MINUTES OF THE
JOINT meeting of the Assembly Committee on Taxation
AND THE
Senate Committee on Taxation
Seventy-Second Session
February 6, 2003
The Joint Meeting of the Assembly Committee on Taxation and the Senate Committee on Taxation was called to order at 2:04 p.m., on Thursday, February 6, 2003. Chairman David Parks presided in Room 1214 of the Legislative Building, Carson City, Nevada, and, via simultaneous videoconference, in Room 4412 of the Grant Sawyer State Office Building, Las Vegas, 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.
Assembly Committee MEMBERS PRESENT:
Mr. David R. Parks, Chairman
Mr. David E. Goldwater, Vice Chairman
Mr. Bernie Anderson
Mr. Morse Arberry Jr.
Mrs. Dawn Gibbons
Mr. Tom Grady
Mr. Josh Griffin
Mr. Lynn C. Hettrick
Mr. John W. Marvel
Ms. Kathy McClain
Mr. Harry Mortenson
Ms. Peggy Pierce
Senate Committee MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Bob Coffin
Senator Joseph M. Neal, Jr.
Senator Ann O'Connell
Senator Sandra J. Tiffany
Senator Randolph J. Townsend
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
None
STAFF MEMBERS PRESENT:
Ted Zuend, Deputy Fiscal Analyst
Richard Combs, Deputy Fiscal Analyst
June Rigsby, Committee Secretary
Mary Garcia, Committee Secretary
Gale Maynard, Committee Secretary
OTHERS PRESENT:
Mr. Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy
Mr. Jeremy Aguero, Chairman, Technical Advisory Committee
Chairman Parks called the meeting to order at 2:04 p.m. The meeting had been delayed 30 minutes due to the late arrival of the principal presenters, Mr. Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy, and Mr. Jeremy Aguero, Chairman, Technical Advisory Committee. Chairman Parks announced that each member had been given a copy of the PowerPoint presentation from the previous meeting held on February 4, 2003 (Exhibit C) concerning the findings and recommendations of the Governor’s Task Force on Tax Policy, also known as the A.C.R. 1 Committee. He introduced Mr. Guy Hobbs from the Governor’s Task Force, and Mr. Jeremy Aguero, Chairman of the Technical Advisory Committee.
Mr. Hobbs gave a brief summary of the information he and Mr. Aguero had presented to the Assembly Committee on Taxation on February 4, 2003. He reiterated that one of the most important steps taken by the Task Force was validating the assumptions contained in A.C.R. 1 of the 71st Legislative Session and quantifying them into numbers on which to base possible solutions. He stressed that the Task Force’s forecasts, including the prediction of a $705 million gap for the 2003–2005 biennium, had been based on projections of current levels of government-provided services. He then went on to address Committee members’ questions that he and Mr. Aguero had been unable to answer at the meeting of February 4. To the question of who benefited from property tax in Nevada, Mr. Hobbs answered that the Task Force considered the $0.75 school district tax rate to be a component of property tax because of the state’s funding duties to the school districts. He added that this $0.75 rate, coupled with the $0.15 debt rate, constituted the direct benefit to the state, and that the balance of the statewide weighted average tax rate, slightly more than $3, went to cities, counties, and special districts throughout the state. Mr. Hobbs stated that sales tax was very similar in that the 2.25 percent local school support tax and the 2 percent state sales tax both directly benefited the state.
Another question left from the last meeting concerned the percentage of the sales tax revenue that came from visitors compared with the percentage paid by local businesses and residents. Mr. Hobbs explained that the 9 percent referred to in the previous meeting as coming from out of state was actually from sales that took place outside of Nevada, and was separate from sales tax paid by tourists. He said tourists generally accounted for about 28 percent of the sales‑tax burden; businesses, 31 percent; and residents, 41 percent. He added that those figures might have been quite different if not for certain exemptions built into the state sales tax system.
Mr. Hobbs then began his scheduled PowerPoint presentation on revenue alternatives considered and the Task Force’s recommendations (Exhibit D). He mentioned that if Nevada opted for some long-term alternatives, such as a lottery that would not realize actual cash flow for five to six years, other, shorter-range alternatives would have to be selected to fill the gap. He added that some alternatives might require a constitutional amendment. He stressed that there was no perfect tax and no perfect tax system. With that in mind, he said, the Task Force evaluated and compared various alternatives based on a particular set of criteria, including:
Mr. Hobbs cited sales tax, room tax, and casino entertainment tax as being highly exportable because tourists paid so much of them. He said the comparison matrices for the various alternatives could be found in the appendix in Section 6 of the Task Force’s report.
According to Mr. Hobbs, it was important to consider Nevada’s needs in terms of balancing near-term cash flow with long-term structural alternatives, and also balancing alternatives to broaden the tax base with impacts upon economic development, diversity, and growth. Another area where the Task Force had seen a need for balance was between fairness and spreading the tax burden among as many taxpayer groups as possible. Mr. Hobbs then read from the PowerPoint presentation some of the alternatives that had been considered, including some that had been specifically mentioned in A.C.R. 1 of the 71st Legislative Session.
Mr. Hobbs moved on to the presentation of the Task Force’s recommendations, which had been divided into three parts. The key consideration in Part I was increasing system efficiency. Before it had looked at revenue issues, he said, the Task Force had considered Nevada’s ability to collect revenue owed it in an expeditious manner. One recommendation was to review exemptions from time to time to determine whether they had actually achieved the desired results, possibly putting a time limit on or eliminating some of them altogether.
Key considerations in Part II, Mr. Hobbs stated, were near-term cash flow concerns and compensating for the erosion of purchasing power. He explained that such erosion was due to Nevada’s heavy reliance on taxes levied on a per‑unit basis rather than on the dollar value of that unit. In the opinion of the Task Force, taxes that would answer these concerns were the cigarette tax, the liquor tax, restricted slot license fees, business license tax, corporate filing fees, and property tax. Mr. Hobbs explained that the first five of these were per-unit taxes that, due to inflation, had diminished in value over time on a per capita basis. The recommendation was to bring them up to the same purchase power level they had had after the last adjustment. He said property tax was slightly different, and could just as easily have been classified as a long-term issue, but was seen by the Task Force as primarily a near-term cash flow and stabilizing mechanism, the fact that Nevada was heavily invested in the property tax notwithstanding. He went on to say that the state had limited itself, on both the operating side and the capital side, to revenue sources that had remained in statute for a long time without change. The Task Force recommended doubling the cigarette tax to $0.70 per pack, while leaving the $0.10 to the local governments unchanged. Recommended liquor tax increases varied with the type of spirit, broken down primarily by alcohol content. Mr. Hobbs informed the Committee that breakdowns of these recommendations could be found in tables in the Task Force’s report. He stated that the recommended increases were generally around 90 percent, which amounted to about a $0.045 increase on a six-pack of beer.
Assemblyman Mortenson asked whether the figures on the chart in Mr. Hobbs’s presentation, showing increased revenue from the six above-mentioned taxes, represented an increase of $0.01 or some other amount. Mr. Hobbs replied that the chart represented an amount agreed upon by the Task Force; for example, the figure for the tax on cigarettes represented the $124 million projected revenue from an increase of $0.35 per pack over a two-year period. The liquor tax, he said, was a little more complicated, but represented roughly a 90 percent increase, which would bring it up to where it would have been if it had been indexed at the time of its last adjustment.
Mr. Hobbs quoted the Task Force’s recommendation for property tax as a $0.15 rate increase phased in over a few years. The recommendation was for an average increase of about 50 percent for the dozens, if not hundreds, of different corporate filing fees, or “Secretary of State fees.” On the matter of restricted slot fees, he said the Task Force had considered including them in the same gross gaming tax scheme as non-restricted licensees, but decided it might be improper to impose what amounted to a gross receipts tax, and have a second gross receipts tax on the same business. Instead, it recommended an adjustment to the per-machine charge, amounting to a 32 percent increase. As for the business license tax, currently set at $100 per employee per year, Mr. Hobbs explained that the level would have to be raised to $140 in order to regain the same amount of purchasing power that the $100 originally had. He pointed out that the focus of his presentation was the recommendations put forth in the Task Force’s report. He said he would compare them with other recommendations being discussed once the presentation was finished.
Assemblyman Griffin asked whether the $106 million on the chart for business license tax represented total projected revenue or just the additional amount resulting from the recommended increase. Mr. Hobbs replied that it represented the additional revenue generated by the increase. He pointed out that since the chart represented the additional revenues to be generated, the $442 million total for all six of the aforementioned taxes could be compared directly with the $705 million gap predicted by the Task Force.
In response to Assemblyman Grady’s question of whether the proposed $0.15 property tax hike would be inside or outside the $3.64 cap, Mr. Hobbs replied that since property tax in some counties was already at the cap, increasing the property tax would actually take money away from those counties. He added that those counties who were already at the cap were generally those counties whose economy was already in decline. For that reason, the Task Force concurred with the S.B. 557 Committee in recommending a bifurcated cap, with a cap of $3.14 for the counties that would not include any state tax or school components that benefited the state, and the state constrained only by the $5 constitutional limit.
Assemblywoman Gibbons asked if the last time the liquor tax, corporate filing fee, state property tax, and business license tax were raised was in 1991. Mr. Zuend replied that the cigarette tax was last raised in 1989 and the liquor tax in 1983; the property tax cap was originally set in 1979; annual corporate filing fees were last raised in 1991 to $85, while many transactional fees were raised during the 2001 legislative session; the restricted slot license fee, to the best of his knowledge, had last been raised in 1993; and the business license tax was originally imposed in 1991 and was significantly changed to a full-time equivalency basis in 1993.
Senator Neal asked what the proposed percentage increase was on the property tax. Mr. Hobbs responded that the increase would be roughly 5 percent of the state’s weighted average property tax of just over $3, but that it would vary by county. In response to Senator Neal’s specific query about Clark County, Mr. Hobbs replied that Clark County was the driving force behind the statewide average, so the answer was still 5 percent.
Assemblyman Goldwater inquired if the Task Force had used an elastic model of demand to determine what the proposed tax increases might do to the demand for tobacco products and the policy quandary that might result. He also wanted to know if they had taken into account other problems affecting the demand on tobacco products. Mr. Hobbs stated that cigarettes were the product probably most sensitive to such an increase. He called on Mr. Aguero to answer Mr. Goldwater’s question. Mr. Aguero replied that the Task Force had, indeed, looked at price elasticity of demand estimates with regard to each of the individual sources. He added that the per capita consumption of cigarettes had declined over the last several years, and they had projected that decline accordingly. He said they did that type of modeling to a certain extent in regard to liquor taxes, but their information at the time had been insufficient to do more. He did say that more information had become available since the Task Force closed. He added that different price elasticities existed between different types of liquor, and that perhaps more study was needed in that area in order to better understand the elasticity of demand. Mr. Goldwater asked if the Task Force’s model took those elements into account. Mr. Aguero replied that they absolutely did, looking at every consumption category by line item with an eye to how it had trended over time and what the effect of an increase in cost might be.
Assemblyman Marvel asked how the tax was spread among the various types of liquor. Mr. Hobbs’s response was that the recommendation was to increase the tax on malt liquor from $0.09 to $0.17 per gallon, increase the tax on liquor with up to 14 percent alcohol from $0.40 to $0.76, increase the tax on liquor with 14 to 22 percent alcohol from $0.75 per gallon to $1.42 per gallon, and liquor with an alcohol content greater than 22 percent from $2.05 per gallon to $3.87. Chairman Parks asked if the increase on a six-pack of beer would be $0.045. Mr. Hobbs agreed that it would be.
Senator Coffin asked for clarification as to whether the liquor tax was per gallon of liquor or per gallon of pure alcohol in the liquor. Mr. Zuend answered that the tax applied to a gallon of liquor by category, not a gallon of pure alcohol. He said the current tax on wine was $0.40 per gallon of wine, regardless of the alcohol content of any particular wine.
Mrs. Gibbons asked Mr. Zuend how Nevada compared with other states in the frequency of its tax adjustments. Mr. Hobbs responded that it was difficult to make a comparison in some cases because some taxes in some states were constantly changing, but he added that he had specific tables showing what various states were currently charging for some pervasive taxes, such as the cigarette and liquor taxes.
Senator O’Connell had a question concerning how much time could be expected to elapse after a tax increase for consumption levels to come back up to normal, and whether or not the Task Force had taken that into consideration in projecting their revenue figures. Mr. Hobbs replied that they had tried to take price sensitivity, or elasticity, into account in the demand for certain products, such as cigarettes. In the case of cigarettes, he said, demand had already been declining. He remarked that the Task Force had looked at statistics in other jurisdictions in an attempt to ensure their estimates were within a reasonable range. He added that the situations in other jurisdictions, however, could be very different. For instance, Mr. Hobbs noted that the small size of some of the eastern states made it easy for consumers to drive to another state to make purchases. Senator O’Connell asked if the Task Force expected cigarette tax revenues to drop from the projected $124 million after the 2003-2005 biennium. Mr. Hobbs replied that the expectation was for revenues to actually increase slightly following the biennium, but not enough to keep up with inflation. Mr. Aguero added that the Task Force anticipated the amount of revenue to remain relatively flat because the population growth and the per capita decline in cigarette consumption were expected to cancel each other out. Senator O’Connell asked if, that being the case, the Task Force recommended not using the cigarette revenue for any ongoing expense. Mr. Hobbs explained that the question of how revenue would be used was not something the Task Force had addressed, but that due to those same concerns the Senator had voiced, it had decided to treat the cigarette tax as a near-term cash flow issue. He added that revenue from the cigarette tax was currently about $60 million per year, with 25/35 of that going to the state.
Assemblywoman McClain asked if the Task Force had taken Internet sales into consideration, since a big enough increase in the cigarette tax could drive more people to shop via the Internet if they could afford to buy four or five cartons at a time. Her concern was that the cigarette tax would, in that case, be regressive, as poor people would not be able to afford to buy in such quantities, and would thus bear the brunt of the higher tax. Mr. Hobbs noted that the Task Force had tried to take Internet sales into account, but that it was impossible to tell exactly what might happen without knowing what California was going to do in raising cigarette taxes. At the same time, he said, Internet purchases of all kinds were increasing, and the trend was not yet clearly understood, particularly in the area of sales tax. He mentioned tribal sales of cigarettes as another relatively new area in which there was very little empirical data available.
Assemblyman Goldwater commented that Nevada was a leader in the streamlined sales tax project and that, should the state ever decide to streamline the sales tax system, the infrastructure was in place. He pointed out that many economists throughout the country were more concerned with deflation than with inflation, and asked how deflation, should it become an issue, would affect the Task Force’s economic models. Mr. Hobbs replied that it could have a dramatic effect, but that the Task Force had nevertheless had to decide on a certain set of assumptions on which to base its projections. He stated that the members of the Task Force strongly suggested that a committee similar to the Task Force be convened to monitor the implementation of any new taxes imposed during the Seventy-second Legislative Session and to make adjustments where unforeseen events caused actual results to vary from projections.
Mr. Hobbs continued on to Part III of his presentation on the Task Force’s recommendations. Key considerations in this section were providing sufficient revenue, and, in accordance with the mandates of A.C.R. 1 of the 71st Legislative Session, reflecting the diversity of Nevada’s economy and increasing the long-term stability of the revenue system. According to Mr. Hobbs, simply raising existing taxes would increase revenue, but would not reflect a more diversified economy and would tend to mask problems with those particular revenue sources. He stated that the two primary new taxes recommended were a state admissions and amusement tax, and a state activity or gross receipts tax accompanied by an increase in the gross gaming tax. He said it was agreed at the previous meeting that there were problems with the sales tax base concerning the erosion of the base and with the exemptions, both implicit and explicit. The Task Force thought it best, he said, to determine the objectives and then build something to meet those objectives. In the opinion of the Task Force, the best way to accomplish this was with the admissions and amusement tax. Activities that would be included were those that would be classified as discretionary. The Task Force’s recommendation was for a 6.5 percent levy on the price of admissions and amusements. Activities subject to the current casino entertainment tax, he said, would be exempt, as would those subject to boxing and wrestling fees, since not only were those fees are already higher than the proposed 6.5 percent, but they were also highly exportable. He added that dropping them to 6.5 percent would not be in the state’s best interests.
Assemblywoman Gibbons asked what the tax on boxing and wrestling was and if the money went into the General Fund. Mr. Hobbs answered that it was a tax of $0.04 per dollar or fraction of a dollar of the face value of a ticket, and then four percent of the gross gate receipts, plus three percent of the first $1 million, plus one percent of the next $2 million. In response to the second part of Mrs. Gibbons’ question, Mr. Hobbs said that some of the tax went toward grants to companies that sponsored boxing and wrestling matches in Nevada, but that the vast majority did go to the General Fund. He stated that for fiscal year 1998‑99, the boxing and wrestling tax generated approximately $1.7 million for the state of Nevada.
Senator Neal asked if any collection fees were associated with the exemptions of casino entertainment and boxing and wrestling activities. Mr. Hobbs acknowledged that Senator Neal raised an interesting point, but replied that the Task Force did not specifically discuss a collection fee such as existed for sales tax for vendors on the admission and amusement tax. He supposed that the presumption was that the exemptions from the admissions and amusement tax would likely conform to a modified version of the system of collection allowances for sales and use tax exemptions. Mr. Zuend stated that the collection fee was currently 1.25 percent. Mr. Hobbs added that there was a recommendation to lower that fee to 0.75 percent on a modified scale based on when it was paid.
Senator Neal asked Mr. Hobbs if he knew whether or not there would be a collection fee. Mr. Hobbs responded that there would not be a collection fee with the exemptions, but that there could be with the collection of the tax. He added that neither the casino entertainment tax nor the boxing and wrestling tax had a collection fee. As for a collection fee on participatory activities, he could not say, as such a tax did not yet exist.
Mr. Hobbs reiterated that the Task Force was recommending a 6.5 percent levy be imposed on certain admissions and amusements. Casino entertainment and boxing and wrestling would be exempted in the recommendation because the Task Force did not want to interfere with taxes already imposed on them. The only area in which the members of the Task Force were in disagreement, he said, was whether or not participatory activities should be included in the admissions and amusement tax. He explained that, in the interest of time, they had gone forward without including participatory activities, but with sentiment divided on that point. He admitted they knew someone would have to make a policy judgment on whether an admissions and amusement tax was appropriate to begin with, and, if so, whether participatory activities should be included or not. He did say that, according to the recommendation, events associated with schools, universities, or charitable organizations would be exempt from the admission and amusement tax.
Senator Coffin asked Mr. Hobbs if exemptions did not create more problems, ill will, and charges of unfairness than they prevented. He asked if some of the exemptions could not be eliminated and the rate lowered in order to generate the same revenue and less ill will. Mr. Hobbs replied that the Task Force had agonized over that very issue, especially in the case of exemptions to the business tax, which he would discuss in a moment. He pointed out that the admissions and amusements tax was slightly different, as it did not yet exist. He said the Task Force had constructed something that would include, by definition, spectator activities, and referring to participatory activities as “exempt” was possibly not the best way to explain it. A better explanation, he observed, might have been that no agreement had been reached as to whether to include participatory activities in the definition or not. Senator Coffin remarked that the Task Force had recommended exemptions based on venue, but that commercial ventures could occur in venues that might be exempt. He asked how one could differentiate between school activities and commercial ventures taking place on campus. He pointed out the ill will and unfairness created by organizing the business license tax in tiers. He said people considered a tax more fair when there was no exemption and the tax was lower. Mr. Hobbs answered that the majority of Task Force members probably agreed with Senator Coffin. He added that the Task Force had even considered including prostitution as a taxable amusement.
Chairman Parks asked Senator Rhoads to clarify the issue. Senator Rhoads explained that he had introduced a bill eight years ago to tax rodeos in a manner similar to the boxing and wrestling tax, with the revenue to be used for scholarships. He said the Professional Rodeo Cowboys Association had told him that if he pursued the bill, they would pull the National Finals Rodeo out of Las Vegas. He expressed hope that times had changed.
Assemblyman Mortenson wanted to know what arguments members of the Task Force had given for and against including participatory activities in the amusements and admissions tax. Mr. Hobbs said he hoped he could remain unbiased, and answered that there had been some concern that participatory activities were somehow more family-oriented, and members did not wish to provide a disincentive to family activities such as bowling or skating. Concern had also been expressed, he said, regarding individual participatory activities. He interjected that he had learned during discussions that bowlers were very passionate people. Mr. Mortenson supposed that movies and video rentals were the largest sport in Nevada, and said he would feel very, very bad about charging anyone tax to see or rent a movie while exempting someone joining a country club or playing a round of golf.
Senator Neal asked if it were true that the Task Force had agreed to recommend a tax on spectator activities, but could not come to an agreement about participatory activities. Mr. Hobbs said the Senator was correct, though a majority had felt that participatory activities should also be included. Senator Neal speculated that perhaps a better understanding could be reached by substituting “poor to middle-class activities” and “rich man’s activities” for “spectator activities” and “participatory activities,” respectively. Senator Neal inquired what sorts of activities would be included under amusement and theme parks. Mr. Hobbs replied that Wet and Wild, the water park in Las Vegas; the water park on I-80; and the one at Circus Circus in Las Vegas were good examples. Senator Neal asked how much extra revenue a tax on participatory activities would generate. Mr. Aguero presented figures indicating an increase in the admissions and amusement tax of 19.8 percent, or an additional $40 million over the biennium.
Assemblyman Goldwater commented that since the Committee did not have the bill yet, they could not look at the actual language, but that having questions answered now could perhaps speed up the process once the bill was available. He asked if the Task Force had considered the ticket broker, wholesale/retail aspect of ticket sales; in other words, if the tax was going to be collected on the retail price of a ticket, where would retail become retail. Mr. Hobbs admitted that that point had not been fully resolved. He supposed it would be included in the language of the bill, but said most members of the Task Force had probably not thought much beyond the initial retail sale of the ticket.
Senator O’Connell asked when the Committee might have the bill. Mr. Hobbs stated that he had looked at a first draft of the language for the bill six days ago to confirm that it conformed to the recommendations in the report, and would probably take an additional ten days for the Task Force to finish its part of the editing. In reply to a follow-up question from Senator O’Connell about whether or not everything would be in one bill, he said the Task Force’s recommendation was to have a single bill.
Resuming his presentation, Mr. Hobbs stressed that the admissions and amusement tax was a very important element of the overall solution because it did help offset the weakening sales tax base. He added that the admissions and amusement tax was highly exportable and was more reflective of the overall consumption behavior of Nevada residents. Addressing the regressive versus progressive aspects of the admissions and amusements tax, Mr. Aguero referred the Committee to the bar graphs on pages 24 and 25 of Exhibit D. He explained that the higher the household income, the greater the propensity for purchasing admissions and amusements.
Senator Townsend, who had just returned from a brief absence, requested the lists of spectator and participatory activities be shown again. He expressed amazement that the Task Force had chosen to recommend taxing movies but not golf. In response to Mr. Hobbs’s answer that the Task Force had not been in unanimous agreement on the issue, the Senator asked if he could find out who had voted what way. Mr. Hobbs replied that the information could be found in the minutes of the Task Force’s meeting. He added that, in his opinion, participatory activities should have been included. Senator Townsend noted that he and the other legislators had been receiving a lot of mail on the subject.
Returning to the question that was being answered when Senator Townsend came in, Assemblyman Mortenson asked about the small amount shown in the bar chart on page 25 indicating visitor spending. Mr. Aguero explained that the figure in question indicated how much each visitor spent, not the total amount spent by tourists. Mr. Hobbs further explained that the amounts for households broken down by income represented an entire year’s spending, while the figure for visitors represented spending during an average four-day visit.
Mr. Hobbs reminded Committee members that more extensive details on all areas of the presentation were included in the Task Force’s report. He then introduced the Task Force’s recommendations for a state activity tax, or gross receipts tax, as a way of broadening the tax base in accordance with A.C.R. 1. He stated that, as the state had imposed no other payroll tax, the primary means of participation of businesses in state revenue was the business license tax. Nevada, he said, imposed a tax on the income of only certain businesses, including insurance, mining, and gaming. According to the Task Force, an additional business tax was needed to accurately reflect the diversity of Nevada’s economy while maintaining the state’s competitiveness. The Task Force had considered a 0.25 percent tax on gross receipts to be the best option, specifically as compared to a payroll tax or a net receipts tax. Because smaller businesses were seen as more susceptible to the impact of a gross receipts tax, the Task Force recommended a $350,000 standard deduction to make the tax more equitable. Such a deduction, according to Mr. Hobbs, would exempt roughly 50 percent or more of the businesses in Nevada.
Mr. Hobbs went on to say that the Task Force recommended raising the business license tax of $100 per employee per year to $140, and integrating the gross receipts tax with the business license tax by including a $100 credit per employee for businesses that paid the gross receipts tax, not to exceed the amount of the gross receipts tax. In doing so, he said, the two taxes were joined into one integrated system that balanced the burden between labor‑intensive and capital-intensive businesses.
Mr. Hobbs emphasized that a major point in favor of a gross receipts tax was that it would produce a much more stable revenue flow than would a tax on net profits. He said that states with a net profits tax had experienced as much as a 50 percent change from year to year. Another premium point in favor of a gross receipts tax, in Mr. Hobbs’s opinion, was that it offered much less opportunity for “creative accounting” than did a net profits tax, thus providing greater uniformity and equity.
Senator Neal asked if the gross receipts tax could be paid
at the end of the commerce stream. Mr.
Hobbs replied that if that were the case, it would take on the appearance of a
sales tax, but that such a thing was possible.
The Senator gave the example of someone contracting to have a house
built. The builder would go to the
lumberyard and buy lumber, but the tax would not be due until after the house was
built. Mr. Hobbs suggested that the
example was more like a value-added tax, whereby the tax would be on the end
value that
was added. Senator Neal proposed a
hypothetical multi-state operation that wanted to direct its business to
another jurisdiction. He asked if the
tax could then be directed outside of the state and not paid at all. Mr. Hobbs answered that should events get to
that point, the issue of apportionment or allocation would have to be dealt
with; what portion would be allocated to Nevada and what portion would go to
another state would have to be determined.
Senator Neal stated that Mr. Hobbs and the Task Force were trying to balance the burden between labor-intensive business and capital-intensive business. He asked what the burden was and what the businesses were. Mr. Aguero replied that the business license tax was more burdensome on a labor-intensive business, since it was a fee levied on each employee; therefore, the more employees, the greater the fee. He said that a capital-intensive business, with more transactions but fewer employees, would be hit harder by a gross receipts tax. Mr. Aguero explained that the purpose of the per-employee credit was to equalize the tax burden. He further explained that the credit could be used to offset the gross receipts tax and only the gross receipts tax, and that every business of every kind that paid a business license tax would have some kind of exemption, except business with gross receipts of less than $350,000, since they would have no liability to be offset. Senator Neal asked if that would affect the base figure for the gross receipts tax. Mr. Aguero agreed that it absolutely would. Senator Neal asked if the figure was incorrect, then. Mr. Aguero said that, on the contrary, the figure reflected the credit.
Chairman Parks called for a 15-minute recess at 3:50 p.m. to allow Assemblymen Anderson and Grady and Assemblywomen McClain and Pierce, who also served on the Assembly Committee on Elections, Procedures, and Ethics, to leave to attend a meeting of that Committee.
Chairman Parks called the meeting back to order at 4:21 p.m. He reintroduced Mr. Guy Hobbs.
Mr. Hobbs reiterated that the Task Force’s recommendation included a $350,000 standard deduction in the gross receipts tax in order to avoid overburdening small businesses. He added that the Governor’s proposal included a larger $450,000 standard deduction. The Task Force’s recommendation, he said, integrated the business license tax with the gross receipts tax. Other deductions from the gross receipts tax, he noted, were motor vehicle fuel taxes collected, which was actually just a pass-through; government bond interest, which was not really taxable anyway; income that it was against the Constitution of the State of Nevada to tax; cash discounts taken by purchasers; pass-through revenues in which the business, such as a realty or travel agency, did not have a proprietary interest, control, or use; bad debts; receipt of counterfeit bills; income to hospitals from state or federal government sources; health or life insurance claims paid to a business for losses suffered by the business; operating income of public electric, gas, sewer, and water utilities; and fundraising activities or dues of non-profit organizations. Referring back to Senator Coffin’s concern about exemptions, Mr. Hobbs noted that the Task Force had tried to avoid any industry-specific exemptions, so the items just listed were actually deductions from the gross receipts tax obligation.
A question had arisen, said Mr. Hobbs, about the hotel-casino industry, since there was already a tax on gross gaming revenue, which the Task Force was recommending being raised from 6.25 percent to 6.5 percent in the top tier. He stated that only about 50 percent of hotel-casino revenue was from gaming, down from a previous figure of 60 percent. The other 50 percent, from non-gaming sources, was not taxed as gaming revenue and would be subject to the gross receipts tax.
Other issues that had come up, Mr. Hobbs said, were “pyramiding” and the relationship between profitability and the application of tax. He pointed out that most taxes levied on businesses, such as sales tax, business license tax, and property tax, were applied without regard for a business’s profitability. In that respect, he said, the gross profits tax was not unique; in fact, if the state activity tax were tied to profitability, the state would be accepting a very volatile source of revenue. Another recommendation under the state activity tax was to give a deduction for investments that companies might make in certain types of equipment or facilities, especially those used for research and development. The Task Force also recommended that, if Nevada’s economic development objective was to attract light, clean industry with high-paying jobs, firms approved by the Commission on Economic Development, some type of credit to attract could be constructed to diminish any negative impact the gross receipts tax might have. In the opinion of the Task Force, a gross receipts tax would reflect the diversity of Nevada’s economy, was among the most stable sources of revenue available, captured out-of-state firms importing goods into Nevada, and was easier to administer than a net profits tax.
Senator Neal interjected his opinion that the wording in Mr. Hobbs’s presentation, specifically the use of the word “reflects,” rather than the word “enhances,” implied retaining the diversity status quo rather than improving diversity.
Assemblyman Hettrick acknowledged that the resolution that created the Task Force asked for stability, but said the gross receipts tax would, in the end, account for only about ten percent of Nevada’s revenue, and thus could not have a significant impact on the state’s revenue stability. Mr. Hobbs conceded the point, but stated that while the gross receipts tax could not create overall stability, it could help with the stability issue in about the same way that a relatively stable admissions and amusement tax could provide some stability to a very large sales tax base. It was true they could not ensure stability, he said, since Nevada would still rely heavily on sales tax and gross gaming tax, whose characteristics would probably not change in the near future. Mr. Hettrick asked if it would really be beneficial to go with a gross receipts tax if it accounted for only ten percent of the revenue. He commented that he had already received reports that foreign corporation filings were down just on the Governor’s mention of the possible gross receipts tax in the State of the State Address. Mr. Hettrick also asked why it was so important for the state to have a steady source of revenue when the business and the public who were paying that revenue did not. He declared he did not think the state government was so much more important than the people it served that it deserved to be funded at any cost to the private and business sectors. Mr. Hettrick went on to say that, in his opinion, a gross receipts tax would have a very negative impact on Nevada’s economic development. He said he appreciated all the hard work of the Task Force and was trying to remain open-minded, but that his opposition to a gross receipts tax was a matter of public record. Mr. Hobbs said his purpose before the Committee was not to debate philosophical questions, but to lay out recommendations so that those points could come up for deliberation. He observed that the Task Force gave consideration to economic development and, as a whole, had great respect for diversification. He added that the concern they encountered from other agencies was not with the proposal itself, but rather whether the level of the gross receipts tax, initially at 0.25 percent, which was very low compared to other states, could be contained as time went on. He said he would not say that a gross receipts tax would have a positive impact on economic development, but, in the judgment of the Task Force, the impact of the tax could possibly be kept at a manageable level.
Assemblyman Griffin said he had been intrigued with the notion of national pricing strategies. He asked Mr. Hobbs if he knew what percent of the gross receipts tax would come from companies that employed national pricing strategies. Mr. Aguero said that he had some general sense from some economic modeling of the economy, but did not know the precise amount. He said that imports made up a relatively large portion of the economy, so it should be substantial. Mr. Hobbs stated that there were large enough numbers of national retailers and multi-state wireless communication companies to constitute a material portion of the economy.
In response to Mr. Hobbs’s comment that a gross receipts tax of 0.25 percent was low compared to other states, Assemblyman Mortenson asked Mr. Hobbs what an average business nationally would pay compared with an average business in Las Vegas. Mr. Hobbs regretted that the answer was not readily available, but said he could get an answer rather quickly by taking case study examples from different states, and that if certain other states were of particular interest, those figures could be gotten first. Mr. Mortenson stated that it would be an interesting figure to have, and very important in making a decision.
Assemblyman Goldwater commented that the Committee had never before been able to debate such philosophical questions as had been brought up by Mr. Hettrick, because the information necessary for such a debate had never been available, but that the type of data and modeling provided by the Task Force should facilitate such discussion. He expressed his thanks to the Task Force for all its hard work, and promised that the Committee would work them even more. Mr. Hobbs said he hoped the thing of greatest value to the Committee’s deliberations was the fact that there was now a model that should be able to provide answers very quickly to questions about the effects of changing some of the revenue base.
To conclude his presentation, Mr. Hobbs said the Task Force had constructed two models of three-person families and calculated the annual impact of the recommended new or increased taxes on them. The first family lived in a median-priced home, had one smoker who smoked one pack of cigarettes per day, consumed two six-packs of beer per week, went to two movies per month at $8.50 per family member per movie, and three concerts or other special entertainment events per year. The additional annual tax burden on this family with a smoker was $297. The second family was the same as the first family, except that no one in the family smoked. The annual impact on this nonsmoking family was only $169, considerably different, Mr. Hobbs noted, from the impact on the first family. He said that the largest constant between the two families was the property tax.
The Task Force had also constructed two models of businesses. The first was a business with 3.5 full-time employees and $1.1 million in gross revenue. Mr. Hobbs referred to the chart on page 34 of Exhibit D. He stated that on the first line, the business license tax was based on a $140 per employee, plus an annual registration fee. The corporate filing fee on the next line reflected the recommended 50 percent increase. Mr. Hobbs stated that the property tax was likely to be a pass-through, but that the Task Force had wanted to include every possible cost. Next on the chart was the gross revenue of $1.1 million. Subtracting the standard deduction of $350,000 for all businesses, he said, left taxable revenue of $750,000. Applying the 0.25 percent rate to the $750,000 yielded a gross tax liability of $1,875. Subtracting the business license tax credit of $100 per employee yielded a net state activity tax liability of $1,525. Combining that with the business license tax, corporate filing fee, and property tax, Mr. Hobbs stated that the overall net tax liability came to $2,132 for a business that produced $1.1 million in gross revenue.
Mr. Hobbs said that the second business modeled, shown on page 35 of Exhibit D, was slightly larger than the first, and more diverse in terms of its employment base. He commented that the first business could have been characterized as a service type of business, while the second business was less so. The second one, he stated, had 30 full-time employees and $2.1 million in gross revenue. He pointed out that, looking down the chart, the tax liability on the bottom line for $2.1 million in gross revenue would be approximately $6,300. He said that was what was known as “tax incidence.” Mr. Hobbs added that the Task Force could run as many examples as the Committee wanted to see, but that it had wanted to give Committee members a flavor for the flow of logic as the business license tax flowed through to the gross receipts tax with the credit. He mentioned that, unlike the hypothetical families in the first models, the businesses modeled were real businesses that the Task Force had obtained numbers from.
In summary, Mr. Hobbs listed the measures recommended by the Task Force. They included implementing passive revenue generators or efficiency measures; increasing the cigarette tax by $0.35 per pack; increasing the liquor taxes by 89 percent; increasing property tax by $0.15 per $100 of assessed value; increasing the restricted slot machine fee by 32 percent; increasing corporate filing fees by 50 percent; implementing a state admissions and amusement tax of 6.5 percent; and, finally, implementing a state activity tax of $0.25 percent, with a $350,000 standard deduction and a credit for paid business license tax of up to $100 per full-time employee, with an accompanying 0.25 percent increase in the gross gaming tax. Mr. Hobbs explained that the Task Force had chosen 6.5 percent for the admissions and amusement tax because parity with sales tax was desired and, as he explained, 6.5 percent was the common denominator throughout the state. The revenue projected by the Task Force was $813 million. According to Mr. Hobbs’s information, the projected revenue from the Governor’s tax package was $994 million for the same period.
Assemblyman Anderson asked if the recommended increase in the fee for restricted slot machines would bring them into parity with other machines. Mr. Hobbs replied that it would not. He explained that bringing restricted slot operators under the same taxes as the other hotel-casinos would have amounted to another form of gross receipts tax, thus charging them, in effect, two gross receipts taxes.
Assemblyman Marvel asked how many businesses in Nevada would have to file for the gross receipts tax. Mr. Hobbs answered that it would be approximately 120,000. In response to Mr. Marvel’s question of how long it would take to effectively implement the tax, Mr. Hobbs replied that had not been fully resolved, but the Task Force was engaged in a dialog with the Department of Taxation and with other states about that very issue. He added that the Governor’s office predicted that it could take up to two years. Mr. Marvel asked how much it would cost, and Mr. Hobbs said the Task Force’s estimate was that the cost would be up to $25 million over a two-year period, including an information technology upgrade for the Department of Taxation. He stated that the technology upgrade should be done as soon as possible, regardless of whether a gross receipts tax was implemented. He estimated that $5 million per year would go to staffing, services, supplies, and maintenance of the system. Mr. Hobbs said this was slightly higher than other states in terms of the ratio of cost to dollars collected.
Senator Neal asked who would determine the amount of the tax credit allowed a company for business license taxes paid. Mr. Hobbs’s reply was that all businesses with gross receipts over the $350,000 standard deduction would receive the credit, with no discretion exercised by anyone. Senator Neal stated that Mr. Hobbs’s chart showed a credit of “up to” $100 per full-time employee. Mr. Hobbs answered that a credit of $25 per full-time employee per quarter would be put into statute, and that that amount would be standard.
Senator Neal also had a question about the increase in each of the three tiers of the gross gaming tax. The Senator said that the three tiers and their taxes were 3 percent tax for the first $50,000, 4 percent for the next $84,000, and 6.25 percent for everything over $134,000 per month. He wanted to know what the impact of an across-the-board increase of 0.25 percent would be on the first tier. Mr. Aguero responded that the tax increase would generate about $27 million per year, all three tiers combined. Senator Neal explained that he wanted to know what just the first tier would bring. Mr. Aguero did not have the answer, but said it would be a relatively small amount. Senator Neal claimed they would be taxing the small casinos at the same rate as the large ones, and the tier structure suggested that should not be the case. Assemblyman Anderson stated that there would still be three different levels of taxation. Mr. Hobbs conceded that adding 0.25 percent to 3 percent was a bigger proportionate increase than adding 0.25 percent to 6.25 percent, but that most of the impact, monetarily, would still occur at the higher level.
Senator Tiffany expressed confusion about the differences between the Task Force’s figures and those of the Governor’s recommendations. Mr. Hobbs advanced straight to the slide in his presentation that showed recaps of projected revenues for all recommended new taxes and tax increases and the total projected revenue. He explained to Senator Tiffany that the figure for the total was only the total for the new taxes and increases, and did not represent the state’s total revenue.
Mr. Hobbs also explained that the reason the total additional revenue exceeded the projected $705 million shortfall was the Task Force had used a multi-year forecasting model, and so had to manage the bottom line balance over a multitude of years. Any change in revenue flow over those years, he said, had to be managed via the bottom line balance, and the excess revenues at the beginning were essential to that process. One reason this extra money was needed was the lag time before some of the measures could actually be implemented.
Mr. Hettrick asked what the difference was between the Task Force’s figure on property tax revenue and that of the Governor. Mr. Hobbs explained that the difference was due to two factors. First, the Task Force had assumed that only part of the 15-cent increase would go to the General Fund, and that some of it would go to capital, while the Governor had assumed it would all go to the General Fund. Second, the Task Force assumed that the increase would be in effect for both years of the biennium, while the Governor had based his figures on the increase being in effect for only the second year of the biennium. Senator O’Connell asked if the Governor had proposed a $0.16 property tax increase. Mr. Aguero confirmed that she was right.
Senator Neal noted that Mr. Hobbs had made a passing reference to limits on exemptions, but that he did not see anything to that effect in the presentation. He asked if the Task Force had actually taken a look at such limits. He explained that he meant all exemptions in general, not just from one particular tax. Mr. Hobbs countered by stating that the Task Force had put together a list of all exemptions under sales tax and property tax and recommended that all of them be reviewed to include placing a sunset on some of them. Senator Neal asked why that had not been included in the Task Force’s recommendation, since the elimination of some exemptions would bring in more revenue. Mr. Hobbs answered that those actually had been included as opportunity costs. He explained that the Task Force did not go into specific exemptions because A.C.R. 1 had been very specific in what it asked the Task Force to do, and that the Task Force members thought it inappropriate to go too far into other policy matters. Senator Neal asked Mr. Hobbs if he recommended the Committee take a look at exemptions. Mr. Hobbs replied that such a recommendation was in the report and that, whatever the Committee decided to do, the Task Force recommended, at the very least, every exemption be examined as to how often it was being used, how much it cost the state, and whether or not the exemption was actually performing the function it was meant to perform. As an example, he cited an exemption for widows and orphans that was meant to provide relief for people of lesser means, but pointed out that widows and orphans were not always of lesser means. In response to the Senator’s question of whether or not the Task Force had looked at the cost of the exemptions to the state, Mr. Hobbs said the Task Force had not tried to quantify the cost, but that the S.B. 557 Committee, in previous work, had attempted to quantify it. He said he would have to look and see how far they had gotten.
Senator Tiffany asked if it were true that the economic forum had predicted 4-6 percent revenue growth. Mr. Aguero agreed that they had, but explained that the Task Force had used figures independent of but similar to those of the economic forum. He added, in response to another question from Senator Tiffany, that nearly all revenues were expected to increase in the future. Senator Tiffany characterized Nevada’s projected revenue growth as fairly healthy compared to the rest of the nation, and commented that the problem was on the spending side of the equation. Mr. Aguero cautioned that even though revenue was projected to grow, population and inflation were growing as fast or faster, and that the need for government services was growing as fast as the population. Senator Tiffany remarked that that brought them back to the question of whether growth paid for itself, and stated that the current proposed budget expanded government in Nevada. She stressed that the Governor’s proposed budget included enhancements in every agency, and she maintained that the state was healthy in terms of revenue growth. Mr. Hobbs explained that revenue growth was good when looking at the revenue side alone, but when compared to the expenditure side under a set of status quo assumptions with no enhancements to any existing programs, which was what the Task Force had done, the state economy was not healthy. He made it clear that the $705 million gap was due solely to the fact that the cost of existing services was growing faster than revenue.
Senator Coffin requested a matrix of revenue yield if some taxes were lowered and others were raised. Mr. Hobbs said there was such a table in the appendix of Chapter 6 of the Task Force’s report. He said he would extract that particular matrix for the Senator, plus the model that would immediately show the result of changing amounts of 0.25 percent to 0.375 percent by line item and bottom line. Senator Coffin said he was not optimistic about growth. He observed that the Southern Nevada Water Authority in Las Vegas would be enacting the drop plan that night, effectively losing ten percent of Las Vegas’ water, which he predicted would retard growth. He said that enormous competition between casinos should slow that growth, though there was some new construction coming. Senator Coffin predicted a downturn in the growth curve, but observed that it was impossible to see the future. He observed that the efforts of the Task Force and the Taxation Committees were to spread the load, to move into new areas of taxation in order to generate more revenue to pay for necessities. He maintained that there were more kids now, and it was the state’s responsibility to take care of them and educate them. Nevada, he mused, did not yet have the right to put a fence along the border with armed guards to keep people out, although that might be coming in the future. He stated he was very worried about growth, and that he no longer trusted anyone’s economic forecasts.
Assemblyman Anderson cited an article he had recently read about revenue enhancements and said he saw a possible problem of making a comparison between revenue from gaming and tourism in the immediately preceding quarters and the position Nevada was in prior to the 2001 Legislative Session. He stated that he expected to find reflections in the Task Force’s report of the impact on tourism of the terrorist attack on the World Trade Center. Mr. Hobbs said that information was in the second chapter. He added that compiling the report was equivalent to assembling the New York City phone book, but that he would make sure that the salient portions would be extracted for members of the Committee. He pointed out that the Task Force had taken recent events and growth projections into account in making its forecasts. Mr. Anderson commented that, while demographic population continued to grow along with the need for those things tied to growth, the revenue stream could not possibly keep up. Mr. Hobbs said that was exactly the point of his entire presentation.
Assemblywoman Pierce asked if the exemptions to the sales tax were included in the report. Mr. Hobbs replied that they were in Chapter 7, but he could provide her with a separate list so she would not have to go through the report to find them. Chairman Parks added that he and Mr. Zuend had a list of those exemptions.
Assemblyman Hettrick asked if there was a list of businesses that Mr. Hobbs had referred to as “pass-through,” such as real estate brokerages and travel agencies, which would not be subject to the state activities tax. Mr. Hobbs said he would provide Mr. Hettrick with such a list, at least of the businesses that had come to mind while making that particular recommendation.
Assemblyman Mortenson commended the Task Force for having done a “fabulous job” of producing the report and being able to provide answers to almost every question. Chairman Parks thanked Mr. Hobbs and Mr. Aguero, on behalf of both the Senate and Assembly Committees, for dedicating so much of their time to presenting the information to them, and stressed that the Committees would need a lot more assistance from them. He acknowledged the fine product their hard work had produced. Mr. Hobbs expressed appreciation for the acknowledgement, and reaffirmed his and Mr. Aguero’s willingness to help the Committees in any way they could.
No one had any further questions or comments. As there was no further business, Chairman Parks adjourned the meeting at 5:23 p.m.
RESPECTFULLY SUBMITTED:
Mary Garcia
Committee Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE:
Senator Mike McGinness, Chairman
DATE: