MINUTES OF MEETING
ASSEMBLY COMMITTEE ON TAXATION
Sixty-seventh Session
April 29, 1993
The Assembly Committee on Taxation was called to order by Chairman Robert E. Price at 2:07 p.m., Thursday, April 29, 1993, in Room 332 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda, Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Mr. Robert E. Price, Chairman
Mrs. Myrna T. Williams, Vice Chairman
Mr. Rick C. Bennett
Mr. Peter G. Ernaut
Mr. Ken L. Haller
Mrs. Joan A. Lambert
Mr. John W. Marvel
Mr. Roy Neighbors
Mr. John B. Regan
Mr. Michael A. Schneider
Mr. Larry L. Spitler
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
Mrs. Jan Evans, Assembly District 30
STAFF MEMBERS PRESENT:
Mr. Ted Zuend, Deputy Fiscal Analyst, Legislative Counsel Bureau
OTHERS PRESENT:
Lt. Governor Sue Wagner, Chairman of the Commission on Economic Development
Cecilia Colling, Deputy Director, Commission on Economic Development,
Berlin Miller, member of Commission on Economic Development and Chairman of the Business Tax Abatement Subcommittee for the Commission
Perry Comeaux, Executive Director, Nevada Department of Taxation
Pat Coward representing the Economic Development Authority of Western Nevada and the Nevada Development Authority
Bonnie James representing the Las Vegas Chamber of Commerce
Brian C. Harris, Governor's Office
Michael J. Griffin, CPA, Deputy Commissioner of Insurance, Nevada Department of Insurance
Teresa P. Rankin, Commissioner, Nevada Department of Insurance
Following roll call Chairman Price opened testimony on AB 448.
ASSEMBLY BILL 448 - Revises exemption from business tax for proposed businesses. (BDR 32-954)
Ted Zuend, Deputy Fiscal Analyst, Legislative Counsel Bureau, provided committee members with a Bill Explanation for AB 448 attached hereto marked Exhibit C.
Jan Evans, Assembly District 30, testified as the sponsor of AB 448. Ms. Evans read directly from her prepared testimony attached hereto marked Exhibit D.
Lt. Governor Sue Wagner, Chairman of the Commission on Economic Development, testified in favor of AB 448. Lt. Governor Wagner provided committee members a copy of her prepared testimony attached hereto marked Exhibit E. She read directly from her prepared testimony.
Lt. Governor Wagner referred to a packet she provided committee members attached hereto marked Exhibit F. Lt. Governor Wagner explained the packet and continued reading from her prepared testimony attached hereto marked Exhibit E.
Cecilia Colling, Deputy Director, Commission on Economic Development (CED), testified in support of AB 448. She said the Commission believed the average wage scale of $10.86 was an average statewide industrial wage that included all levels of employment. She conveyed a bill might be introduced to further define the wage scale.
Berlin Miller, member of Commission on Economic Development and Chairman of the Business Tax Abatement Subcommittee for the Commission, spoke in support of AB 448. Mr. Miller said after studying AB 303 from the 1991 Legislative Session it was obvious the abatement incentive was not working. Mr. Miller explained after several discussions and CED meetings, Lt. Governor Wagner appointed a subcommittee to make recommendations and changes. Mr. Miller said meetings were held and extensive research conducted pertaining to two companies that had come to Nevada and companies that had considered moving to Nevada and in fact had not located to Nevada. Mr. Miller said following the research and meetings, recommendations were made to the CED. He stated input from the general public was also considered. Mr. Miller said AB 448 reflected the recommendations made.
Mr. Miller communicated in the two year period of 1991 through 1993, only two companies made application to the CED. The first of those companies had been declared ineligible due to a time factor with regard to the time the legislation had become effective and the actual time the company moved into the state. The second company withdrew its application after looking at all the requirements. The second company was concerned it would not be able to qualify.
Mr. Miller expressed the Nevada Development Authority (NDA) and Economic Development Authority of Western Nevada (EDAWN) conveyed serious concern to the CED that the abatement was not workable as it was written and that the changes be made. Their concern was with the two basic areas regarding the number of employees required for a company and the capital investment that was required.
Mr. Miller articulated the CED through AB 448 had requested a change in the definition and the qualifications of an urban or rural area. The population number was changed from 100,000 to 35,000. It was a standardized figure and the same figure used in other areas such as grant money allocated to various rural and urban development organizations.
Mr. Miller said although the CED requested the rules and regulations be somewhat relaxed, it still kept the rules restrictive with regard to the areas of qualification and number of employees. Another reason for the population amendment was due to the fact of the close proximity between the Carson City and Reno area. It could give Carson City an unfair advantage over the Reno area.
Mr. Miller pointed out the next change the CED recommended was to change the number of employees per company. The CED recommended the number of employees be changed to qualify in the urban areas from 200 employees to 75 employees. It was also recommended the number of employees be changed in the rural areas from 50 employees to 25 employees. Mr. Miller emphasized the figures were selected in accordance with the research that had been conducted.
Mr. Miller continued stating the next area the CED examined and asked to be amended was the capital investment requirement. Currently it required a capital investment of $2 million in an urban area and a $500,000 capital investment in a rural area. The CED through AB 448 had requested a change to $1 million and $250,000, respectively. Mr. Miller iterated again extensive research had been conducted in examining the companies coming into Nevada before the figures were obtained.
Mr. Miller stated the current legislation contained that the
CED verify the company's actual wages and investments. CED requested the Tax Commission verify the information because the Tax Commission was much more qualified and had the ability to verify that type of information more easily than CED did.
Mr. Miller asserted in addition to the legal requirements set forth above, CED adopted additional regulations for qualification. He emphasized the company must pay 100 percent of the average statewide industrial wage. The average wage was $10.96 and was updated annually. He added that requirement had been changed from what was initially in the regulation. He continued stating each company had to meet the overall objectives of the State Plan for Economic Diversification and Development. Mr. Miller read the objectives listed on page 2 of Exhibit F. He specified the CED did not qualify companies involved in the tourism, travel, gaming or lodging areas. The reason CED did not qualify those companies was in an attempt to diversify the economy.
Mr. Miller believed the reason for the changes in the legislation was to show that Nevada had a pro business attitude and Nevada wanted new companies moving into the state. Additionally, Nevada was willing to provide a reduction in the start up cost on the initial investment of the company, allowing the company to initially move in, and over the long-term the company would recognize Nevada's favorable tax climate and business climate.
Mr. Miller stressed through research CED found the companies were more concerned with the bottom-line figure today and not five or ten years from now. Mr. Miller felt Nevada had very few incentives to offer a company compared to Nevada's surrounding states. Mr. Miller said Nevada was "one tough sell."
Mr. Miller commented CED was committed to providing the incentives to good quality companies that would employ highly skilled individuals and would pay good wages. The CED required the companies carry benefit packages that were not included in the average wage scale. Mr. Miller asked the committee's support for AB 448.
Mr. Ernaut commended Assemblyman Evans and Lt. Governor Wagner for procuring AB 448. Mr. Ernaut asked if the thresholds contained in AB 448 were still too high. Mr. Ernaut set forth some examples of lowering the thresholds. Mr. Miller responded stating lower thresholds were discussed, but CED still felt there had to be a level so the incentives were not available to everyone. Mr. Miller articulated CED would not state the numbers were the exact numbers that should be, but did in fact try to achieve a balance.
Lt. Governor Wagner responded to Mr. Ernaut's question stating it was very clear in 1991, through AB 303, the intent was to attract signature companies. Lt. Governor Wagner was pleased Mr. Ernaut was interested in offering incentives to businesses. She stressed CED would not know if those numbers were exactly the right numbers because obviously the numbers were not correct when offered in 1991; however, the numbers contained in AB 448 were more carefully examined through the subcommittee process. Lt. Governor Wagner wanted to point out one could "incent yourself to death" and incentives could be overdone. Nevada does have a very low tax base compared to other Western states.
Mr. Miller knew there were groups and companies that objected to any exemptions. CED wanted to make sure the incentive would produce the type of revenue CED anticipated.
Perry Comeaux, Executive Director, Nevada Department of Taxation responded to a question inquiring about the possible fiscal impact of AB 448. Mr. Comeaux stated there was no fiscal note because no one had participated in the program to date as the law was written. The Department of Taxation could use the list of companies that had applied to the CED and prepare a fiscal note on the premise the company had qualified under the proposal set forth in AB 448. Mr. Comeaux stated over the first four years the tax the company would have otherwise paid would be cut in half and that was the effect of the incentive. Mrs. Williams asked Mr. Comeaux to prepare the fiscal on that premise. Mrs. Williams wanted to see the actual dollar amount due to the budget crunch Nevada was experiencing.
Mrs. Williams wanted to know why Nevada had such a difficult time attracting the high tech businesses. Mrs. Williams stated, even with the business tax, Nevada had a better tax climate than most of the states in the continental United States. Mr. Miller vocalized in his experience he believed it was image and perception. He conveyed another reason was Nevada's labor force and cost of labor. Nevada was losing to Arizona, Utah and Texas. Nevada did not compete in labor or an educated labor force in highly technical areas. Mr. Miller gave the committee a specific example of a company that was looking to move its company to a location in Nevada or another location in California. That company's concern was the fact that it was a top management and highly technical company and would not be able to hire those types of employees with those qualifications. Mr. Miller added when a company looked at construction costs, land costs and labor costs, Nevada did not compare very well with Arizona. Mrs. Williams believed with the income taxes in Arizona it would level the bottom line out.
Mrs. Williams noted at the top of a list in the Wall Street Journal were education and cultural activities. She asked if either education or cultural activities had been mentioned by the businesses considering the move to Nevada. Lt. Governor Wagner interjected one of the major problems with Nevada was with customized training or a skilled labor force. She said Arizona just passed legislation appropriating over $3 million for job training. She noted Nevada's budget was requesting $150,000 for job training.
Lt. Governor Wagner asked the committee to look at page 3 of Exhibit F and noted local incentives ranked fifth in Nevada's incentive package. She conveyed some of the important incentives other states gave in terms of start-up costs were training, sales tax reduction and property tax reduction. Those were major policy questions the Taxation Committee would have to decide upon. Lt. Governor Wagner felt comfortable with the numbers set out in AB 448.
Mr. Marvel asked if Nevada should review the role of its community colleges with regard to training. Lt. Governor Wagner thought that was a good place to examine.
Mr. Miller responded to Mrs. Williams stating Nevada could attract a highly talented, qualified work force, but it would take time and effort. He added it was more difficult to convince those companies it would happen. Mr. Miller stated in his experience with the community college system he found they were very cooperative in training programs for each and every company that had moved to Nevada that needed training for employees. He said the community college system was a great system and had been working very well.
Pat Coward representing the Economic Development Authority of Western Nevada (EDAWN) and the Nevada Development Authority (NDA), expressed their strong support for AB 448. Mr. Coward provided committee members a letter from Dennis H. Stein, President and Chief Executive Officer of NDA and Thomas Y. Hartley, the Chairman of the Board of NDA, expressing NDA's strong support for AB 448. The letter is attached hereto marked Exhibit G.
Mr. Coward expressed EDAWN and NDA were finding in the area of economic development it was more and more competitive. He stressed AB 448 was one of the few items Nevada could offer as incentives and pro business.
Mr. Coward referred to Exhibit G stating over a five year period of time for a company that had 100 employees, it would cost approximately $20,000. It was about 50 percent. He communicated the reduction of the threshold might not be the key driver of a business relocating to Nevada, but it was a competitive tool.
Mr. Spitler asked what types of businesses did EDAWN and NDA expect to attract by lowering the thresholds. Mr. Coward responded some of the companies might be financial institutions, Lockheed, Alaska Airlines and Intel. Mr. Spitler asked if Lockheed would have moved into Nevada had the thresholds been a little lower. Mr. Coward asserted that Lockheed might have moved to Nevada had the thresholds been lower, but he agreed with Lt. Governor Wagner with regard to not lowering the thresholds too much. He indicated to Mr. Spitler EDAWN and NDA endorsed the thresholds as set forth in AB 448.
Bonnie James representing the Las Vegas Chamber of Commerce, expressed the Chamber of Commerce's strong support for AB 448. Ms. James pointed out the new companies coming into Nevada created new jobs, more money and tax revenue, unlike some other exemptions where tax revenue would be lost.
Ms. James believed EDAWN, NDA and CED were well aware of the companies moving into Nevada and thought the thresholds were low enough. Ms. James said many people were moving into the state enjoying the benefits and services provided by Nevada, but were not paying the taxes to provide the services. Ms. James stressed the Las Vegas Chamber of Commerce strongly supported AB 448.
Chairman Price closed testimony on AB 448.
Chairman Price opened testimony on AB 331.
ASSEMBLY BILL 331 - Requires annual prepayment of tax on insurance premiums. (BDR 57-1714)
Ted Zuend, Deputy Fiscal Analyst, Legislative Counsel Bureau, provided committee members with a Bill Explanation for AB 331 attached hereto marked Exhibit H.
Brian C. Harris, Governor's Office, spoke in support of AB 331. Mr. Harris explained AB 331 was the Governor's proposal which was not an increase in taxes or new money, but in fact a timing change depicting how insurance companies would pay their annual premium tax. Mr. Harris illuminated the Insurance Commission had proposed a number of amendments to AB 331 and he asked a representative from the Insurance Commission to go through the proposed amendments.
Michael J. Griffin, CPA, Deputy Commissioner of Insurance, Nevada Department of Insurance, submitted a packet containing two memorandums attached hereto marked Exhibit I. He explained the first memorandum outlined some amendments the Department of Insurance felt would make the proposed legislation more equitable. He also referenced within Exhibit I a proposed amendment to AB 331 prepared by the Legislative Counsel Bureau suggesting certain deletions and additions.
Mr. Griffin explained the second memorandum contained in Exhibit I outlined the current method of how the premium tax was collected. The current method was a quarterly method. Mr. Griffin said AB 331 would enable an annual method whereby premium taxes would be prepaid on March 1st of each year.
Mr. Griffin referenced the last page of Exhibit I illustrating an example of how the current method would apply to a hypothetical insurer in addition to the proposed method.
Teresa P. Rankin, Commissioner, Nevada Department of Insurance, wanted to reinforce for the record the tax rate was not changed, just the timing of the taxes. The taxes were moved from a quarterly payment with a one-year true up, to a one collection point where the timing was changed from paying on last year's basis to paying current year. She iterated there was some true up points suggested in the Insurance Commission's language to mitigate the amount of the penalties suggested in the language.
Ms. Rankin explained AB 331 with the amendments would accomplish the state general fund receiving additional monies in a fiscal year in 1995 sooner than the general fund would by two quarters worth of payments. The bill would also eliminate the quarterly system that was rather complex. She added the reorganization bill transferred the premium tax collection to the Department of Taxation. She iterated the bill accomplished both the simplification of collection, plus a timing difference that assisted the general fund in obtaining revenue earlier.
Mr. Ernaut wanted to know why the Governor wanted to treat the insurance industry differently than everyone else. Mr. Harris clarified the gaming and the mining industry prepaid some of their taxes. Mr. Harris responded to another question explaining it was not the intention of the Administration to change the collection of the business tax or the cigarette tax to an annual prepayment basis.
Mr. Harris replied to a question presented by Mr. Ernaut disclosing AB 331 would assist in correcting a cash flow problem. It was a one-time attempt to collect money in the approximate amount of $30 million and was not actual tax policy.
Mr. Marvel asked if the collection of the tax was actually a "double hit" in one year to the insurance companies. Mr. Griffin responded stating on March 1st each company would be expected to pay at a minimum the amount paid in the previous year, plus an estimated amount equal to 3.5 percent of the increase in net direct premiums and net direct considerations estimated by the insurer to be written by it during the current calendar year. Mr. Griffin did not think it was fair to call it a "double hit." It was in fact moving the quarterly prepayments into an annual prepayment.
Mr. Marvel asked if any premium rates would be increased. Ms. Rankin addressed the question stating in a rate filing for the lines of insurance reviewed there was a line item for the insurers that reflected fees and taxes paid. Ms. Rankin represented most companies did that on a percentage basis in an estimate in a rate filing because it was projecting future. Ms. Rankin said a company might show a 4 percent number when the tax rate was 3.5 percent. The company would use another half percent to reflect the different fees or assessments paid by the company. Each insurer filed differently. She continued explaining because the rate filings were on a future cost, the ratepayer ultimately paid the tax, but it should not affect the rate filing per se, simply because of the timing change.
Mr. Marvel asked if the tax would affect the cash flow of the insurance companies pointing out the premiums had not been paid, but the company was expected to pay the advance premium tax. Ms. Rankin responded two quarters worth of premium taxes would be prepaid. Mr. Marvel was of the opinion there would definitely be a rate increase. Ms. Rankin said one of the proposed amendments allowed the companies to take it as an admitted asset on the prepayment of the expense for taxes. The company would secure an accounting credit reflected on the books. Ms. Rankin pointed out AB 331 would be effective in 1995. She hoped the companies would be anticipating the prepayment and would have money set aside.
Mr. Harris explained to a committee member the rationale behind the prepayment program was to raise money.
Mr. Spitler wanted to look at the effect of AB 331 from the perspective of an insurance company rather than the government's perspective. He wanted to know why an insurance company would like the program. Mr. Griffin was of the opinion that any self righteous insurer would already have a cash management program in place. Mr. Griffin believed prepayment would not be an onerous type of payment because the companies were already used to that type of payment in many other ways. He added no one enjoyed paying taxes. Mr. Spitler said he thought most of the insurance companies had a five or ten year plan, but the cash kinds of set asides AB 331 imposed would impact the company.
Mr. Spitler asked how much money two quarters reflected on any average company. Mr. Spitler pointed out it was not difficult for a company to come up with $2,500 dollars, but if a company had to come up with $1 million, it would not fit into an economic plan the businesses currently had in place.
Ms. Rankin referenced an example of a hypothetical company contained in Exhibit I showing the existing quarterly payments and the proposed payment. Ms. Rankin walked the committee through the example of the hypothetical company contained in Exhibit I. She said the company would owe $1.9 million for 1994 in the example. When the company paid quarterly the spread of the payments with the adjustment on the annual year basis of March 1 was $443,562. Under the proposed prepayment plan the $1.9 million would be owed right away. If one took the prior year, the income would be lost on the last two quarters. Currently the quarterlies were due March 31st and June 30th and were included in the prepayment. Mr. Spitler calculated the insurance company would be paying over $1 million as opposed to the $142,000 on March 1st. Ms. Rankin said that was correct. Mr. Spitler thought that was a lot of cash to be lying around.
Mr. Spitler asked if the Department of Insurance was of the belief that insurance companies would automatically pass on the cost and insurance premiums would be increased. Ms. Rankin said it would depend on the size of the company and its ability to generate return on its investment. Mr. Spitler pointed out if the government took the company's investment income and made the company spend it, the government was depleting money that would have to be replaced. Mr. Spitler voiced there was a down side from the consumer's perspective. He anticipated there would be insurance rate increases passed on to the consumer as a result of an advance payment on a premium.
Chairman Price interjected that committee members had to attend other meetings at this time and rescheduled the testimony to continue on AB 331 to the May 4, 1993, meeting.
There being no further business to come before committee, the meeting was adjourned at 3:29 p.m.
RESPECTFULLY SUBMITTED:
DIANNE LAIRD
Committee Secretary
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Assembly Committee on Taxation
Thursday, April 29, 1993
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