The Committee on Taxation was called to order at 1:35 p.m., on Tuesday, May 25, 1999. Chairman David Goldwater presided in Room 3142 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. Roy Neighbors, Vice Chairman

Mr. David Goldwater, Chairman

Mr. Bernie Anderson

Mr. Morse Arberry, Jr.

Mr. Greg Brower

Mrs. Vivian Freeman

Ms. Dawn Gibbons

Mr. John Jay Lee

Mr. Mark Manendo

Mr. John Marvel

Mr. Harry Mortenson

Mr. Bob Price

Ms. Sandra Tiffany

GUEST LEGISLATORS PRESENT:

Assemblyman Greg Brower, District 37

Assemblyman Don Gustavson, District 32

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

Following roll call, Chairman Goldwater announced the committee would hear a subcommittee report on A.J.R.17 and limited, brief testimony. Ted Zuend would take the committee through the measure. On behalf of the committee, Chairman Goldwater thanked Assemblyman Brower, Assemblyman Mortenson and Assemblyman Price for their work on A.J.R. 17.

Ted Zuend, committee fiscal analyst, reported the subcommittee hearing was held on May 12, 1999 with Assemblyman Brower chairing and both Mr. Price and Mr. Mortenson in attendance. The subcommittee heard from 16 supporters directly who testified for A.J.R. 17. Additionally, a number of people appeared in support of the bill but did not testify. Much of the testimony recounted problems and hardships caused by escalating assessed valuations, particularly in households with limited or fixed incomes. One proponent of the resolution also noted the main goal of the resolution was to eliminate the run-up; the unexpected and unanticipated increases in assessed values in the hot market areas throughout the state.

Two amendments to the bill were submitted. One would define taxable value. It was not circulated because of its impracticability; a constitutional amendment referring to a statute which the legislature could repeal, abolish, or change. There had also been a provision that essentially would allow the severability of the provisions if a court found any part of the amendment violated federal law or the U.S. Constitution. Mr. Zuend provided work session document, marked Exhibit C, detailing the amendments.

Assemblyman Brower noted he was a cosponsor of the measure and supported the concept. He noted further in the amended version of the amendments summary, one issue that might be addressed by some of the witnesses was the predictability the change in the law would offer taxpayers. He believed that was the key point of the effort, and he urged his colleagues to keep that in mind amidst the other very important concepts.

Assemblyman Gustavson, representing District 32, referred to the amendment he distributed at the initial hearing on May 13, 1999 and asked to have that included in the record as though the same had been read herein. That amendment was marked Exhibit D.

Marvin Leavitt, representing the City of Las Vegas, said that although the measure had been around all session, he had not come forward until the present meeting; that was because he now felt he should comment on some of the issues previously mentioned by others.

Mr. Leavitt did not want to address what he saw as a revenue loss to local governments, instead he wanted to address the concepts behind taxation and why, in his view, the measure violated those concepts. He noted at the beginning of the bill was a recitation of the Constitution. The Constitution provided for a uniform and equal rate of assessment taxation. Ironically, the bill essentially provided an exception to that in that it read we no longer want to be uniform and equal about the way we do things. The foundation of property taxes was called ad valorem, which simply meant, "based upon value." When that method was changed and an artificial mechanism was provided, it was no longer uniform and equal. Then, some special benefit would be provided to somebody that would require the value of certain properties, at least, not be based on actual value but based on something else. The idea would be based on something less than that. When that happened, specific benefits would go to those whose property values were rising more rapidly than others. That would create a redistribution of the way the whole scheme worked, and those who benefited would be the ones who owned very valuable properties. It changed the mix, and that limited the total levy of taxes.

Mr. Leavitt mentioned an idea that had been around for many years and was seen in the Federal Tax Code, where the government sometimes wrote the codes so they accomplished special social needs. For example, the Federal Government believed it was desirable for a person to own their own home and so they provided for a deduction from federal income taxes for interest payments on mortgages incurred on home purchases. The proposed measure essentially provided the same type benefit for those who kept a residence as opposed to others who sold one residence and moved into another.

Mr. Leavitt did not see what the social benefit was nor the reason the State of Nevada should adopt the measure. He asked what particular benefit and what logic was there that would encourage the state to provide substantial tax benefits to someone who decided to keep a home as opposed to selling that home and buying one down the street.

Next, Mr. Leavitt spoke about the total revenue structure of the state where so much of the revenue was based on sales tax, which was somewhat unpredictable and varied with the economy. So much was based upon gaming tax, which was very volatile and could fluctuate even within the space of a year. The foundation of the total tax system was property tax, for which a change was being proposed. Mr. Leavitt believed in the long term the state might have to look to some other form of taxation, because property tax would no longer be the tax that it could turn to. It would eventually have a large effect on debt issuance around the state. He also believed that radically changing the methods currently used would be detrimental to the infrastructure of the state.

Mr. Leavitt recalled the beginning of the 1999 session, when Governor Guinn proposed a study to try to bring some stability to the tax system of the state, and the legislation presented appeared to move in the opposite direction. He said he had been involved with taxation in the State of Nevada for a long time, he understood that people wanted to be able to control their taxes and were concerned when they rose; however, there was no fairer way to tax than based on the value of property. An ad valorem taxing method provided some kind of equality. The state deviated from that somewhat when it went to the depreciation factor and that probably created some inequity. In retrospect, that plan had not worked because it rewarded older property but penalized newly constructed property and that might not be fair either.

He added, and strongly emphasized, that he believed the proposed legislation was a mistake and if allowed to become law would be regretted.

Mr. Goldwater thanked Mr. Leavitt for his testimony and acknowledged he was a well-respected expert in the field, and for that reason would take his comments very seriously.

Assemblyman Mortenson concurred that Mr. Leavitt was one of the outstanding authorities on taxation in the State of Nevada. He noted, too, that Mr. Leavitt viewed matters from the standpoint of government however, what was good for government was not always good for the people.

Mr. Mortenson sincerely believed the bill was meant to help some people out who, through no fault of their own, owned property that had appreciated. Sometimes it appreciated to the point where they were forced to sell and move out of their house. The bill was designed to help mitigate that problem; and it was a good bill. However, it was not without its problems. Assemblyman Mortenson expressed concern that if the bill went into effect in a transition period he could not be certain it would not affect the counties' budgets. It appeared that no matter how it was manipulated, it either benefited the small counties and hurt the large counties, or benefited the large counties and hurt the small counties. In summation, he believed it was a wonderful bill but was gravely concerned about its affect.

Mr. Leavitt hypothesized changing the rate of taxation. It would have the same scheme of providing assessed value changes and changed the rates so the governments would not lose any money. Based on that supposition, it would still be unfair. It would leave behind the value of property and attach some artificial value that rewarded keeping property as opposed to selling and buying new. The very act of doing that changed the relationship among taxpayers. Mr. Leavitt offered a scenario: He had a home which he sold to buy a new one. Should he be taxed more than his new neighbor down the street who had a similar home and had lived there for some time. Could any governmental purpose be served in that scheme of taxation. And what particular purpose would be served for the individual. Why should there be some artificial method for determining value when it could be determined based on what it was actually worth. In his opinion, when value was determined artificially; whether on the consumer price index, on how long a person had been in their house, or even on allowable growth by a specific percent, it essentially rewarded those whose property had grown in actual value the most rapidly, at the expense of those whose property had not.

Assemblyman Marvel recounted attempts at correcting tax increases that had been unsuccessful in the past, and believed the base had become so narrow it limited the possible remedies. In essence, Mr. Marvel agreed with Mr. Leavitt about maintaining a uniform base in order to survive and keep government entities alive.

Chairman Goldwater observed that seemed to be the California experience. They received the property tax reduction, but taxes in most other areas increased. There was a discreet amount of money, it needed to be funded, and where it came from was the question.

Mrs. Freeman responded to a comment made by Mr. Leavitt that the Governor had promised, in the State of the State Address, that he would do a study on taxation. She emphasized she would like to have some kind of statement from the Governor and asked if there was anyone in the audience from the Governor’s Office who could tell the committee the Governor’s position. No one came forward. She also stated she was in agreement with Mr. Leavitt's comments.

Mr. Mortenson said everything he had heard presumed that taxes had to go up. He allowed that while it might be a very profound thought, perhaps taxes did not have to go up. Perhaps the state did not have to keep taking a higher percentage than what it was taking presently.

Bob Hadfield, representing the Nevada Association of Counties (NACO), said the association had not taken a position on the bill. However, as a longtime resident of this state, he felt it was important this issue be given the greatest consideration. He recognized the right of the people to decide what kind of government they would like to have, and when they felt aggrieved, they had the right to seek solutions to that problem. He also shared many of Mr. Leavitt’s concerns. When a constitutional amendment was brought forward it presumed to treat everyone equally. He said one of the biggest battles in his public career with the Federal Government was that they wanted to treat everyone exactly the same. He said if he had learned one thing from being a long-term resident of the state and growing up in Winnemucca it was that Nevada was very different and very diverse. There was no single tax plan to address the concerns of residents in Incline Village, or other "hot spot" areas, that would not at the same time have an adverse impact on other cold spot areas of this state, such as in Mineral County. There were no buyers for homes in that county. Similarly, in Spring Creek, near Elko, if a worker was laid off from the mines and had to sell his home, he could not find a buyer. Mr. Hadfield shared Mr. Leavitt’s basic philosophical concern. He did not see why someone who lived in the same tract home, in the same neighborhood and required the same level of services should be treated any differently for purposes of taxation than anyone else. Mr. Hadfield felt strongly that there must be a different and better way to address the concerns of growing assessed valuation without applying a single rule across the board in the State of Nevada.

Mr. Hadfield agreed with Mr. Mortenson that tax rates should not automatically go up. He also believed people should participate in government at the lowest level. He was on a town board and believed more people attended those town board meetings than most of the county commissions in the state. If an individual county and its residents felt their taxes were too high, that should be addressed there. As statewide policy makers, the committee had to be concerned with how anything impacted the entire state. Finally, probably the biggest problem the small counties faced were federally unfunded mandates. In fact, he said, a meeting was being held in the building simultaneously to speak about rural county problems and the EPA with which the counties would be unable to comply.

In conclusion, Mr. Hadfield urged the committee before they supported the measure they tour the State of Nevada, places like McGill, Ruth, Hawthorne, or Goldfield, and before proposing a singular solution, consider how it would affect the people in every community.

Tom Grady, executive director of the Nevada League of Cities, agreed with Marvin Leavitt’s comments. He suggested the committee review the comments made on May 12, 1999 by John Swenseid, a bond expert, to understand the effect the bill would have. Furthermore, he believed the Committee needed to examine what had been done over the last couple of years, from S.C.R. 40 to the S.B. 253 Committee, on the distribution of revenues. Mrs. Freeman, Mr. Neighbors, and Mr. Price had been on the S.B. 253 Committee and had been trying very diligently to address all the tax problems in the state. Moving ahead with A.J.R. 17, he believed, was stepping into the territory those people had been working on. It was an ongoing committee, not an interim committee. It would continue. Moreover, there were people not only from the government entities who served as advisors to that committee but others contributing their input to what was wrong with the taxing situation in the State of Nevada.

Mr. Grady hoped the committee would give the 253 Committee the opportunity to continue to look at the tax problems in this state and afford the experts the chance to come up with an answer, before hastily accepting a resolution that though well intended, would probably usurp part of the study that was being done.

Mr. Goldwater noted, for the record, the opposition of the Clark County School District.

Carole Vilardo, president of the Nevada Taxpayers Association, spoke before the subcommittee in opposition to the bill. However, she wanted to make an additional comment: "You can put all of the restrictions you want on property tax or on a sales tax or anything else. There will still be a revenue need and unless you have some sort of an expenditure cap or an acknowledgement that it’s the expenditures that are driving the need for revenue, all you’re going to do is shift who pays the revenue that is going to be required."

She also commented on some mechanical problems with the bill. Page 3, section 6.1, where it stated "may be set by the county commissioners but shall not exceed." We have approximately 230 to 250 local governments in this state. The County sets their operating rates. The city sets their operating rates. GID’s, library districts, town boards outside of Clark and Washoe, have the input on their rates, in addition to which you, as the legislators, set the state debt rate. So mechanically as this is written, it would need to be amended."

Ms. Vilardo noted she was pleased to see on the next page the assessed value for the fiscal year for purposes of calculation had been changed to 2001 and 2002. It had gone to 80 percent of full-cash value, and she noted that 80 percent replaced what was now 35 percent of taxable value so that becomes a very substantive change.

She noted a provision relative to the bonding that could be approved by a two-thirds vote at a local level. However, she referred the committee to the last page of the bill that stated in effect the legislature was allowed to increase rates or change methods if approved by a two-thirds vote. That would follow the Gibbons initiative and the interpretation would be the same. She expressed confusion because it appeared state bonding was totally eliminated.

Jim Spinello, representing Clark County, concurred with Ms. Vilardo.

Mr. Goldwater remarked that when the committee considered amending the Constitution they wanted to be sure they were very clear. He felt some legitimate issues had been brought out.

Speaking in rebuttal was Ted Harris, representing Nevadans for Fair Taxation, who had worked closely with Mr. Gustavson to develop the bill and fine-tune it to the point where it made sense to the county governments, the city governments, and to the taxpayers of the State of Nevada. Those who spoke in opposition had raised some good points. However, there were answers to these questions. He was most concerned about the bias expressed in that the chief concern of the opposition was the revenue for the government. He came from another position.

Mr. Goldwater interjected that Ms. Vilardo certainly had not come from that position.

Mr. Harris said he might have gotten the wrong impression but the purpose of the bill was to institute some equity into a system that displayed much inequity. One of the criticisms often heard was that one person in a neighborhood was paying less tax than someone else in the same neighborhood because he just bought the house. How is that anymore unfair than if person "A" happened to have lived in the neighborhood for a given period of time and there were two or three sales in that neighborhood, and the county assessor, by law, was required to reassess the property. "A" suffers a punishment simply because persons "B" and "C" choose to spend more money for their homes. The consequence of the action or the way the system was structured was that it punished people who chose to stay in their home. Many people had lived in a home they had worked for years to buy, and were now faced with having to move because of escalating taxes. It was not happening uniformly. Some of the smaller counties were not having excessive increases and were not impacted to that extent; however, in other areas, many people were being forced to sell their homes.

Fairness was an issue and the one thing the current tax system failed to provide the property owner was any sense of predictability. When one purchased a home it was unknown what taxes would be in the future. Even though the county commissioners had done a good job in many cases of holding down tax rates, no one had any control over the increase in assessed value.

Mr. Goldwater agreed the current system may not be fair but the difficulty came in trying to find one that was more fair.

Mr. Harris noted the bill had been tailored after California's Proposition 13 where it had worked for 20 years and there was tremendous precedent. Oregon had recently done the same thing for the same reasons. He urged the committee to give the bill thoughtful consideration.

Assemblyman Gustavson, representing Assembly District 32, urged fairness. As Mr. Harris pointed out, many people were being taxed out of their homes. The bill had been patterned after Proposition 13. It had been refined and no longer contained the rollback provision. The intent was not to hurt any county, and the bill had been fine-tuned so the counties now could predict their revenue. They would have a starting date. It was not a rollback date. They had a point from which to start if the measure passed in the committee and through the legislative process and constitutional amendment process.

Ms. Gibbons asked how Mr. Harris felt about impact fees. Mr. Harris felt it was an acceptable means of providing additional revenue and allowing growth to pay for itself to some extent. Counties with populations greater than 40,000 people could not impose impact fees. There had been considerable growth in Clark County and in Washoe County, but there were no impact fees for schools. One of the options chosen in California as a result of Proposition 13 and the need to build the new schools was that the burden could not be placed on the property owner forever. Someone new coming into the community had to pay for that school. Does a new person coming into the community have a right to expect that all of the infrastructure and facilities will be there when there is no price of admission. With impact fees the pendulum could swing both ways and in many cases had swung too far. Mr. Harris noted in Sacramento County, where he had lived 12 years earlier, at the present time the impact fees for schools in climbed to over $2.50. If a builder constructs a 2,000 square foot house, a $5,000 impact fee went into the fund.

Mr. Goldwater asked if he was in favor of impact fees. Mr. Harris said he was.

Mr. Goldwater said the choice before the committee was to accept the subcommittee report on A.J.R. 17 in its amended version or not accept it.

ASSEMBLYMAN MARVEL MOVED TO INDEFINITELY POSTPONE

A.J.R. 17.

SECONDED BY ASSEMBLYWOMAN FREEMAN.

THE MOTION CARRIED. THREE MEMBERS WERE OPPOSED.

Mr. Chairman turned next to S.B. 411.

Stephanie Tyler, representing Nevada Bell, appeared in support of S.B. 411 and provided a proposed amendment, marked Exhibit E. She explained the legislation had a long and rich history within the legislative session. First and foremost S.B. 411 corrected an inequity that currently existed in the tax system. Second, it established a phase-down process to mitigate the impacts for the corrections of this inequity to the local governments. Third, it created a subcommittee to study the methods of taxation of utilities.

In regard to the first point, it corrected an inequity that currently existed between centrally and locally assessed utilities. That had been part of a 2 year process where the industry had worked with the Department of Taxation to identify the inequity and minimize the role of intangibles and the role they played in the property tax formula. The legislation eliminated intangibles from the property tax formula used for central assessment. The bill was the next logical step to ensure that centrally assessed utilities were taxed in parity with locally assessed competitors. In a practical sense, since the 1996 Telecom Act at the federal level, and also with some of the hearings that had taken place in the legislature that dealt with power restructuring, it had created new competitors in traditional utilities. Many of those competitors operated in only one county, were assessed locally by the county assessor, and not taxed on intangibles. She added that she and her colleagues present at the meeting operated in more than one county, were centrally assessed and, therefore, intangibles were used. The natural inequity that created was clear.

The proposed legislation sought to level the playing field. The second part of the legislation established a phase-down. It acknowledged there would be no impact in 1999. Ms. Tyler referred the committee to page 5, subsection 2, of the amendment that would create a phase-down. The intent of the amendment was to address some constitutional questions that were raised during bill drafting. In 1999, there would be no impact. For fiscal year 2000-2001, 95 percent of intangible value would be taxed. Years 2001-2002 would be 90 percent. Years 2002-2003 would be 60 percent. Years 2003-2004 would be 30 percent and in years 2004 to 2005, the phase-down would be complete.

One additional year had been added versus what the current bill draft had included to further minimize the impact to local governments. She pointed out the reason the committee would see such small phase-downs in the first two years was there would be only a 5 percent phase-down of the intangible value. The impact to local governments would be felt at only 5 percent before the legislature reconvened and had the benefits of the study.

Lastly, Ms. Tyler said the third part of the legislation was the study. S.B. 411 would create a subcommittee of the S.B. 253 Committee. The subcommittee would be made up of legislators, local government representatives, those currently on the Technical Committee, and industry representatives. There would be specific findings required from this study. First, any recommended tax change would have to be an equitable tax. The subcommittee would evaluate the reliability that local governments had on the tax revenue and make sure the recommendations created neither a windfall nor a substantial debit to local governments. The recommendations would be reported back to the 2001 Legislature.

Assemblyman Marvel agreed with Ms. Tyler on intangibles but asked how much of the property was intangibles. Ms. Tyler said an estimate was produced by the Department of Taxation and Mr. Pursell from the department was present.

Dave Pursell, executive director, Department of Taxation stated the original bill called for a fiscal note and using the financial statements reported to the Department of Taxation they had determined approximately $1.4 million of intangibles through all industry groups; airlines, railroads, and telephones.

Mr. Marvel asked if those were taxable dollars. Mr. Pursell said yes; they were

the intangibles identified from the balance sheets that were reported by the various industry groups.

Mr. Marvel asked if those were centrally assessed properties and was the $1.4 million distributed throughout the state. Mr. Pursell said that was correct. The greatest impact would be in Clark County. He added it would probably be $700,000. "When we did the fiscal note, we based it on an average tax rate so that amount is going to be a little bit different if you go right to the individual tax rate for the entities, it’s going to be a little bit less than that but, yes, compared to the total amount, it won’t be that much."

Mr. Marvel then asked if logos and goodwill were included in the intangibles. Mr. Pursell said those would be considered part of the intangible value. Mr. Marvel wanted to know if that was a write-off. Mr. Goldwater said it could not be written off, that it was part of the franchise value so it actually enhanced the tax. Mr. Marvel noted when the bank made acquisitions, a certain amount was goodwill but it was able to be written off. Mr. Goldwater said goodwill could be depreciated.

Mr. Goldwater told the committee that in reading what other states were doing in the areas of taxation, and being progressive in an era of deregulation, the internet, and various kinds of communications, more creative and fairer methods of taxation were on the horizon. Nevada had not been proactive or progressive in that area but he thought it would begin to be.

Mr. Marvel asked if the amendments were discussed in the Senate. Ms. Tyler said the marked up amendments she had given to the committee had not been discussed in the Senate, because there had been some last minute changes and there were some constitutional questions.

Mr. Anderson was curious about July 1, 2004, when the tax on intangibles dropped to zero percent. Since it was a relatively new emerging market area of activity he was concerned that the state would end up completely out of it. Ms. Tyler said the additional language of the 2004 zero was merely explanatory. That was the way bill drafting had done it and it would be returned to the committee in the form of an amendment, and probably would not include that 2004 zero language. The original bill did bring it back down to zero but the way it was drafted was not specifically reflected to indicate 2004 and zero. The effect would be the same but in fact would take one year longer for the phase-down to complete.

Mr. Anderson asked if the stability and reliability questions were really questions of technical cleanup language. Ms. Tyler said yes. The intent of the bill drafter was to make sure all interests were represented and went to the issues the industry was concerned about, but also the stability and reliability issues were very important to local government.

Jim Endres, representing AT&T, had nothing more to add but wanted to thank Mr. Pursell and all the local governments and members of the legislative corps who worked all session on the bill to reach the current compromise point.

Mr. Goldwater said it was apparently a good compromise. There was no further testimony and he closed the hearing and asked for a motion on S.B. 411.

ASSEMBLYMAN MARVEL MOVED TO AMEND AND DO PASS

S.B. 411.

SECONDED BY MR. ANDERSON.

The vote was taken.

THE MOTION CARRIED UNANIMOUSLY.

Mr. Goldwater announced the committee had been given two letters addressed to the S.B. 253 Committee, in draft form. The committee should review those and advise him of any corrections or additions. Mr. Goldwater would then put them on letterhead and send out on behalf of the committee.

With no further business before the committee, Chairman Goldwater adjourned the meeting at 2:45 p.m.

RESPECTFULLY SUBMITTED:

___________________________

Darlene Rubin,

Transcribing Secretary

Nykki Kinsley,

Committee Secretary

APPROVED BY:

Assemblyman David Goldwater, Chairman

DATE: