MINUTES OF THE
SENATE Committee on Taxation
Seventy-First Session
March 8, 2001
The Senate Committee on Taxationwas called to order by Chairman Mike McGinness, at 2:17 p.m., on Thursday, March 8, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Randolph J. Townsend
Senator Ann O’Connell
Senator Joseph M. Neal, Jr.
Senator Bob Coffin
Senator Michael Schneider
STAFF MEMBERS PRESENT:
Kevin D. Welsh, Deputy Fiscal Analyst
Rochelle Trotts, Committee Secretary
OTHERS PRESENT:
Krys T. Bart, A.A.E., Executive Director, Airport Authority of Washoe County
David L. Howard, Lobbyist, Nevada State Chamber Association
Lynn Thompson, Executive Vice President and Chief Operating Officer, Reno-Sparks Convention and Visitors Authority
Greg W. Ferraro, Lobbyist, Nevada Resort Association
C. O. Watson, Lobbyist, Executive Director, Nevada Association of Tobacco and Candy Wholesalers
Stephen Moran, Lobbyist, Board Member, Retail Association of Nevada
Marvin Leavitt, Lobbyist, City of Las Vegas
Chairman McGinness:
I open the hearing on Senate Bill (S.B.) 39.
SENATE BILL 39: Expands purposes for which proceeds of certain taxes on fuel for jet or turbine-powered aircraft may be used by governmental entity. (BDR 32-789)
Senator Townsend:
With the committee today are members of the Airport Authority of Washoe County as well as the executive director. The northern Nevada area is experiencing challenges requiring significant flexibility. In section 1, subsection 2, S.B. 39, “The money so received,” through jet fuel tax, “must be used by the governmental entity receiving it to pay for the cost of:” we are adding a new paragraph (c), on line 15, “Promoting the use of an airport, including, without limitation, increasing the number and availability of flights at the airport,” is the language which gives flexibility to the board to find solutions to the needed additional flights and use of the airport.
Krys T. Bart, A.A.E., Executive Director, Airport Authority of Washoe County:
I would like to introduce the chairman of the board of trustees of the Airport Authority of Washoe County, Thomas J. Gribbin, trustees S. Phillip Miller, Richard A. Hill, Michael J. Houghton, Laurence “Larry” Martin, and John M. Moore. This bill would expand the issues of the revenues generated by jet turbine aviation fuel tax. In the mid-1990s we had Reno Air as our hometown carrier, which provided a tremendous amount of air service to the community as well as revenue to the airport. American Airlines purchased Reno Air in the late 1990s and, subsequent to the purchase, has been slowly taking down the flights. What we have today is less than half of the flights we had when Reno Air was here. For the past 3 years, the passenger traffic has declined year after year. Along with it, our revenues have declined. At the same time, we have the challenge of generating additional air service to continue to grow the community and support the demands of the community, both from a business and gaming/tourism perspective. In order to do that, we need to have funds. At the same time, in order to keep the cost level with the carriers we now have, the airport authority has consistently cut the budget and remained very frugal in its approach. At the same time keeping the cost to the carriers exactly the same so as not to force any other carriers to eliminate additional service. We are here identifying and supporting S.B. 39 as a way of generating more funds with those we now already receive, more importantly, to expand the use of those funds for air service development. We are prohibited by federal law from discriminating against any carrier. These funds could be used for new carriers coming into the market or new markets being served by existing carriers. These funds would not be used for direct subsidies to carriers because that, too, is prohibited by federal law. Any use of the money would be in accordance with federal law. We would therefore propose this money be used to market ways to generate community support in additional funding for perhaps, revenue guarantees, airport and community marketing, which would drive the demand for additional air service as well as potential reduction in fees in initial start up of service for new services. We met with the corporate representatives of all the airlines serving Reno and are in support of this bill, recognizing the creation of demand is the most important thing in the community to generate new air service. We also have met with the representatives of the Las Vegas McCarran International Airport as well, and they too support this bill. Please support S.B. 39 on behalf of the Airport Authority of Washoe County.
Senator Neal:
In the Las Vegas area, the convention authority takes care of all of this. What is it about your convention authority which makes them not able to embark upon these types of projects in terms of bringing new airlines or promoting the airport?
Ms. Bart:
I believe the airport envisions the potential revenue generated through this means as being leverage in working with our convention authority, as well as with the properties in our community. Pooling the revenues to create a much larger pool. This would be one of the elements of such a pool. Our convention authority does work in similar ways to the Las Vegas Convention and Visitors Authority; however, our convention authority does not have the degree of financial resources the one in Las Vegas does. We are very limited in financial resources.
Senator Neal:
We are talking about fuel taxes and the bill addresses itself to certain taxes on fuel. How much money are we talking about?
Ms. Bart:
Currently, the legislation allows for an airport to receive 1 cent per gallon. The airport has the ability to gain 4 cents more, which would be 5 cents, based on county approval. We are not asking for an increase in taxes. The Airport Authority of Washoe County now receives 1 cent per gallon. At the level of usage we currently have, it is about a half-million dollars a year.
Senator Neal:
How much of the money you would be receiving would be available for the expanded purposes you have listed?
Ms. Bart:
It is about a half-million dollars a year. Currently, the use of that money, by existing legislation, is limited to transportation or transportation-access projects for airports, which would be land-side transportation. In the case of Las Vegas, the people mover would be a perfect example. It is also limited to use to pay debt service on those projects. Since we do not have either one of those projects, the money is sitting in our fund, right now. If this bill passes, we would be able to use all the money we collect if the board so chooses.
Senator Neal:
Do you presently have any transportation projects outstanding? Do you have any bond payments outstanding?
Ms. Bart:
No, we do not, we have no projects outstanding, not for transportation; and we have no bond payments fitting under this legislation, as it exists.
Senator Neal:
The payment of principal and interest on notes, bonds, and other obligations incurred, to fund a project is the existing law. You have no obligations and everything has been paid off?
Ms. Bart:
Yes.
Senator Neal:
The total amount of money this 1 cent or 5 cents would generate is a half-million dollars?
Ms. Bart:
At 1 cent, it would generate a half-million dollars a year.
Senator Neal:
At 5 cents, it would be $2.5 million.
Ms. Bart:
Yes, you are correct. It would be a quarter of a billion. This bill does not propose to raise taxes.
Senator Neal:
Are you presently utilizing the 1 percent fuel tax?
Ms. Bart:
We are presently saving the 1 percent fuel tax in one of our airport funds.
Senator Neal:
Are you utilizing the total 5 percent cost on the field?
Ms. Bart:
No, only 1 percent, the airport is collecting 1 percent of the 5 percent obligation they can collect.
Senator Neal:
How much money do you have in the fund now?
Ms. Bart:
Currently, we have $1.5 million in the fund.
Senator Neal:
When talking about promoting the use of an airport, what does it mean?
Ms. Bart:
Based on what our limitations are by federal law, any revenue coming into the airport, which includes this, would be limited by federal law. Federal law says we can use this money to promote, advertise, and market the airport, and do joint marketing with our convention authority. We can use it to offset costs of landing fees and operating cost for a short initial period of time for a start-up carrier or new service. That time, based on what the FAA (Federal Aviation Administration) has approved, is 90 days. We can also use it when an airport goes to an airline to convince the airline to bring service to the community. The airport presents a business case for the airline, identifying the best route opportunities and the revenue-generating potential or the profit potential to the carrier. We can use fuel tax money to perform that analysis. These are generally the types of things the airport can do by federal law to promote the airport. It is clear, from my perspective, this money could be used to leverage more resources from the community. This brings in to play an opportunity for more people in the community to participate in creating the demand for air service in the Reno community or any community in the state of Nevada.
Chairman McGinness:
The FAA says you can reduce landing fees for 90 days, which is not considered discriminating against other carriers.
Ms. Bart:
As long as you do it for either a new entrant carrier or a new market from an existing carrier, you can use that as an air-service inducement. The FAA, this past year, changed the regulations and broadened them.
Chairman McGinness:
If you access the fund of $1.5 million, would the allocation of that money be done at a public meeting?
Ms. Bart:
It would. If this is approved, we would go to the board with a recommendation for a general policy on how it will be approved and any use of that fund would come back to our board through public process.
Chairman McGinness:
This also refers to transportation projects. Do you help fund a repaving project? Could this money be used for taxiways as well?
Ms. Bart:
My understanding the original purpose of this money, and as it currently exists, was to benefit the Las Vegas airport when they were putting in the people-mover system and looking for a sustained funding source to retire the debt. It is generally for transportation projects, moving people within or between terminals at an airport. Funding for taxiways comes from a federal source.
Senator Neal:
What other funding is available to your board?
Ms. Bart:
The Airport Authority of Washoe County, as well as the Las Vegas airport, takes absolutely no money to operate from local taxes or the community. We generate our operating revenue at the airport by the landing fees from airlines, parking cars, and concession fees. These operations bring revenue to the airport and it is the revenue we use for our day-to-day operations. In addition, we receive federal funding through airport improvement program grants and passenger facility charges for certain specific and approved projects. In the case of airport improvement, the program has to be approved by the FAA. In the case of passenger facility, the charges are approved by both the airlines and the FAA. Those projects very specifically can relate to safety, security, noise, and capacity enhancement. Large projects like runway, taxiway and gate construction, common areas in terminals, noise insulation programs, and purchase of property for noise insulation, typically receive federal funding.
Senator Neal:
What is the amount of the resources available to the airport authority?
Ms. Bart:
Our operating revenue is about $32 million a year; however, in an airport environment you must also consider the operating agreement we have with the airlines. At the end of each year, after paying all the bills, we split our profits with the airlines. Their share goes against their cost for the following years. The more profit you make, the greater you can reduce their cost. The profit does not all come back to the airport to be retained in a fund; it goes back to the airlines by virtue of an agreement we have in place with the airlines. Our goal is to be very competitive and to that extent, we try very hard to keep the cost to the airlines as low as possible. We have been very successful and need to continue to be successful by virtue of implementing the agreement and sharing the revenue.
Senator Neal:
Out of the $32 million available to the authority in terms of income, how much was passed back to the airlines?
Ms. Bart:
For this fiscal year, it was about $2.5 million.
Senator Neal:
What are your operating expenses?
Ms. Bart:
Including debt services, it is around $30 million.
Senator Neal:
Does this mean you are now in the hole a half-million dollars?
Ms. Bart:
No, we have other funds. I am proud to say we are financially stable. We have just had our bond rating reaffirmed because of the strong financial management at the airport. Our funds are restricted; so, while we have several sources of funds, the use of those funds is restricted through a number of things, whether it is the airline agreement, the bond covenant, or the federal funding for capital projects.
David L. Howard, Lobbyist, Nevada State Chamber Association:
Anything to make our airport more profitable, we support this bill because the airport is an economic engine of our community. It does not raise any taxes, S.B. 39 just reallocates the tax within.
Senator Neal:
What would happen to the money if nothing were done?
Senator Townsend:
The money stays in the fund.
Lynn Thompson, Executive Vice President and Chief Operating Officer, Reno-Sparks Convention and Visitors Authority:
I am here to support the airport board of trustees in its effort to expand the use of these funds for legitimate airport promotional purposes in order to support increased air service for our community. The RSCVA (Reno-Sparks Convention and Visitors Authority) has a responsibility to support efforts of this type. As Senator Neal pointed out, there was a recent increase in the room tax provided to us. Those funds are committed for debt service for the major expansion and renovation of our convention center, as well as a portion going to the City of Reno for a separate program. In conjunction with the efforts of the RSCVA and the expansion of this convention center, obviously air service is important and a critical element of our communities’ ability to deliver service to business travelers or tourists. Any efforts the airport authority, as well as the RSCVA and the business community, can put forward to encourage either new air service or expansion of existing air service to our community will help in this regard and certainly assist us in our sales efforts.
Greg Ferraro, Lobbyist, Nevada Resort Association:
The board supports the passage of this legislation. The airport needs as many tools and instruments they can get their hands on to remain competitive. We have seen a drop in air service in northern Nevada and threats are encroaching upon northern Nevada as it relates to tourism and gaming. It is essential the airport be given everything it possibly can, so it can compete and continue to recruit tourists and visitors who help pay the bills for this state.
Senator Neal:
How much is the Nevada Resort Association willing to put up on this?
Mr. Ferraro:
I do not know if there is a matter before us with regard to this measure. We work very closely with this airport, as we do with McCarran International Airport in Las Vegas and both convention authorities in both markets. We have a very symbiotic relationship because we are all trying to accomplish the same thing, which is to bring more people to Nevada.
Senator Neal:
This bill will become effective July 01, 2001. If we made this effective on passage and approval, the money would be available to start using then, would it not?
Ms. Bart:
That is my understanding.
Senator Neal:
You would not have any problem, because of the date?
Ms. Bart:
As soon as the money would be available, we would have a plan approved by the board in place with the public process as part of the plan, and be ready to use it. We cannot wait any longer; we must have these tools now.
Senator Coffin:
I have a concern with only one metal detector line open, which gets frustratingly long.
Ms. Bart:
FAA regulations require the airlines be responsible for passenger safety and service. It is one of the issues the airport continues to discuss with the airlines in the realm of passenger service. I will certainly pass that on to the airlines. Southwest Airlines is responsible for the checkpoint going to the Southwest Airlines concourse.
Chairman McGinness:
I close the hearing on S.B. 39 and open the hearing S.B. 72.
SENATE BILL 72: Revises definition of “basic cost of cigarettes” for purposes of regulation of sales of cigarettes by wholesale dealers. (BDR 32-684)
C. O. Watson, Lobbyist, Executive Director, Nevada Association of Tobacco and Candy Wholesalers:
I have given you submittals 1 and 2 (Exhibit C and Exhibit D) and would like to review those with you. Submittal 1 (Exhibit C) documents the basis for S.B. 72. Since the beginning of time, the cigarette manufacturers have allowed the wholesaler a 3.75 percent term-of-sale cash discount, which you will find in submittal 1. The 3.75 percent was for cash payment or electronic transfer of funds on the day of purchase. In September 2000, the manufacturers reduced the term-of-sale discounts to 2 percent or 1.75 percent, which automatically increased the basic cost of cigarettes to the wholesaler. The basic cost of the cigarettes to the wholesalers is based on the manufacturers’ list price on the invoice. Any deduction from the list price, by way of cash discounts, tends to reduce the tax cost to the manufacturers. Attachment 1 (Exhibit C) from Philip Morris, is documentation on terms of sale and the effectiveness dated September 5, 2000, when they reduced it. They also have proposed other charges for immediate or 2-day delivery. Attachment 2 (Exhibit C), which is addressed to the Legislative Counsel Bureau, dated January 9, 2001, is a calculation showing the effect to the cost of cigarettes brought about by reducing the terms of sale. As of January 2, it increased the cost to the manufacturers on class A cigarettes, 43 cents a carton, 38 cents a carton on generic brands, and 28 cents on private label brands, by virtue of the increase and terms of sale. Senate Bill 72 reduces the deduction from the manufacturers invoice price from 25 to 5 percent. By the way of documentation, submittal 2 (Exhibit D) dated March 5, is the basic cost of cigarettes, as established by the Nevada Revised Statutes (NRS) 370.005, approved via United States District Judge Howard D. McKibben on October 29, 1999, by an action filed against an organization who was in violation of the basic cost of cigarettes provision. The ruling by Judge McKibben stated as per the provisions in NRS 370.005, the violator was to cease and desist. Not only did it affect the basic cost of cigarettes but also the judge ruled Senate Bill (S.B.) 244 of the Seventieth Session, passed by this legislature to contraband cigarettes, was applicable and effective on January 1, 2000.
SENATE BILL 244 OF THE SEVENTIETH SESSION: Makes various changes relating to sale of cigarettes. (BDR 32-1190)
Mr. Watson:
Our basis for S.B. 72 are justified by actions of the manufacturer in as much as the actions taken by them increases the cost to the manufacturer even though it does not change the manufacturers’ list price.
Senator Neal:
What are repatriated cigarettes?
Mr. Watson:
Those are gray market cigarettes, which were supposed to be exported, but are brought back in and sold in the United States. This was completely another issue and has nothing to do with basic cost of cigarettes.
Senator Neal:
Reacquaint me about the difference between exported cigarettes and the cigarettes sold in this country.
Mr. Watson:
Gray market cigarettes are cigarettes manufactured and packaged specifically for export which have been brought back into the states and sold illegally. No taxes have been paid on these cigarettes. They first showed up in Florida and California, Their sale cost Florida $40 million in lost taxes. They did not show up in Nevada until 1999.
Senator Neal:
There is no difference in the nicotine level?
Mr. Watson:
I cannot answer that, I was told they were gray market cigarettes and so marked.
Stephen Moran, Lobbyist, Board Member, Retail Association of Nevada:
From a retailer vantage point, this bill seems to be an attempt by the wholesalers to legislate an increase in margin for reasons not pertaining to public policy. The minimum-pricing bill seems to pertain to public policy as one controlling predatory pricing and the other on consumption. We see no clear evidence predatory pricing is taking place. Although S.B. 72 sets a legal minimum price for cigarettes sold at wholesale, the market sets the price at which wholesalers are willing to sell those cigarettes. The market says wholesalers are not required to sell their cigarettes for a 2.5 percent discount. Not many retailers get that high of a discount according to the retailers I have spoken to.
Some get no discount at all and some end up paying a premium. The 2.5 percent is not a set-in-stone requirement, that is up to 2.5 percent. This statute only deals with the sale of cigarettes at wholesale, not the purchase of cigarettes by a wholesaler. The wholesalers might have you believe, if there were no minimum pricing law, they would be financially devastated, even be forced to sell below their cost. Nevada laws do not prohibit them from buying from wholesalers in those states where they are doing just that. Where they have been driven to destitution and are giving away their cigarettes, Nevada wholesalers can go to those states. According to a brochure prepared for the Minnesota House of Representatives, as of September 2000, it shows 18 states have no minimum pricing laws at wholesale. You expect these low prices to exist there and certainly Nevada wholesalers would obtain them there. Three of those states border Nevada and are readily available. At the same distances licensed Nevada wholesalers who come in from California travel to deliver here. They do not do it because those prices just do not exist, the wholesalers are financially able to discount from the manufacturers’ list price because there are other revenue streams making their operations profitable. The wholesaler gets paid money when a manufacturer wants to put a vendor coupon on a carton of cigarettes. They get paid for packing promotions and get a stamping allowance from the State of Nevada.
Mr. Moran:
They have contracts with the manufacturers that pay them a certain amount per carton on how much volume they do with their particular companies, like a shelf contract at wholesale. They get back-in money from selling particular brands the manufacturers want to promote at that time. Since January 1998, the wholesale price of cigarettes has increased over $11, which has almost doubled. The wholesalers are able to pass that on to the retail and also make a profit. They not only can restock their inventory, but also make a profit on that increase in the value of the inventory. They can buy forth their cigarettes, from manufacturers who are participating manufacturers in the master settlement agreement. What that would allow them to do is, buy inexpensive cigarettes and get a high margin on them. One of the things they do get is a cash discount on purchases; depending on when they make their payments, they get 3.75 percent. In fact, those have been reduced but not eliminated. What they did was put it as a criterion in the shelf contracts at wholesale.
I was told Philip Morris reduced their 3.75 percent to 2.75 percent, but pay the extra 1 percent at wholesale, not in a cash discount situation, but by virtue of a the wholesaler signing a shelf contract. They are paying everyone across the country that 1 percent. I think it has to be investigated. Did they really get a reduction in cash discount offset by a raise in another spot of revenue? Furthermore, if it is the policy of the state to increase the price of cigarettes to reduce consumption, it is a policy matter. It could probably be better addressed by raising something concrete like excise taxes, instead of having an additional margin placed on the wholesalers. The Retail Association of Nevada would like you to keep the statute in its present language.
Senator Neal:
What do you mean by last purchase and less all allowances?
Mr. Moran:
The last purchase is the last invoice that came in. These prices change over the course of time; so, the price we are talking about is the last purchase.
Senator Neal:
It is the end of the month purchase?
Mr. Moran:
It is based on the last invoice in, which establishes a number that can easily be traced.
Senator Neal:
What is the average cost of a carton of cigarettes?
Mr. Moran:
$24.54 for a carton of Marlboro, plus the state excise tax.
Senator Neal:
If the last invoice was $24.54, then what are all allowances not to exceed? Would it be the taxes?
Mr. Moran:
No. Once you have established this dollar amount from this manufacturer’s invoice, showing how much you can discount when you sell to the retailer, you cannot discount anything over 2.5 percent of the amount.
Senator Neal:
It is the discounted figure we are talking about, what is the average discount?
Mr. Moran:
From a retailer’s standpoint, it would be 1.5 percent.
Senator Neal:
If you are talking about a discount, .5 percent, are you not getting a bargain?
Mr. Moran:
No. What happens is, if this discount goes from 2.5 percent to .5 percent, the retailer ends up paying an additional 2 percent and the wholesaler gets an additional 2 percent margin.
Senator Neal:
I am not connecting the 2.5 percent, as written in the statutes, with the $24.54 a carton. Is it something the wholesaler can bargain for with you, in terms of giving you the discount for the cigarettes?
Mr. Moran:
The wholesaler cannot give more than a 2.5 percent discount to the retailer. The 3.75 percent comes from the manufacturer to the wholesaler; the wholesaler turns around and can discount up to 2.5 percent of the manufacturer’s invoice, the same dollar amount. They are not required to do this, but it cannot exceed the 2.5 percent.
Senator Neal:
What is the complaint?
Mr. Moran:
The complaint from the retailer is margins go up and down. Without a public policy matter in front of you, like predatory pricing or a health concern of raising the price of cigarettes I do not see why we should be legislating a margin for the wholesalers.
Senator Neal:
Is there an arrangement between the retailer and the wholesaler forcing them to give the discount of a certain percentage up to 2.5 percent?
Mr. Moran:
I would think, the more accounts you have would bring your overhead down and you could make more money. The wholesalers want to sell to more retailers to make their money.
Senator Neal:
Why would this be in the statute in the first place?
Mr. Moran:
The primary concern, according to the Minnesota Unfair Cigarette Sales Act, which was done for the Minnesota House of Representatives, the reason for these minimum pricing laws, is to prevent predatory pricing.
Senator Neal:
If the 2.5 percent is reduced to .5 percent, it lessens the predatory pricing much more, right?
Mr. Moran:
It reduces it to the extent if there is any at all, we do not see it.
Chairman McGinness:
If you are a wholesaler and an establishment is buying 1000 cartons of cigarettes a week, and you decide to give him a 1 percent discount, and another establishment is buying 10,000 cartons a week, you can give a larger discount of up to 2.5 percent, correct?
Mr. Moran:
Yes.
Chairman McGinness:
It is an incentive for the wholesaler to reward their good customers.
Mr. Moran:
Yes.
Chairman McGinness:
We found out, in the natural resources committee, Nevada exported 15 pounds of cigars last year.
Senator Neal:
What does this have to do with the injunction against repatriated cigarettes?
Mr. Moran:
That is not connected to this. Gray market cigarettes’ law was addressed in the 1999 Legislative Session (S.B. 244 of the Seventieth Session) prohibiting their sale in Nevada. The United States prohibited them in the United States, except for those inventories in existing stock. As of February 7, it is prohibited to have gray market cigarettes in existing stock. You cannot possess them or there are federal and Nevada fines, if discovered. I have not seen them on the market anymore.
Senator Neal:
When you say you do not see them anymore, is there some type of stamp distinguishing them from the domestic type?
Mr. Moran:
Yes.
Mr. Watson:
The list price referred to in NRS 370.005 is a manufacturer’s invoice price. It is not from some other wholesaler in some other state. The ruling was based on NRS 370.005, which is a basic cost of cigarettes with no operating profit. There is no provision for operating in the basic cost for cigarettes. There is no profit margin, no cost of doing business. Somebody was violating the ruling, they were selling cigarettes at less than the basic price established under NRS 370.005, cigarettes which were acquired someplace else other than from the manufacturer. There are incentives a manufacturer will give to a wholesaler, provided he does certain things, but it has nothing to do with the cost.
Senator Neal:
I would like to have our legal counsel address the question as to whether or not the legislature can actually get involved in this statute, in terms of setting these particular limits. This injunction from the judge (Exhibit D) speaks about the basic cost of cigarettes under the statute Mr. Watson just mentioned.
Chairman McGinness:
We will ask legal counsel. I close the hearing on S.B. 72 and open the hearing on S.B. 266.
SENATE BILL 266: Creates chapter relating to tax increment areas. (BDR 22‑891)
Senator O’Connell:
The counties were looking for some means or another way to finance undertakings to benefit both the community and the cities. We realize this bill has some problems.
Marvin Leavitt, Lobbyist, City of Las Vegas:
The beginning of this bill is very complex and deals with the general subject of tax-increment financing. If the bill is going to make any sense at all, we need to understand how tax-increment financing works. Page 8, line 30 of the bill is why people have problems with tax law. Let us suppose we are establishing a tax-increment area and it is a defined geographical area. When we establish this tax-increment area, the assessed value of this defined geographical area is a certain amount and we call it the base. The taxes, actually levied upon the property owners in the area are distributed in a certain fashion so thestate gets some, the schools get some, normally the county would get some, and if it is included in the boundaries of a city, the city would get some. Each one having what we call an “overlapping rate.”
Mr. Leavitt:
What would happen, if we establish this tax increment area as the assessed valuation grows, let us suppose this assessed valuation just for rounding purposes is $1 million when this tax-increment area is established, all the entities would continue to get their respective shares, based on the rate existing in any one year of the respective shares of taxes from this million‑dollar assessed value. Let us suppose it grew over time to $2 million of assessed value. The taxes on the $2 million would be allocated so the first $1 million remains the same, but the additional million all goes to the tax-increment area. It does not change the rate of taxation or how much anyone pays, it changes who gets the money among governmental units and the money raised by the increment, as we call it. The amount from the base to whatever the assessed valuation is the year we are measuring it, the taxes on the difference go only to the tax-increment area in this particular case. We are familiar with this because this is a technique used in redevelopment areas. All the governments involved in the tax rate do not receive the revenue they would otherwise receive as a result of these being established. For instance, if we do not provide some limit on it, say a city established one, the city general fund would not get taxes on the $1 million I spoke about in its rate.
The state, with its 15 cents or whatever it levies, would not get its rate of the new revenue generated. The schools’ 75 cents would not come to the schools. All of the money that would otherwise go to the other local governments would now come to this tax-increment area. That is the way it works. There is a provision in the bill, if new additional taxes are levied over and above those, by a vote of the people, say for instance, the schools had a bond issue they approved after the October date of this year, then the taxes pledged to repayment of that bond issue would not be applicable and would not go to the tax-increment area, it would be distributed normally.
There are some severe problems needing some extensive work to get the bill in any form I, at least, could recommend passing. We ran into a situation years ago where a county established a redevelopment agency to fund a project where there was not previously any development. A number of us looked at it and said, “How can you have a redevelopment agency where there has not previously been development. Redeveloping assumes there has been development there previously, there has been some kind of problem, and you are trying to retrace your steps. What they essentially have done was to use this money to develop new projects.
Mr. Leavitt:
That particular situation and those particular projects exist on the hill between Carson City and Douglas County, outside the boundaries of the city of Carson City. As we look at the project now, the Target Store and The Home Depot sites that gave rise to this, essentially, this is designed for projects to benefit economic development specifically authorized by the county bond law, which covers numerous capital construction projects. Page 3, section 17, line 4 was supposed to represent the design for a monorail-type project to be in Clark County. On page 3, line 10, where it says the operation or maintenance, most of us had understood these kinds of funds were not to be used for the long-term operation and maintenance of a project. These kinds of funds would be used for capital. One of the reasons is recommended in this legislation that there be a limit to the life of one of these projects of 30 years. If you have the monies from the project or from this tax increment being used for operations or maintenance, what do you do for an encore after the 30 years are over and you no longer have the money to use for the operation and maintenance of the facility? The bill provides for the methodology and some details as to how you establish one of these tax-increment areas. The local governing board would have a responsibility of determining a funding pattern whether there is going to be other revenues involved, what is going to be the use of the tax increment.
We could have a situation where you have revenues being produced by the product being funded, the expenditures being necessary for the project, which might either operate at a profit or a loss. The bill goes through the whole process of establishing this plan, establishing a public hearing, in the end the local governing board has to make a determination on this project, on page 7, section 24, the undertaking is in the public interest. Once they have made the determination, then they make a secondary determination as to whether to proceed with it or not. It is a threshold question, ”Is this whole project in the public interest?” There are limitations on page 9. A municipality whose population is 100,000 or more, essentially, cannot have a tax increment of more than 10 percent of the assessed valuation of the community. If the population is less than 100,000, it cannot exceed 15 percent of the assessed valuation of the municipality. Section 26, subsection 3, line 33, any tax approved after October 01, 2001, by voters voting upon a question, in other words, I used the example of the school bond issue, the tax proceeds would be distributed the normal way and not go to the tax-increment area.
Senator Neal:
That is standard by the majority of the registered voters of the tax-increment area voting upon the question.
Mr. Leavitt:
In a previous session, there was a law passed similar to this, saying (exempting) bond issues relating to redevelopment passed after this certain date by the people. This would also apply to tax overrides and would not be received by the redevelopment agency, but go directly in the normal manner, notwithstanding the tax-increment situation. On page 10 is where a number of the big problems arise; this law provides several funding methods. It provides a situation where you issue bonds, essentially obligations, to be repaid by the net revenues of a project financed by this increment area. Net revenues really mean gross revenues less expenditures, so money left after the payment of operation expenses could be usedfor the repayment of the bonds as well as revenues coming from the project from the tax increment. Those kinds of bonds can be issued without a vote of the people and without going to the debt commission. If it is going to be general obligations, in other words, general obligation is payable by any revenues available for it, if there are going to be those that have to go through the normal process, the vote of the people, and the general obligation bond commission, they are going to be the general obligation of the community.
On page 10, line 19, which means $5, in other words the $3.64 rate we all commonly use, this wouldmake it not apply. I think we all recognize one of these projects should not be able to levy a rate up to the constitutional maximum. If you issue this kind of debt, where you finance projects outside of the normal stream, local government projects, I think there is also a question if they are not going to be general obligations, might it not be appropriate to put this before the debt management commissions, where they could have one more review other than the governing board of the entity wanting to issue it.
Mr. Leavitt:
There are some sections dealing back and forth between contracts of the federal government. Section 31, line 34, a city could have a project outside its boundaries. Since municipality can be defined as a county, the county could have a project going into another county, without the approval of either of those two other entities. If you notice, starting on line 36, we would want to have more definition in this area before proceeding with the bill. In general, either there are problems or we need more definitions throughout this whole bill. In section 35, we have NRS 354.59811 amended, and where we have the 106 percent formula. We have excluded redevelopment agencies, but, even in this bill we do not exclude one of these agencies and the way these are funded. To apply the 6 percent formula to it would make no sense. There is a huge amount of work needed to come upwith the details necessary before I, or anyone who looks at this carefully, could recommend passage of this legislation.
Senator Neal:
Where did this originate?
Senator O’Connell:
The 253 committee was established via Senate Bill 253 of the Sixty-ninth Session.
SENATE BILL 253 OF THE SIXTY-NINTH SESSION: Creates legislative committee to study distribution among local governments of revenue from state and local taxes. (BDR 17-193)
Senator O’Connell:
The counties and the cities were looking for new funding sources for projects they felt would benefit both the city and the county, you might use an example of a Disneyland, which, of course, would fit this very well.
Mr. Leavitt:
The committee established some of the basic principles and it was passed the very last meeting in committee prior to coming into this session. We did notactually ever see this language. This language does not meet any of the requirements any of us who participated in the process would want to have, before we recommend to proceed with the bill. This legislation, in the present form, clearly does not meet our qualifications.
SENATOR O’CONNELL MOVED TO INDEFINITELY POSTPONE S.B. 266.
SENATOR NEAL SECONDED THE MOTION.
THE MOTION CARRIED. (SENATORS RHOADS AND TOWNSEND WERE ABSENT FOR THE VOTE.)
*****
Chairman McGinness:
I adjourn the meeting at 3:46 p.m.
RESPECTFULLY SUBMITTED:
Rochelle Trotts,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: