MINUTES OF THE
SENATE COMMITTEE ON TAXATION
Sixty-seventh Session
June 30, 1993
The Senate Committee on Taxation was called to order by Chairman Dean A. Rhoads, at 10:55 a.m., on Wednesday, June 30, 1993, in Room 224 of the Legislative Building, Carson City, Nevada. Exhibit A is the Meeting Agenda. Exhibit B is the Attendance Roster.
COMMITTEE MEMBERS PRESENT:
Senator Dean A. Rhoads, Chairman
Senator Ann O'Connell, Vice Chairman
Senator Randolph J. Townsend
Senator Sue Lowden
Senator Bob Coffin
Senator Raymond C. Shaffer
Senator Ernest E. Adler
STAFF MEMBERS PRESENT:
Kevin Welsh, Deputy Fiscal Analyst
Billie Brinkman, Committee Secretary
OTHERS PRESENT:
Lorne J. Malkiewich, Legislative Counsel, Legal Division, Legislative
Counsel Bureau
Michael Griffin, Deputy Commissioner, Department of Insurance
Carole Vilardo, Lobbyist, Nevada Taxpayers Association
Howard Barrett, Lobbyist, Nevada Taxpayers Association
James L. Wadhams, Lobbyist, American Insurance Association
Chairman Rhoads told the committee that he had discussed with Lorne J. Malkiewich, Legislative Counsel, Legal Division, Legislative Counsel Bureau, an issue concerning the constitutionality of using the insurance money. (The reference was made to Assembly Bill (A.B.) 778 on the Agenda.)
ASSEMBLY BILL 778: Revises provisions governing payment of tax on insurance premiums.
Chairman Rhoads indicated other committee members also had concerns on the subject, so he invited Mr. Malkiewich to come forward to discuss Nevada's balanced budget requirement.
Mr. Malkiewich said Senator Rhoads had inquired if the budget is balanced if, in fact, revenues are being taken from a future fiscal year to balance the current budget. He referred to Article 9, Section 2, of the Nevada Constitution, reciting it provides that the legislature shall each year, in case the anticipated revenues are less than the anticipated expenses, impose a tax sufficient to pay the debts of the state as they come due. He said that has been interpreted as a balanced budget provision. He continued, saying if by accelerating payments from a future year, the state would get enough money to pay the debts of the state as they become due, then for the purposes of the Constitution, compliance with that provision has been completed.
Chairman Rhoads interpreted Mr. Malkiewich's statement as meaning tax revenue has to be used to balance the budget. He pointed out A.B. 778 provides for money to be borrowed from the private institutions to balance the budget.
Senator Adler read from the statutes:
.....The legislature shall provide for levying of tax sufficient, with other sources of income, to pay the deficiency.
Mr. Malkiewich stressed that all that is required is that the amount of money that comes in must match or exceed the amount that is going out.
Senator Coffin said he was reminded of 1983 when the legislature created an advance payment situation for gaming taxes.
Mr. Malkiewich said that was exactly 10 years ago with exactly the same situation. The General Fund was very low when the legislature went into session, and one of the ways that shortfall was met was by making gaming taxes prepaid, and making the payments quarterly to try to get a better cash flow. Mr. Malkiewich said that provision had been made permanent.
Senator Adler pointed out that the last section of the measure in question says essentially interest is paid among the insurers to pay back for interest lost on the prepayments. He asked if constitutionally, that applies against the debt ceiling of the state.
Mr. Malkiewich said he did not think it does. The subject being discussed is not a loan, which, he said, has been the rationale for the language in this measure. He said he did not believe providing for tax credits for prepayments constitutes a debt. He said he thought the language in A.B. 778 is a tax credit allocated among the insurers over the next 5 years.
Chairman Rhoads asked Mr. Malkiewich to walk the committee through the first reprint of A.B. 778 as amended in the assembly. Mr. Malkiewich explained the first reprint moves the payment forward, going from retrospective to prospective payments, but maintains the quarterly payment method. So that once the payments were shifted forward, they would be kept forward forever.
In comparison, Mr. Malkiewich said A.B. 778, as introduced, provided for a one-time payment early in 1995 for the year rather than quarterly payments. Then in 1996, the quarterly payment method would resume. He said that would create a shortfall in fiscal 1995-1996.
Mr. Malkiewich indicated there would be a $30 million hole in the budget under either version of A.B. 778. However, he said the amended version avoids a $60 million shortfall in the following biennium.
Chairman Rhoads concurred with Mr. Malkiewich that the first reprint of A.B. 778 would provide for a permanent prepay. And Chairman Rhoads asked if the committee decided not to make it a permanent prepay, would the $60 million dilemma be created in the budget. Mr. Malkiewich said that once the acceleration is in place, then dropping back would create a hole in the budget.
Senator Coffin recreated the history leading to A.B. 778 and its first reprint. He said the first reprint of the measure makes the advance payment permanent. He pointed out the original prepay provision which would occur in 1995 and which would begin allowing the insurance industry to recapture starting in 1996, remained unchanged and that would not be a premium increase. The first reprint of A.B. 778, by making permanent the prepayment, means that starting in 1996 when the payment is permanently accelerated, there would be an additional cost of business which could then be passed on (to the customer). And although the hole in the 1995-1996 biennium budget would be $30 million, a permanent cost of doing business is not created.
Senator Coffin said there is still going to be a hole in the budget in the next biennium. One version of A.B. 778 allows a $60 million hole, and the other version allows a $30 million hole, but the Governor's original proposal was a $60 million hole. The first reprint of A.B. 778 makes the hole $30 million, but it also permanently increases the premium.
Michael Griffin, Deputy Commissioner, Department of Insurance, came forward to join the discussion on A.B. 778. He indicated there would be an incremental cost of business for the insurance industry in subsequent years as a result of this measure. He said the materiality of the increase would certainly be minimal. He added that certainly when rates are set, the loss experience which the company incurs, is the driving factor of the rate experience. He indicated there would be an impact, but materiality, it would not be all that great.
Senator Coffin said they had calculated around a $2 million hit the first year because interest rates are very low now. But that hit could be as much as $5, $6 or $7 million in the future years. But he pointed out in the total insurance premium tax picture, it is not a huge amount. He said the original version of A.B. 778 increases the insurance premium of the constituent, and that the first reprint does not allow that language. He pointed out neither approach solves the hole in the budget problem.
Mr. Griffin said all the calculations he had seen have come up with a $l.5 to $2 million range as far as carrying charge or cost of money for the prepayment.
Senator Townsend asked if there was language in the first reprint of the measure providing for prevention of the cost to the industry being passed on to the consumer. Mr. Malkiewich said there was no "hold harmless" provision in A.B. 778.
Discussion ensued.
Carole Vilardo, Lobbyist, Nevada Taxpayers Association, came forward to oppose A.B. 778. She stressed, as a type of financing mechanism, it is poor tax policy for the state of Nevada.
Senator O'Connell inquired if this measure would impact the bonding rate of the state. Ms. Vilardo said, to the best of her knowledge, this financing mechanism would not impact the state bonding ability.
Howard Barrett, Lobbyist, Nevada Taxpayers Association, concurred with Ms. Vilardo concerning the bonding issue.
Chairman Rhoads asked Ms. Vilardo which version of A.B. 778 she preferred, the original bill or the first reprint. She replied she did not know how to make a bad bill good, that this measure is just bad policy.
Chairman Rhoads summed up the options: The original version of the measure is that the next year of the biennium budget there will be a hit of a $60 million deficit. The first reprint will make that hit permanent and there will be a $30 million deficit. And the third option is to not pass A.B. 778 and look for $30 million to make up the budget deficit or cut $30 million in expenses.
Chairman Rhoads asked Mr. Barrett if it was possible to have a "trailer bill" which would amend the budget. Mr. Barrett said he believes there is no statute that cannot be changed. He maintained the only thing that cannot be changed by the legislature is the Nevada Constitution. He said just because a bill has been drafted does not make it sacred.
Senator Lowden expressed distress over the taxation committee being in the "llth hour" of the legislative session trying to find revenue to fill the gaps.
Senator Coffin indicated he thought A.B. 778 could be passed, knowing there is going to be less money for the next legislative session. He said the question is which version of the measure should be moved.
SENATOR COFFIN MOVED TO AMEND AND DO PASS THE FIRST REPRINT OF A.B.778.
Senator Coffin explained the motion is to remove the language which has been inserted in A.B. 778 to create the first reprint.
SENATOR SHAFFER SECONDED THE MOTION.
Senator Coffin called for discussion. He said the posture of enacting A.B. 778 in its original form provides the following: An increase in insurance rates is not created; creates a negotiated payback of the imputed interest which is lost over a 5 year period; negotiates with the insurance industry to prevent a raise in insurance rates; and it will be in the rate base that they have a payment coming back.
Senator Adler asked what portion of insurance rates does the tax in A.B. 778 represent. Mr. Griffin replied in the 1 to 3 percent range.
However, he said he did not believe there would be any impact on subsequent periods from the standpoint of potential consumer rate increases. In explaining his statement, Mr. Griffin said in the year of change, 1995, there would be an impact which has been allowed for in the carrying charge of $1.75 million tax credit allowance. He added in the subsequent years, the companies would not have the same costs because they would be aware the tax payment is on an annual basis, therefore they could accrue in the prior periods for that tax liability.
James L. Wadhams, Lobbyist, American Insurance Association, addressed A.B. 778 and its concept. He said the insurance industry did not think this is a good way to collect tax. However, he said during testimony on the measure on the assembly side, the insurance industry did indicate they would participate during the first biennium. And he said they do understand this issue can be revisited.
Senator Adler stated he understands the prepayment is an advancement of 6 months. Mr. Wadhams concurred.
In reply to Senator Lowden's question, Mr. Wadhams said the original bill was preferred in the insurance industry because it does not set a long-term agenda. He pointed out, however, the term of any law is only 2 years.
Chairman Rhoads called for the vote on the motion before the committee.
THE MOTION FAILED. (SENATORS RHOADS, TOWNSEND, O'CONNELL AND ADLER VOTED NO.)
*****
Chairman Rhoads said he now would accept a motion to take the original bill to the senate floor and recommend without recommendation.
SENATOR TOWNSEND MOVED TO AMEND A.B. 778 FIRST REPRINT BACK TO ITS ORIGINAL FORM AND SEND IT TO THE SENATE FLOOR WITHOUT RECOMMENDATION.
SENATOR COFFIN SECONDED THE MOTION.
Senator Coffin indicated he is for sending out A.B. 778, however he objects to the inclusion of the amendment of sending it out without recommendation.
Senator Townsend explained his reason for making the motion, stating this measure had been handed to the committee as the last measure of the legislative session in order to balance the budget, therefore not many options had been left on which opinions can be based.
Senator Lowden said she believed the motion sends a message that the committee is clearly not happy with A.B. 778.
Senator Adler said he did not like the motion because it leaves the budget with a $60 million hole versus a $30 million hole. He said he thought a better arrangement could have been included, especially in regards to quarterly payments. Senator Lowden said she was agreeable to looking at new language if it were presented.
Conversation with Mr. Griffin ensued. Mr. Griffin said the real benefit of A.B. 778 to the budget is a timing difference on how premium tax is collected, because the tax is collected on business done in a calendar year. The state is on a fiscal year. So by moving those dollars forward to the March 1 and June 15 payments, the treasurer's office gets the money in the current fiscal year. He said to try to do a hybridized quarterly payment mechanism would impact that $30 million benefit in fiscal year 1995.
Mr. Wadhams said he had run all the possible numbers and there is no other way to bring $30 million into the tail end of the 1995 biennium without doing this mechanism.
Chairman Rhoads called for the vote on the motion before the committee.
THE MOTION CARRIED. (SENATORS ADLER AND O'CONNELL VOTED NO.)
*****
There being no further business to come before the committee, the meeting was adjourned at 11:50 a.m.
RESPECTFULLY SUBMITTED:
Billie Brinkman,
Committee Secretary
APPROVED BY:
Senator Dean A. Rhoads, Chairman
DATE:
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Senate Committee on Taxation
June 30, 1993
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