MINUTES OF THE Meeting
of the
ASSEMBLY Committee on Taxation
Seventy-First Session
February 15, 2001
The Committee on Taxationwas called to order at 1:30 p.m., on Thursday, February 15, 2001. Chairman David Goldwater 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. David Goldwater, Chairman
Mr. Roy Neighbors, Vice Chairman
Mr. Bernie Anderson
Mr. Morse Arberry Jr.
Mr. Greg Brower
Mr. David Brown
Mr. John Marvel
Mr. Harry Mortenson
Mr. David Parks
Mr. Bob Price
Ms. Sandra Tiffany
COMMITTEE MEMBERS ABSENT:
Mrs. Vivian Freeman (Excused)
STAFF MEMBERS PRESENT:
Ted Zuend, Fiscal Analyst
Kathryn Ely, Recording Secretary
N. Jolene Jones Miley, Transcribing Secretary
Elaine Lancaster, President of Nevada State Education Association
Al Bellister, Lobbyist, Nevada State Education Association
Kenneth B. Lange, Executive Director, Nevada State Education Association
James Penrose, Attorney, Dyer, Lawrence, Cooney & Penrose
John Bartlett, Legal Counsel, Nevada State Education Association
Barbara Clark, Lobbyist, Nevada Parent Teacher Association
Lonnie Shields, Advocate, Washoe County Education Administrator Association
Allin Chandler, Executive Director, Clark County Association of School Administrators
Danny Thompson, Secretary/Treasurer, Nevada State AFL-CIO
Mr. Goldwater called the meeting to order and stated the first order of business would be the introduction of BDR 20-1302 by Mr. Bernie Anderson. Mr. Anderson requested the committee to review BDR 20-1302 that would exempt local residents from taxes levied on the rental of transient lodging. The bill would require an exemption statewide and would require proof of residency. Mr. Goldwater announced he would accept a motion.
ASSEMBLYMAN ANDERSON MOVED FOR COMMITTEE INTRODUCTION OF BDR 20-1302. (A.B. 655)
ASSEMBLYMAN MORTENSON SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY BY ALL THOSE PRESENT.
Initiative Petition 1: Nevada Tax Fairness And Quality School Funding Accountability Act.
Mr. Goldwater stated the hearing was a result of a group of constituents that had exercised their right under the Nevada Constitution to petition the legislature, as well as the voters, with their idea. It was important to remain open-minded and fair when considering the petition and that it was not a bill introduced by a legislator. He explained how he would conduct the hearings. Proponents would present their position that day, February 15, 2001, and opponents would present their position on Tuesday, February 20, 2001. Mr. Goldwater stated he would allow members of the committee to make opening remarks before testimony was taken. The hearing was open to the public and public testimony was welcome. He opened the hearing and allowed committee members to make their opening comments.
Mr. Anderson read from prepared text entered as Exhibit C. He recognized the right to petition government for redress and understood the issue proposed and looked forward to an open and fair discussion.
Mr. Brower stated he had heard from many constituents that had expressed serious concerns about the initiative. The nature of the concerns included possible local control over education, a tax disguised as a back door personal income tax, legislative control over the budget process and the creation of a “mini Nevada IRS.” Mr. Brower stated he shared those concerns. He enumerated other concerns raised with respect to teacher accountability and that the initiative provisions appeared to lack a process for ensuring that aspect was achieved. He also indicated he had heard, over the past several months, concerns the initiative would be harmful to the state’s economic development. Mr. Brower commented that constituents in his district would expect an “A” game on the part of the proponents to satisfy those concerns.
Ms. Tiffany reported the initiative generated more constituent response than she could remember in a long time. She would be very responsive to the needs of the teachers in Henderson, Nevada, and would listen with an open mind.
Mr. Marvel was interested in how state agencies and higher education would be affected if the initiative was successful.
Mr. Goldwater reiterated the committee was not the body to determine the constitutionality, only the merits of the measure. He opened the meeting to proponents.
Elaine Lancaster, President of Nevada State Education Association (NSEA) read from prepared text in (Exhibit D). She explained the overall strategy of the Quality Schools, Today and Tomorrow Plan could be divided into three sections. First, the association members provided input, monetarily assessed themselves and took the petition to the communities and collected signatures. The plan consisted of four pillars that included, Quality Teaching, Enhanced Student Learning, Parental Involvement and Student Accountability. The plan would give education personnel in Nevada the hope of realizing the funding necessary to strengthen the K-12 system (EXHIBIT E).
Al Bellister, Lobbyist, NSEA, explained during the Seventieth Session in 1999 the National Education Association (NEA) commissioned a study of tax systems in the 50 states. Mr. Hal Hovey, a recognized expert in state and local government finance, wrote the study. Mr. Hovey ranked the states based on their structural deficit. The definition for “structural deficit” was state revenues that could not support state expenditure needs. Conclusions drawn from the study revealed the state of Nevada had the largest structural deficit in the country. As a result of that study, the initiative petition was prepared in the interim. Mr. Bellister stated certain individuals had dismissed Mr. Hovey’s findings; however, when certain examples of structural deficit were examined, the conclusion was that Nevada had a structural deficit. There was a need for more money to fund K-12 public education. Additionally, that was the third time in the last ten years that K-12 public employees were asked to accept zero and zero for salary increases. Mr. Bellister explained the governor proposed zero and zero for salary increases for public employees.
Mr. Bellister went on to explain that according to the annual Education Week quality assessment survey of schools in the United States, Nevada’s school climate received an “F.” A contributing factor for that grade was classroom size; Nevada was the largest in the country. The classroom size reduction program passed over ten years ago and had not been a fully funded program. Legislation was passed to fund it at a ratio of 1 to 15 and it had to be changed to a ratio of 1 to 16. He stated the program had to postpone the third grade implementation until 1997 because of budget shortfalls. There had never been sufficient funding to implement one of the most important education reform issues in Nevada: class size reduction.
In continuing, Mr. Bellister pointed out that in 1997, a study was commissioned that addressed the condition of school facilities. The study concluded Nevada would require $436 million dollars in existing facility needs to correct conditions. This could be referred to as deferred maintenance of public school buildings. Another $620 million would be needed for capital replacement and repair through the year 2008. The Nevada Commission on Education Technology included in their budget a request for $108 million dollars for the biennium.
Mr. Bellister turned to the issue of schools being provided with “a basic level of connectivity,” in other words having the ability to provide access to students to the Internet. The governor was not able to provide a single dollar for that request. Instead, a one shot appropriation of $20 million dollars was appropriated for a combination of things; technology, which was one according to Mr. Bellister, special education, is a hugely under-funded, mandated program in Nevada. In 1988, the state covered 56 percent of the costs of special education and was currently at 29.4 percent. It appeared Nevada had backed away from a mandated program that was having an impact on other programs and because of the mandate, local school districts had to make up the funding from somewhere. The per-pupil expenditures were about $950 less than the national average, and the programs previously discussed could achieve the national average; however, it would take money.
Mr. Bellister stated the Governor was not able to put sufficient funding into the Distributive School Account for ongoing operating items and inflation. For example, an audit of textbooks in the state revealed a shortage. About 5 percent of the classes in the sample had a textbook shortage and yet school districts were spending the amount of money allocated for textbooks. Last, but not least, salaries of public school employees could not compete with private sector salary increases. Education Week, last year, concluded there was a gap between public school employees’ salaries and private sector salaries of approximately $13,000 for a college graduate with a bachelor’s degree. Mr. Bellister commented an advanced degree did not appear to command a higher salary. If a teacher had a master’s degree the gap was $22,000. Average salaries were $2,600 below the national average and that was without consideration for all the money teachers spend of their own to buy materials and supplies for their classroom.
Mr. Bellister told the committee a Legislative Counsel Bureau (LCB) audit concluded the average teacher spent $500 per year of their own money to buy supplies and materials for their classrooms. Nevada ranked 19 out of 20 in base salary in its largest school district, (Clark County) when compared with 20 other urban school districts of similar size in the country. Entry-level teachers in the Clark County School District receive $26,800 per year. The average salary for that same group of 20 large urban areas was in excess of $30,000, which was $4,000 more than starting teacher salary in the Clark County School District. Additionally, there was no funding to provide incentives and mandates similar to those in other states offered to attract teachers. California passed an initiative to raise starting salaries to $32,000 a year. That resulted in a teacher shortage in Nevada in the academic areas of math, science, and specialty areas such as special education.
Mr. Bellister stated another issue of concern was that Clark County School District had over 100 long-term substitutes in the classroom because they could not attract teachers to the school district. The implications, in an era of high stakes testing were that students were in classrooms with unqualified teachers. Mr. Bellister stated the school districts had difficulty retaining teachers and had a huge turnover rate. The Clark County School District was an example. Of 1,600 teachers employed for the 1997-1998 school year, 28 percent had left. The attrition rate was approximately 7 percent per year and was greater than the national average. The budget document projected an inflation rate of 2.5 percent the first year of the biennium, and 2.8 percent for the second year. Yet K-12 public school employees have zero and zero appropriated for salary increases. Mr. Bellister acknowledged the governor had set aside a five percent bonus, but that would not fix the problem.
Mr. Bellister explained teachers had a right to collectively bargain and they had been able to bargain for salary increases greater than those appropriated by the legislature. According to the state department’s annual salary survey, of the three employee groups analyzed, city and county employees were able to bargain salary increases of 23.4 percent over the past five years. State employees received 16 percent and school district employees received 14.8 percent. The total amount of spending for K-12 education was 17.7 percent of total spending and decreased to 16.2 percent. Mr. Bellister added the lack of public funding was the greatest obstacle to sustain education reform and maintain quality schools in the state.
Mr. Bellister suggested the “throw money at it” solution had yet to be tried. Price-Waterhouse’s study ten years ago revealed if the state ever decided it needed money, a general business tax would be an appropriate revenue source. If adopted, a general tax would be imposed on all businesses regardless of their legal form. Price-Waterhouse had also suggested with a proposal the state should consider the size of the business. That had been included in the $50,000 exemption.
Mr. Bellister then introduced Kenneth B. Lange, Executive Director, SNEA, who read from prepared text (Exhibit F). He stated projections point to another 15,000 students a year for the foreseeable future, new standards and accountability had been raised and the market for new teachers had become highly competitive. Mr. Lange commented the initiative was the only solution put forth and would impose a 4 percent tax on business net profits. There were five reasons why the tax on business net profits was selected and included:
Mr. Lange explained there were four key criteria that needed to be met. They were that the tax should be fairly applied, should be easy to administer with a minimum of paperwork and bureaucracy, the tax should place Nevada at a disadvantage with similarly situated businesses in the United States, and the provisions should include a protection for marginal or startup small businesses.
Mr. Lange then introduced the drafters of the initiative, James Penrose Esq., of the law firm Dyer, Lawrence, Cooney & Penrose and John Bartlett, Esq., Legal Counsel for the Nevada State Education Association.
Mr. Penrose offered he was a local attorney and gave his previous employment history. He introduced John Bartlett, Esq., who was an attorney in private practice in Carson City. Mr. Penrose indicated any questions that related to tax issues could be directed to Mr. Bartlett. He explained the initiative concept was not novel because 47 states had some form of business income tax. Nevada itself had a business tax imposed on a per-capita basis based on the number of employees a business employs. Provisions of the initiative petition had been borrowed either from the existing provisions of Nevada Revised Statutes, Chapter 364A, (NRS 364A), which was the existing business tax, or similar provisions in other states. Mr. Penrose stated virtually nothing had been invented in the course of drafting the initiative.
Mr. Penrose stated he wanted to discuss the contentions made about the initiative and how it would operate. He would explain the proponents’ view with regard to its merits, or lack of merit of those assertions. One of the primary allegations made was that it was nothing more than a back-door personal income tax. When the Nevada Constitution provisions were reviewed concerning that issue, the language provided that no income tax shall be levied upon the wages or personal income of natural persons. Mr. Penrose emphasized “wages or personal income” was a key phrase. Mr. Penrose continued to read from the constitution, specifically that taxes may be levied upon the income or revenue of any business in whatever form it may be conducted for profit in Nevada.
Continuing, Mr. Penrose said the issue was pending before the Supreme Court and was uncertain the Court would find it necessary to resolve the issue. The language provided the state could not impose an income tax against the wages or personal income of human beings. If a person was doing business as a sole proprietor, a partner in a partnership, or as a shareholder in an S corporation, and that person was receiving income from the operation of business, that income was subject to taxation. Mr. Penrose explained a contrary reading of that provision would, in effect, mean only the C corporations would be subject to the tax under that reading of the constitution. There was nothing in the constitution or in Nevada statutes that defined personal income. Mr. Penrose stated the interpretation shared by the proponents was that “income” meant bonuses, commissions, tips, inheritances, alimony and gifts received from other people. The meaning could be significantly more limited than some of the opponents had suggested.
Mr. Goldwater reminded that he intended to keep the debate on track and that the committee would not determine constitutionality, particularly since it was an initiative petition. For the purposes of the hearings, it would be assumed it was constitutional unless the committee was informed differently.
Mr. Penrose responded that he understood the Chairman’s statements, but wanted to make two points. To the extent there were items of income that were arguably characterized as personal income, the initiative dealt with that subject in four different ways.
Mr. Penrose explained that Mr. Brower and other attorneys on the committee might be aware there were other similar provisions that dealt with the assertion of personal jurisdiction by the courts of Nevada. The statute basically states the courts of Nevada could assert jurisdiction to the outer limits permitted by the constitution. The initiative provision did that as well. With regard to the issue raised about the taxation of trusts and estates, the initiative defined a business, in part, to include certain trusts and estates and did only to the extent that such trust or estate was “engaged in any activity for profit.” Mr. Penrose stated that could occur in at least two ways. For example, through the creation of a testamentary trust. If an owner of a business provided for the creation of a testamentary trust in his will and subsequently died, the trust would continue to operate the business indefinitely or until its affairs could be wound up. Another example would be an estate. If an owner of a business died without a will, and no provision for the disposition of the business was made, the administrator of the estate would operate the business for a period of time. The reference to trust and estates in the initiative was intended to accomplish and ensure that while such a business was operating and earning income, it should pay tax on the same basis as any other business.
Mr. Penrose turned to the issues that had been raised with regard to apportionment. He stated that was a tremendously complicated area of constitutional law and there was a fairly well developed body of law that dealt with the question of how a state taxed income earned by a business that operated in Nevada, and in other states as well. The constitution required that the state, in order to tax income earned by such a company, had to attempt to apportion the percentage, or portion of the business’s income attributable to its operations in that state. Most states applied a three-factor formula to make that apportionment. The three-factor formula looked to the property a business owned in this state and in other states, its payroll and its sales, both in Nevada and outside the state. Mr. Penrose stated that was not new and was something a vast majority of states with some kind of business income tax were currently using in some form or another. To the extent issues may arise about whether an application of that formula made sense in a particular case, Section 30 of the initiative permits the Department of Taxation to modify the application of those factors or apply any other reasonable method to fairly apportion business income to its activities in Nevada.
Finally, Mr. Penrose explained the 50 percent provision in Section 53, a concern dealt with in drafting, was that the revenue raised by the new tax would be used for purposes other than what were provided for in the initiative. Section 53 addressed the concern two ways. First, subsection 3 provided that the money raised from the tax was to be used only for purposes specified in Section 14 of the initiative. Existing sources of funding for education were not to be used to supplant those revenues. Mr. Penrose stated the initiative went beyond that and devised a 50 percent provision formula. It was intended to ensure that the legislature and the governor maintained funding for K-12 public education at historic existing levels. The 50 percent figure was calculated by the amount that had been appropriated for the K-12 education for the 1999-2000 fiscal year. Added to that was the revenue to be generated from the new tax that was projected at $250 million. Mr. Penrose continued, if that amount of money was spent, it would represent a benchmark to ensure that funds expended would not decline. The Economic Forum and its projections were reviewed, and a requirement had been added that required the Economic Forum, when making projections to also project revenue that would be raised from a new tax. The benchmark was chosen based on existing expenditures and requires the state to spend 50 percent of projected revenues on K-12 education.
Mr. Marvel inquired what impact the initiative would have on companies that incorporate in Nevada. Mr. Penrose responded he was not aware of all the factors a company might review when considering incorporation in Nevada. His impression was that the rate of tax paid in a state when looking to locate in Nevada was only one in a number of factors considered. A company also considers the quality of life and educational system in the state. As a practical matter, given the fact that 47 other states currently impose some form of business income tax, it would not seem this particular factor would be singled out as determinative to whether a company chose to locate in Nevada.
Mr. Marvel asked if the initiative could “reach out” and tax the corporation in any state where it did business. Mr. Penrose responded it was permissible to tax a corporation on the basis of its operations in every state and had been for at least 100 years under law developed in that area. The railroad was a good example. The courts early on decided that a state like Nevada need not look only to the income generated from the 100 miles of track laid in the state of Nevada, but to the total operations of the railroad. Apportionments were made on all proceeds earned by the railroad, not just the line miles in Nevada.
Mr. Bartlett stated if a company wanted to incorporate but not operate in Nevada, it would not be subject to the tax unless it actually had operations that earned income in Nevada.
Mr. Brower referred to Section 53 language that is the term “projected” was used with respect to revenue. He asked why the term ”actual” was not used in the event of a shortfall. Mr. Penrose responded that the shortfall was addressed using the percentage approach, because if a there was a shortfall in revenues, it would still be a percentage of whatever the revenue was. He said the reason they used projected revenues instead of existing revenues was:
· The initiative required that appropriations were made prospectively; and,
· The way the legislature composed the budget under existing law on the basis of projections made by the Economic Forum.
Mr. Bartlett explained in order for Nevada to tax the income of business, the income must be earned in Nevada. There were many corporations in Nevada that were not physically located in Nevada, but operated in other states. In that event, they would not be subject to an income tax in Nevada because they had earned no income in Nevada. If a corporation operated in Nevada and in other states, the business would apportion its income among those states where they were doing business and would pay tax on the amount of income earned in Nevada. Mr. Bartlett explained the concept of apportionment was a constitutional requirement.
Mr. Price inquired where it was stated in the initiative that a Nevada corporation not physically located in Nevada, but earning its income outside of Nevada would not be taxed. Mr. Bartlett replied that the income had to be earned in Nevada before it could be taxed. Therefore, if they earn no income within the state, they would not be subject to the tax.
Mr. Goldwater stated that the concept of apportionment was not foreign to corporations.
Mr. Marvel asked if money spent for capital improvements were deductions or depreciation against the $50,000. Mr. Penrose was unable to answer the question.
Mr. Marvel queried if the Department of Taxation would have access to federal tax returns and, if so, what would happen to the confidentiality provision. Mr. Bartlett responded federal tax returns would be used. The department would have access to federal income tax returns of the business and it would be necessary as a check on what had been reported. The state income tax was dependent on what was reported for federal income tax purposes. There was a confidentiality provision built in where the state or federal government could not divulge that information to the public. Confidentiality of business records would be preserved.
Mr. Marvel inquired if everyone who filed federal income tax would be required provide a copy to the department. As an example, Mr. Marvel cited individuals that received dividends and interest income. Mr. Bartlett replied the income would not be subject to the tax.
Mr. Bartlett stated the initiative attempted to be as broad as possible under the authority of the constitution. The definition for personal income and business income had not been defined. That was something the Department of Taxation would deal with to draw that line based on existing precedence.
In regard to Internet sales, Mr. Bartlett explained that might be a nexus issue and would be dealt with in the sales and use tax. There were certain parameters that had to be met in order to tax those businesses. An Internet business that did not have a physical location in Nevada could not be taxed on sales of their tangible property, nor could they be taxed on income unless they engaged in sufficient activities in the state that would subject them to the state’s nexus. Congress enacted a statute that attempted to draw the parameters for states that could impose its income tax on an out-of-state business as a result of activities that occurred in the taxing state. That federal statute was broader than the nexus required for Nevada to claim jurisdiction to tax out of state under sales and use tax. It still required the out-of-state business to conduct specific activities beyond merely soliciting sales in the taxing state. There was a well-developed body of law that dealt with income tax nexus that would benefit Nevada.
Mr. Goldwater asked what trusts would be taxed under the initiative and would municipal income from other states be subject to the tax. Additionally, he asked whether a passive arrangement for the purposes of estate planning and limited partnerships would be anticipated and who would have audit jurisdiction. He anticipated the Department of Taxation would have full audit jurisdiction and, if that was the case, the state would need to train a fleet of auditors about Internal Revenue Tax Code.
Mr. Bartlett responded if a trust was actually operating a business, the income from that business would be subject to Nevada tax.
Mr. Goldwater stated any trust that holds a business under the definition is subject to the tax, to which Mr. Bartlett clarified that all businesses in Nevada were subject to the tax.
Mr. Goldwater then asked whether limited partnerships would be taxed, including those used for estate planning and gifting. Mr. Bartlett responded they would have to be considered as operating a business in Nevada in order for any of their income to be subject to the tax.
With regard to municipal income, Mr. Bartlett stated if the income was earned in another state, the income might be exempt. If it was subject to Nevada tax it would again depend on whether it was a business income, or income from the operation of the business. There was not an obligation to exempt municipal bond income earned in another state if that business was not operating in any other state other than Nevada.
With regard to audit jurisdiction, Mr. Bartlett responded the Department of Taxation would be the body that administers the tax and would have jurisdiction.
Mr. Goldwater inquired if there was a provision that would appropriate funds for training expenses. Mr. Penrose stated in Sections 56 and 57 of the initiative, there were appropriations totaling $2.2 million dollars made in each section for that purpose. It depended on how the initiative was adopted as to which section would become effective. The appropriation was made to fund startup costs for the department. In Section 14, once the new tax went on line, there was a provision that provided the Department of Taxation could retain one-half of one percent of the money it collected to fund costs for administration.
Mr. Marvel asked if municipal bonds would be exempt. Mr. Bartlett stated there could be scenarios where income from municipal bonds could be included as taxable income for a business. Mr. Goldwater offered the example of a limited partnership in which a business was placed, as well as a portfolio of bonds from the state of California that were currently exempt from federal taxes and Nevada taxes. Mr. Goldwater asked if that income would be taxable. Mr. Bartlett answered it would depend on whether or not the income earned from that portfolio of California municipal bonds was considered business income.
Mr. Goldwater inquired if the initiative clarified “actual operating” versus “non-operating” and not the entity from which it was derived.
Mr. Bartlett stated he believed the ultimate intent of the initiative was to tax the income of operating businesses. It would come down to identifying what was income earned versus income that was not earned from the operation of the business through investments. Mr. Bartlett indicated the initiative addressed that issue because the starting point for drafting the petition was the constitutional provision. The constitutional provision did not clarify where to draw the line for wages and personal income that were not subject to an income tax. Income earned from business, in whatever form conducted, was potentially subject to an income tax. However, the constitution does not specifically indicate where to draw the line.
Mr. Marvel queried if income from family trusts was exempt. Mr. Bartlett explained a family trust, in many cases, was an estate planning vehicle and for purposes of taxation the trust was not recognized. It only becomes effective upon the death of the trustor. The business itself was still subject to all the same taxes as any other business. Mr. Bartlett stated the defining factor was what was and what was not a business that produced income.
Mr. Marvel asked, based on the fact that all assets were placed into the trust, how was it determined what was income and what was investment income. Mr. Goldwater added that was his question earlier.
Mr. Bartlett explained for purposes of filing federal income tax returns, the distinction was made by the different schedules for reported income. Under the federal income tax code, if an individual had interest and dividend income, that was not considered business income from the family trust and was personal income.
Mr. Goldwater commented that a distribution from that trust was federally taxable income to the individual and that appeared to be a gray area. He pointed out that even though it may be taxable under IRS rules, the IRS code should be followed as much as possible. However there would come a time, assuming the initiative passed, when Nevada would have to make its own determination. He stated not everything the IRS declared would be binding. Nevada would need to develop an interpretation of the initiative intent and in doing so would cause a difference of opinion between Washington and Nevada on a number of issues. For example, the discounts taken when assets were moved around would be subjective.
Mr. Bartlett responded the starting point for the analysis was the constitution. Any interpretation of the petition, should it become law, would need to draw those distinctions. Flexibility had been built in to the initiative and the authority of the administrative agency and the Legislature Counsel Bureau to draw those distinctions, as they needed to be drawn.
Mr. Neighbors noted the mining industry was allowed certain business costs. Mr. Bartlett believed Mr. Neighbors’ question was whether the state income tax would be deductible from a gross yield in determining net proceeds. Mining companies are allowed to deduct before they have to pay net proceeds tax. If it was deductible, they would pay less proceeds both to the state, the county and the school districts and the unincorporated town. Mr. Bartlett stated he was aware of a number of deductions available for taxes already under the net proceeds statutes and regulations. It would be determined by the Nevada Legislature and Tax Commission whether they would specifically allow that deduction.
Mr. Marvel asked if the initiative intended to assess the 4 percent prior to arriving at the net proceeds. Mr. Bartlett stated he believed net proceeds were excluded from the Nevada taxable income under the provision. A mining company would not be taxed on mining activity.
Mr. Penrose pointed out that Section 27, subsection 2 of the initiative provided for deductions on Nevada taxable income and one of the deductions was for income derived from the net proceeds of minerals on which a tax has been paid.
Mr. Bartlett explained the reason they excluded that income was that the net proceeds of mines were already subject to a tax in Nevada. The gross yield from a mine was subject to the net proceeds of mines tax and that was a tax on the income earned from the proceeds of mines. Under the constitution, Mr. Bartlett believed there was language that suggested Nevada could only subject the proceeds of mines to a net proceeds of mines tax. Gross gaming revenues were subject to a gross receipts tax and they were excluded because they were already taxed.
Mr. Goldwater pointed out those were subjective interpretations that could occupy a significant amount of time for the legislature, courts and the commission.
Mr. Bartlett corrected his earlier testimony and stated that gaming revenue was not excluded.
Mr. Goldwater asked if Mr. Bartlett could foresee a tendency to solve the problems posed in the future to be addressed through the legislature by statute, or be addressed through regulation by the commission, and possibly involve civil and tax courts. Mr. Penrose believed there were areas in the initiative that would need clarification. However, the initiative contemplated all three methods to be used. Certainly, the legislature, the tax commission and the initiative petition contained a number of provisions that dealt with the ability of an individual taxpayer to challenge the operation of the initiative.
Barbara Clark, Lobbyist, representing the Nevada Parent Teacher Association (PTA) read from prepared text (Exhibit G). Ms. Clark acknowledged the shortfall in K-12 funding and the needs the public education system had. She commented because of Nevada’s narrowly based system of taxation, the revenue needed to provide the quality and type of education needed would not be available. Nevada PTA recognized that excellence in education would cost money and supported the creation of additional revenue sources the initiative would provide.
Lonnie Shields, Advocate for the Washoe County Education Administrator Association (WCEAA) read from prepared text marked (Exhibit H). Mr. Shields commented he had attended a budget workshop for Board of Trustees members in Washoe County and it was learned there would be no money in the next biennium for a pay raise for employees. Attracting the best and the brightest with that “scenario” would be difficult. The WCEAA believed that Nevada could afford the status quo for another 2 years and urged support for the initiative.
Allin Chandler, Executive Director, Clark County Association of School Administrators (CCASA), read from prepared text (Exhibit I). CCASA represented 854 administrators of the Clark County School District (CCSD) and more than 97 percent of the administrators of CCSD belong to CCASA. Mr. Chandler stated that officers and directors of CCASA voted unanimously to endorse the initiative. The CCASA believed the additional funds generated annually would ensure quality could be realized.
Danny Thompson, Secretary/Treasurer, Nevada State AFL-CIO, stated each May the Nevada State AFL-CIO and its 120 different unions held a convention to consider political items. The tax base of the state raised concerns that Nevada taxes were not diversified. He drew attention to a resolution that was drafted by a committee that addressed the problem. Mr. Thompson read the resolution (Exhibit J).
Ms. Tiffany asked Mr. Lange what he considered an adequate salary for a teacher.
Mr. Lange stated what was left in place within the proposal was the ability of local school boards to negotiate a fair wage with their local unions. Ms. Tiffany calculated if salaries for every teacher were increased, and that the number of teachers, support personnel, or administrators multiplied number, it would not seem to leave much money for programs. She asked what the raise increase would be. Ms. Tiffany referred to the proponents’ position on improved student achievement and said she tried to envision where the money would go for such items as library books, programs for at-risk schools, and other programs for student achievement. How much would be left for those programs?
According to Mr. Lange, a two percent salary increase over each year of the biennium for all school employees would cost about $84 million dollars. If that figure was divided by two, the portion of the $250 million that would be absorbed for salary increases would be at two percent. There was an attempt to strike a balance between the things the members needed to do the job and the salary issue.
Ms. Tiffany said it appeared that to add a two or four percent salary increase across the board would probably take up all of the $250 million generated and would not leave much revenue for the programs.
Mr. Bellister stated the initiative should not be perceived as the sole source for funding education. The state had to maintain its obligation through its general fund revenue and whatever other revenue support they could offer in addition to the initiative.
Ms. Tiffany stated she saw the state guarantee had remained the same and the amount generated from the petition was not to be added to the general fund. An increase of two percent proved to be inadequate. She wanted assurances the programs for student achievement would receive their fair share.
Mr. Brown asked about the calculation of $250 million anticipated to be generated annually from the initiative. There should be a weighing of interests, and he referred to the many communications received from constituents that stated a concern if a new tax was imposed. He asked whether there was any factor used to consider the possibility of business closures or failures.
Mr. Lange opined the model drew on existing businesses used by the IRS for fiscal analysis purposes. He did not know whether the initiative took into account business closings, but it did take into account tax avoidance strategies by those businesses. The initiative assumed that some businesses would change from a sole proprietorship to a corporation and would take certain deductions.
Mr. Marvel inquired how they derived $50,000 as the base. Mr. Lange responded they started by looking at per capita income as a meaningful benchmark and did an incidence rate that revealed the kind of revenue coming in. The drafters of the initiative felt the 50 percent was a meaningful benchmark in terms of determining where an entity in fact became a business. It isolated enough small businesses so that protection would be afforded to the “mom and pop” businesses, the startup businesses and the “Mary Kay” folks. The top ten percent of the largest companies would pay ninety percent of the tax.
Continuing, Mr. Lange offered there were two entities that conducted studies on teachers’ salaries: the American Federation of Teachers (AFT) and the National Education Association (NEA). In the AFT study, benefits were included in the calculation. The salary amount allowed a person to pay rent and keep the lights on, but benefits cannot be spent and should not be included in the calculation.
Mr. Bellister interjected Nevada ranked 22 in the country according to NEA and that was about $2,600 below the national average. The NEA ranking was preferred because it was strictly a dollar-for-dollar salary comparison and did include benefits.
Mr. Goldwater adjourned the meeting at 3:50 p.m.
N. Jolene Jones Miley
Transcribing Secretary
APPROVED BY:
Assemblyman David Goldwater, Chairman
DATE: