75,000, it would pay 5 percent on that portion only. Mr. Aguero explained that the net profits portion was a graduated tax just like income tax. Every business, if it made $50,000 or $500,000, would pay 3 percent on the first $50,000; from $50,001 to $100,000 it would pay 5 percent, and so forth.
Assemblyman Hettrick referred back to the exemptions. Mining, insurance, and gaming, he noted, were straight exemptions. For gaming there would be an exemption on the gaming portion and not the non-gaming portion. Construction would have an exemption based on what a business had actually paid in real property transfer tax. Mr. Hettrick questioned whether the exemptions would be against only net profits tax, against the franchise fee, or against both. Mr. Aguero responded that the exemption would be from the net profits portion.
Assemblyman Hettrick indicated that at the highest rate, a business would want to pay the 0.2 percent real property transfer tax in every transaction in order to avoid the 7 percent net profits tax. Mr. Aguero said he believed businesses would manage their tax liabilities as best they could. Mr. Hettrick said he had real problems with that idea.
Vice Chairman Parks asked if there were any further questions. He thanked Mr. Aguero for his presentation. He said the Committee would like to see the worksheets that would be produced in the morning so that the members could review the tax plan’s merits.
At 6:25 p.m., Vice Chairman Parks adjourned the Committee until 8:30 a.m. on June 6, 2003.
Mary Garcia
Transcribing Secretary
APPROVED BY:
Assemblyman Morse Arberry Jr., Chairman
DATE:
APPROVED BY:
Assemblyman David Parks, Vice Chairman
DATE: