MINUTES OF THE JOINT meeting of the
Senate Committee on Taxation
AND THE Assembly Committee on Taxation
Seventy-second Session
February 11, 2003
The joint meeting of the Senate Committee on Taxation and the Assembly Committee on Taxation was called to order by Chairman Mike McGinness at 1:38 p.m., on Tuesday, February 11, 2003, in Room 1214 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.
Senate Committee MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Bob Coffin
Senator Joseph Neal
Senator Ann O'Connell
Senator Sandra Tiffany
Senator Randolph J. Townsend
Assembly Committee MEMBERS PRESENT:
Mr. David Parks, Chairman
Mr. David Goldwater, Vice Chairman
Mr. Bernie Anderson
Mr. Morse Arberry Jr.
Mrs. Dawn Gibbons
Mr. Tom Grady
Mr. Josh Griffin
Mr. Lynn Hettrick
Mr. John Marvel
Ms. Kathy McClain
Mr. Harry Mortenson
Ms. Peggy Pierce
STAFF MEMBERS PRESENT:
Rick Combs, Deputy Fiscal Analyst
Ted Zuend, Deputy Fiscal Analyst
Mary Garcia, Committee Secretary
June Rigsby, Committee Secretary
Mavis Scarff, Committee Manager
Gale Maynard, Committee Secretary
OTHERS PRESENT:
Michael Hillerby, Deputy Chief of Staff, Office of The Governor
Chairman McGinness:
Our agenda today is to hear an overview of the Governor’s recommendations for adjustment to Nevada’s tax structure. We have with us Deputy Chief of Staff Michael Hillerby.
Michael Hillerby, Deputy Chief of Staff, Office of the Governor:
On behalf of Governor Guinn, thank you for this opportunity to provide some information about the Governor’s tax plan and what it does. On Thursday, we will have the Department of Taxation and Charles Chinnock, Executive Director, and staff. They will answer any specific questions on implementation, the department’s budget, and the investment by the Governor’s proposed budget in the Department of Taxation.
I want to thank Brenda J. Erdoes, Legislative Counsel and her staff for drafting a very complicated bill. We are going over the 175-page draft we received to make sure it accurately reflects the Governor’s intentions and what he wants to do with this plan and have it back to be finalized and introduced.
I want to talk about the three phases of this plan which includes this biennium, the coming biennium, and the following biennium, and when parts of this plan will be implemented. While you have jurisdiction over taxation, and we have two money committees that talk about the budget, I think it is important these two parallel tracks converge at the end of the session so we can pass a balanced budget. Before we get into details, I want to walk through how we got a $4.8 billion budget, what were the prime pieces that drove this budget, and where we are this biennium.
There has been a lot of confusion about deficit numbers. We have a deficit for the current biennium, which the Governor had begun to address through cuts this year to the State budget for programs and one-time expenditures in some positions. He proposes about $100 million of the Rainy Day Fund be tapped during this Legislative Session to finish getting us through this year. This is one part of the deficit and is approximately $300 million. I am sure John P. Comeaux, Director, Department of Administration, can answer more detailed questions.
The second piece is the deficit moving into the next biennium. Again, these are two separate and distinct numbers driving this tax debate. And lastly, I need to thank Guy Hobbs, Chairman of the Governor’s Task Force on Tax Policy in Nevada, and Jeremy Aguero, Chairman, Technical Advisory Committee, who did an excellent job in presenting some complicated and detailed information, and to all the members of the task force for implementing the Legislation as expressed in A.C.R. No. 1 of the 17th Special Session.
Senator O’Connell:
I just want to make sure I understand the first part of what you said. Taking us through June of this period of the biennium, are you telling us we are short $300 million?
Mr. Hillerby:
Yes. We have obviously made a number of cuts, about $211 million in combination with the ones made at the end of the last legislative session after the economic forecasts were redone in May. The across-the-board cuts are to one-time expenditures and enhancements. The rest were proposed to be made up from the Rainy Day Fund, the $100 million, and we will get into the specific tax recommendations for this biennium.
Senator O’connell:
Thank you.
Mr. Hillerby:
We will start with the Budget In Brief (Exhibit C. Original is on File in the Research Library.) This is taken from the Governor’s Executive Budget and the Executive Budget In Brief. The Governor has used the concept of flat budgeting. That is, taking the second year of the biennium for the agencies and multiplying it by two. This number is used to build the next biennium’s budget. We will get into caseload growth; those are caseload and services we provide by statute and the budget act. This basic number is $3.942 billion coming in the next biennium. That is 2003 actual appropriations with some minor adjustments for mandatory step increases and cost allocations and the other things we have in the budget.
Taking the Economic Forum projections from December, the amount of money they have and have projected they will have versus the flat budget figure is an extra $24 million. This means the subtotal base budget need is $3.918 billion.
Senator Rhoads:
Is that a mistake up there? It says millions. Should it be billions?
Mr. Hillerby:
No. It is $3.942 billion. But this one is a billion-dollar figure for the rest of these individual budget items. We needed to get into the mandated growth and essential item category. These things are driven by funding formulas, State law, to some extent by federal law, some precedent with the way we fund the DSA, (Distributive School Account), school funding and the like. The first item is Kindergarten through twelfth grade (K through 12) education growth, which will be $311 million over the next biennium. This is broken down as follows:
First we have an approximate $165 million for the roughly 27,000 new students we are expecting and additional class size reduction money at $37 million. A 2 percent raise for school employees was a commitment made by the Legislature and the Governor at the end of last session. There were triggers put in, and had those triggers been met, the teachers and other school employees would have received a 2 percent raise this year; they did not. The Governor feels this is a commitment important to honor and has built it into his budget and believes it is part of the mandatory spending we need.
Another cost is the increased health insurance cost for school district employees, and all other growth, including retirement, transportation, equipment replacement, and other issues. This is the $311 million the Governor used to build the budget.
Other items for mandated growth were the UCCSN (University and Community College System of Nevada) student growth and group insurance cost for employees, Medicaid caseload, welfare, DHR (Department of Human Resources) and other costs broken up between the Division of Mental Health and Developmental Services and the Division of Child and Family Services, $7 million for the Judicial Branch, and $7 million for the Health Division.
Benefit cost increases for State employees total about $37.6 million. There were some other items of about $10.5 million the Governor felt were critical, in some cases driven by statute, and in other cases, serious enough to be included and mandated as essential items, such as teacher signing bonuses. While not driven by a specific law or directive of the Legislature, this has been crucial, particularly in Clark County, to attract new teachers where they have to get two-thirds of their teachers from out of state.
Also included is the State Fire Marshal Division. There has been a lot of publicity regarding this office and a legislative audit; the finding was very clear. I know Senator Townsend, Assemblyman Anderson, and others have worked for a long time to identify those needs. We have been unable to fund them over the years, with hearings and budgets about it. This brings to the front one of the issues. We either need to adequately fund to meet expectations, or we need to change the legal expectations of what the fire marshal does and our inspections. Either of these two things will work.
This list is the $704-million deficit going into the next biennium. These are the enhancements recommended by the Governor in the State of the State address and are included in his budget. The Governor believes strongly these are meaningful and important investments to make going forward in our State.
An investment in our educational system is one which businesses look to for their employees and to make decisions about moving here and the quality of life. These include money for a full-day kindergarten beginning in at-risk schools, textbooks, supplies, and technology. This is a per pupil funding ratio at about $50 per pupil. Additional items cover special-needs pay for teachers who would stay in at-risk schools, ESL (English as a Second Language) teachers, math teachers whom we have a hard time recruiting, and funding the university at 86 percent of the funding formula. Nevada Senior Rx and Check Up, programs you are very familiar with, are an additional $10.2 million. Rate increases of $17.8 million for critical providers come from studies initiated by A.B. No. 513 of the 71st Session. This plan includes community-based care programs to keep people in their homes and independent, rather than in State institutions, which include mental health and drug court funding.
The child welfare integration program (A.B. No. 1 of the 17th Special Session) will require $6 million in new money to finish that transfer to the counties, and the Yucca Mountain legal fund is at $2 million. This is how we get to the $4.8 billion budget.
I thought it was important to briefly go through this exercise, realizing a lot of you do serve on both committees, so you may understand these hard numbers.
These are real numbers, based on formulas, the Governor felt were important investments to make for Nevada. Does this mean there cannot be cuts to this? No, it does not. What the Governor has sought all along were two things. One, he is not the only one with good ideas or plans and encourages debate and discussion. The other is this is a balanced budget; it is a balanced ledger. Any cuts to the revenue side obviously will necessitate cuts to the spending side to balance the budget. This needs to be a part of any discussion about concerns of specific spending or taxes as we move through the session.
There has been a lot of conversation about the State budget and General Fund revenue with expenditures growing faster than the State population, CPI (Consumer Price Index), inflation, or some combination of these factors. The problem with this analysis is what drives our spending is not quote, “the general population,” but our spending 83 percent of our General Fund budget on public safety, human services, and education. These are important investments for the State and they are laws passed by the Legislature, funding guidelines other Governors and this Governor have agreed to follow.
This chart is very important. Our General Fund revenue growth from 1999 to 2003 is actually a negative number. It is down by about 5 percent when adjusted for inflation and in real per capita growth. Compare this to the main places we spend our money, the growth in K through 12, the growth in university enrollments, the overwhelming growth, particularly this last year and a half or so since the economic downturn and the aftereffects of September 11, 2002, in Medicaid and TANIF (Temporary Assistance Need In Families), which is welfare. This is very fundamental to understanding what has put us in the position we are in. It is a part of what the task force did and the Governor has spoken about for a long time, the structural deficit, and the long-term problem facing the State of Nevada. What drives our expenditures is not necessarily directly tied in any meaningful way to the population growth, to CPI rates of inflation; you need to divorce these two figures to talk about what drives the budget.
Senator Townsend:
I have two issues. First of all, have you broken out what percentage of Medicaid recipients are the working uninsured in Nevada? This number has escaped most of us, particularly Senator O’Connell, Senator Rhoads and me, for the last 20 years. If you happen to know or have close figures, that would be helpful.
Mr. Hillerby:
Senator, I do not have that number. I will check with Michael Willden, Director, Department of Human Resources, and his department.
Senator Townsend:
I am not saying the number is findable, but we think it is starting to skyrocket even more.
Mr. Hillerby:
I would tend to agree and we know Nevada has a serious problem. We have a high percentage of our population without insurance. Obviously many of these people look to the State at some point, particularly once they become eligible for benefits from the State. There are real problems at the county level and we all know the problems UMC (University Medical Center) is having in Southern Nevada.
Senator Townsend:
It is a policy question, particularly from the working side we are trying to deal with because people get up every day and go to work, turning the economy and doing the right thing. We want to make sure they have health care.
The second issue, when you break this down based on per capita General Fund revenue growth going one way and all of the demand of caseload going the other way, points up the structural deficit a little different and the State is not capturing the growth in revenue. The counties are capturing it; yet, we are still responsible at the State level. We need to meet these obligations and responsibilities. At some time, I would like you to respond to this.
Mr. Hillerby:
In every session, the discussion about the unfunded mandates one government pushes on another is a topic and will be a hot topic. The local governments are concerned about this exact notion. To be sure, we are adequately accounting for the kinds of services we provide, and where the revenue is going will be a big part of discussion this Session.
The next slide shows Nevada’s job growth and this addresses what our future looks like. We enjoyed a terrific economic bubble or boom during the 1990s, as did much of the United States, with the opening of resorts. We were fortunate enough, as you will see on this chart, to enjoy an average annual growth rate in jobs between 1995 and 2001 of almost 6 percent. You can see what happened in 2002, for obvious reasons, and 2003 is projected to be a little bit better, but still slightly over 1 percent. Looking in the next biennium, our job growth, which affects our revenue and our future for the budget, is expected to be about half of what it was for the last several years and the previous decade and the beginning of this decade. This is an important number to remember and you can find this in the Executive Budget In Brief.
This slide deals with State employment. The Governor has worked hard to be conservative in budgeting. In 1995, reflected as a calculation of per 1000 residents, the State had 8 employees per 1000 FTE (Full Time Equivalency) employees. By the end of the coming biennium, this number will be down to 6½ FTE. From the beginning to the end of the chart, population growth has gone up over 400,000 people and State employment has stayed flat. Had this ratio stayed the same, there would have been 3000 more State jobs on the rolls at a conservative cost of about $400 million. Not only were these jobs not created, but the Governor has frozen 1500 positions, beginning in the Miller administration and continuing under Governor Guinn, and recommends permanent elimination of 500 of those positions.
I want to talk about the measures we have done in the current biennium. Fifteen hundred positions remain frozen. The Governor cut $126 million with this body at the last legislative session, when the first indications of trouble were on the horizon from the Economic Forum projection. He has made $47 million in cuts to one-time expenditures and to new enhancements, particularly in the area of social service programs we fought hard for last session and you supported. There were $38 million in across-the-board cuts to some agencies that resulted in layoffs. Agencies also had to absorb increased costs for energy and health insurance, as did the University and, to a great extent, the local school districts as well, and also the impact of flat budgeting.
I will go over the next three slides with you and talk about what the three phases are in some detail.
Assemblyman Goldwater:
In the Governor’s first State of the State, he mentioned a fundamental review of government budgets. I think it is important to note we do fundamental reviews of base budgets and there is not a lot of waste. Obviously, we can contribute cost savings and I do not know if we subtracted out what it costs to do the review. Did the process reveal anything different than what we know today? Did the Governor’s fundamental review yield any dividends?
Mr. Hillerby:
I would like to answer in two ways. At the time the fundamental review was underway, I was a department director. We were asked a lot of difficult questions on the future of the department, the pieces that belong together, what could be cut, the process of justifying the cuts, looking at agencies, and deciding on reorganizations and efficiencies. I think a lot of departments had bills coming out of the process, and in this respect, it was very helpful. What cost savings did the Governor’s fundamental review from the task force reveal? I could not answer that specifically. I would either have to defer to Mr. Comeaux if he has the information available today, or I will have to get back to you specifically on the Governor’s recommendations from the fundamental review task force.
Assemblyman Goldwater:
How did we arrive at this deficit? We have looked at these programs, their base budgets, and where they are coming from and it is part of it. Does the Governor have a view on that?
Mr. Hillerby:
Yes. I think the Governor has worked hard through the audit process from the Legislature, the internal audits process, the fundamental review of base budgets, the Governor’s fundamental review, and flat budgeting. A great deal has gone into defining what these basic expenditures are and looking for savings where we can. There will always be more ideas for efficiency and savings. We want to hear about them. We think for the most part this budget and the past budget going into the next biennium were built fairly conservatively.
Assemblyman Mortenson:
A couple of slides back you showed the number of government employees per thousand for population and you also showed that it was eight. While the population was growing, the number of government employees had stayed static. Does the budget office figure the number of people in government should grow, in a constant ratio, with the population?
Mr. Hillerby:
Let me answer that as no. There will always be efficiencies, just as there are productivity improvements in any private business. They will always be more productive with a given number of employees. We think the same holds true for State government. We should always try to do as best we can. In this case, there are vacancies in agencies causing problems. Our employees are working very hard and I am proud of the people I work with and who serve the Governor. No, it does not need to continue with population growth, this was an exercise to show we have been lean, and again, if you use this as a formula, how much more we would have incurred in expenses.
Assemblyman Mortenson:
So you do not consider a deficit in personnel of 6½ FTE versus the 8 FTE?
Mr. Hillerby:
Yes, in some agencies. We have people working very hard and we obviously do not want to shortchange areas, particularly public safety and education. I think the university system, a lot of our school districts, and a lot of our State agencies would tell you they are working very hard to meet the demands on them now. I want to talk about the next three slides and about what the three phases are.
Phase 1 is a recommendation to enact some taxes for the end of this biennium, as the Governor has stated in his State of the State, by the end of March, so we can enjoy up to a quarter of revenue to help with the situation we currently face. This is an increase in the current tax rate and fees, and an increase in the BAT (business activity tax), and an expansion to capture sole proprietors and other business forms that are currently exempt.
Phase 2 is for the coming biennium and would levy an annual business license fee, increase the property tax in the second year of the biennium by 15 cents, and levy a State transaction tax on admissions and amusements.
The last piece is phase 3 and would begin in the following biennium, which will include the beginning of the GRT (gross receipts tax) we will talk about in some detail later, including a credit against the tax liability of $100 per employee and the corresponding reduction in the BAT from $300 down to $140. It is important to remember here, this also includes a $450,000 income threshold for businesses exempting outright, by the task force calculations and ours, about 62 percent of Nevada’s businesses, and ties in at the same time with a 0.25 percent increase in the gross gaming fee.
Assemblyman Marvel:
When you raised the ad valorem 15 cents, is your bill going to have a raise in the $3.64 cap?
Mr. Hillerby:
This is still something we are talking about and what would be the best way to implement this, either by exempting the State portion from the cap or raising the cap. We need to get a good understanding on how this affects the individual counties.
Assemblyman Marvel:
You are at $3.64 now.
Mr. Hillerby:
Chairman Parks and the Interim Study Committee made a recommendation that allowed you to do either one. We could either exempt the State portion, we would not try to force that and make the counties’ portion go lower if that is the answer to your question. There are two ways to do this. We can exempt the State’s portion from the $3.64 cap or raise the cap.
Assemblyman Marvel:
Well, what is going to be in your bill? Have you decided yet?
Mr. Hillerby:
No, we have not.
Senator O’Connell:
When you were looking at the figures for the business tax and the business fee on the sole proprietor, how did you come up with the figure?
Mr. Hillerby:
It was actually a number from the task force. William Anderson, State Economist, and the budget office also looked at the figures and later on we will get some estimates of what that is. Expanding the base is projected to bring in the first full year of the biennium about $12 million and the second year of the biennium about $21 million.
Senator O’Connell:
The explanation of how you reached this number is forthcoming?
Mr. Hillerby:
No. I would have to refer to the task force if Mr. Hobbs did not cover this in the presentation last week. I do not have details on the calculations they used to estimate the number of businesses, but will get that information to you.
Assemblywoman Gibbons:
How did you come up with this figure to increase the gaming percentage fee in the fiscal year of 2006 and 2007? Or maybe I should ask you, why did you decide to delay that?
Mr. Hillerby:
The Governor took the task force recommendation and made a change rather than implementing it in the second year of this biennium. To be sure we could implement this and ensure the Department of Taxation had the opportunity to get up to speed by passing regulations, or we would wait until the beginning of the following biennium. The GRT would kick in at the same time as the increase on the gaming fee. These recommendations mirror those in terms of the amount contained in the task force report.
Senator Tiffany:
On the BAT, the first thing you did was to spread the base and raise the amount. Then you reduced the amount, but you kept the base spread.
Mr. Hillerby:
Yes.
Senator Tiffany:
I would like to know what those numbers would be also.
Mr. Hillerby:
You will be seeing some of that coming up in the presentation and if it is not enough, we will be happy to provide some more detail later.
Senator Townsend:
In the presentation last week, it had the premise the goal was to spread the burden of responsibility across as many as possible. I believe that is what you are attempting to do here with the BAT. This tax will be increased from $100 to $300 for this biennium; then, when the proposed GRT is implemented, that is an offset against the GRT of $100 per employee leaving this responsibility of $200. Is this my understanding?
Mr. Hillerby:
No. When the GRT begins at the beginning of the next biennium, the BAT will be reduced to $140 per FTE. A business subject to the GRT could take a credit of $100 per employee against their GRT liability. As we get more into this presentation there are some specific examples of businesses, hypothetical and real, and what the tax burden would look like.
Senator Townsend:
But, that only affects those above $450,000 in gross revenue.
Mr. Hillerby:
The credit does, yes. The BAT would reduce for all businesses from $300 to $140. So those small businesses, the 62 percent below $450,000 would not be subject to the GRT and would have their BAT reduced from $300 to $140.
Senator Townsend:
Did you get into a discussion with the task force regarding the thought process of going against their premise of stable and broad base, then raising this? They had $350,000, you have $450,000. It is easy to say we do not want to hurt the little guy, but that comes right on the heels of them saying they want it to be as broad-based as possible, and you have taken in some other individuals not previously in the BAT handout, Comparison of Revenue Proposals in the 2003 through 2005 Executive Budget (Exhibit D), referring to sole proprietors. How do we answer that?
Mr. Hillerby:
The economic impact of the Governor’s decision to raise the threshold from $350,000 to $450,000 is between $6 and $7 million. That is the hit we take by exempting those businesses. In terms of broadening and expanding the base, as you said, we continue to keep sole proprietors and the others paying the BAT, the business license tax fee as well, and there are also the BAT increases from $100 to $140. Those businesses will also see the same kind of increase in their property tax rate as residential citizens.
Senator Townsend:
Then, if I may follow up: if we could get the number I previously asked for, which is those working Nevadans who are falling under Medicaid and also our friends in the medical community who have bad debt as a result of persons who are working, but are unable to pay their medical bills and that does happen to people unfortunately. Then, it goes back to the issue of trying to encourage employers to provide health benefits for two reasons. One being the competitive side of it so you can bring the best employees here and make sure they were covered, because it is the right thing to do. The other thing is we, as a State and as taxpayers, become responsible for medical care. Even though it is 50 cents, it is 50 cents we did not have.
Mr. Hillerby:
We become their health insurer, and we agree to that. The other issue is we know people who do not have health insurance often wait longer to gain access to care, then, the care they do get is more expensive. Regardless of whether we are paying 50 cents on the dollar or not, this is an expenditure we are concerned about.
Senator Townsend:
The other issue, being a problem relative to this, is the less people insured, the less premium tax being paid, and this is another major component of our revenue.
Mr. Hillerby:
It is the third largest General Fund revenue string.
Senator Townsend:
We have not wrestled with this and unfortunately, the previous task force members had a tough time answering serious policy questions. Two of our Senators and I have asked the question for 20 years. How do we help working Nevadans who do not have health insurance? If we can work with you and our colleagues from the House to try and figure out incentives for this, we would be thrilled.
Mr. Hillerby:
We would be thrilled to engage in a discussion of that importance as well.
Senator Townsend:
I do not have the answer; otherwise, I would share it with you. This is why I am asking for those numbers.
Assemblyman Griffin:
I have two very brief questions and I might have missed this from last week when Mr. Hobbs made his presentation. I remember the $140 figure was based on the fact the $100 had not been raised since 1991, or whenever it had been implemented, and $140 is roughly the same value of $100 in 1991. When it goes back to $140 will there continue to be an index from there, or is it going to be flat on $140?
Mr. Hillerby:
The Governor’s proposal does not include an indexing function.
Assemblyman Griffin:
It does not?
Mr. Hillerby:
No, it does not.
Assemblyman Griffin:
Thank you. My second question is if a GRT is created does the gaming industry pay into this tax as a GRT, or do they have their gross gaming fees raised and their gaming revenue exempt from the GRT? Not exempt, but are they going to have all their gaming revenue and nongaming revenue applied to the GRT?
Mr. Hillerby:
Yes. All nongaming revenue and all revenue not subject to the gaming tax.
Assemblyman Griffin:
So the gaming…
Mr. Hillerby:
Would be subject to gross receipts, yes.
Assemblyman Griffin:
Then, would the gaming fees remain as they are and the fee coming in from gaming is what they would use to pay the GRT?
Mr. Hillerby:
The gaming fee is proposed to go up the same 0.25 percent the gross receipts would kick in, so for the top tier that would raise from 6.25 percent to 6.50 percent for the revenue subject to the gaming tax. All revenues from hotel casinos that are nongaming revenues will be subject to GRT.
Assemblyman Griffin:
Thank you.
Chairman Parks:
Mr. Hillerby, for the interest of time, if there are questions directed to you, which have a subsequent slide and would be better explained when you get to that point, I am sure we would prefer to defer questions until then.
Mr. Hillerby:
Moving into some detail, phase 1 is the proposal for the current biennium to: increase the BAT to $300 per FTE for a year, expand activity base to include all businesses, sole proprietors, and all employees, increase Secretary of State fees by 50 percent, enhance the liquor tax to reflect an 89 percent inflation adjustment, increase the State cigarette tax by 70 cents per pack, and adjust the restricted slot tax at 33 percent inflation.
This is the amount of money to be generated this biennium, the final quarter. These are the estimates: an increase of $39.7 million on the BAT by expanding the base another $3 million, approximately $6.8 million from the Secretary of State fees, liquor tax of $4.2 million, cigarette tax increases to $29.7 million, and the slot route tax at $0.6 million, for a total of $84 million.
This is the proposal to get money to finish this biennium, put some money back into the rainy day fund, and to ensure our ending fund balance remains above the statutorily required 5 percent.
The Governor believes this is a prudent plan to get us through the end of the biennium, and with something in the rainy day fund, because we do not know what is ahead. There are obviously great concerns about war and rumors of war, what it might do to our economy, and our tourism base. There is a lot that can happen between now and the end of the year.
Assemblyman Marvel:
If you raise the Office of the Secretary of State fees, will we still be competitive with states like Delaware, or will this turn people away from Nevada and in the end, reduce our income?
Mr. Hillerby:
We believe this will still make us competitive. There were some concerns expressed 2 years ago about a bill that raised some of the secretary of State fees. They have had tremendous growth in the kinds of filings they have seen. Nevada is still an attractive place. I understand there are some other proposals from the resident agents and other groups about ways to structure this to make it more attractive for initial filing and different ways to do the fees that may raise the same or more amounts of money. We look forward to seeing those proposals.
Assemblyman marvel:
Have you worked with Secretary of State Heller on these fees at all?
Mr. Hillerby:
The secretary of State’s office was involved in the preparation of their budget and whatever increases and mechanisms they need to do an increase. Understand that some of these fees affecting this calculation were billed in January of this year and are annual fees. If a new corporation comes in and submits filing fees, we will see some of those revenues in this quarter, if these measures were passed.
The next chart shows the impact of the liquor tax increase. Again, liquor is taxed on volume, not on price. The current tax for beer and wine has two levels of liquor: less than 22 percent of alcohol and higher. What this amounts to is a six-pack of beer would go up by 4.5 cents, a fifth of whiskey by 36 cents and a 750 ml bottle of wine, standard size, would go up about 10 cents. This is the impact of the liquor tax increase.
Cigarette taxes would go from 35 cents in State taxes per pack to $1.05. Some information on what the current cigarette tax rates are in other states or the proposals they are considering at the moment, and where Nevada would sit: we would still be lower than everyone but Utah, who just recently increased its tax by 18 cents and are at 70 cents per pack.
Moving on, phase two, which is the next biennium, would change the one-time business activity or license fee to an annual $100 fee, increase the property taxes by 15 cents per $100 assessed valuation in the second year of the biennium, levy a 7.3 percent tax on admissions and amusement expenditures, again essentially following the recommendations of the task force and their definition.
Going into some detail about the admissions and amusement tax, I think you heard a great deal about this last week from the members of the task force. It would apply to spectator entertainment such as professional sports, concerts and the like, and other entertainment as DVDs, videos, game rentals, and movie ticket sales. The exemptions would be nonprofit activities associated with public, private schools or for charitable purposes, nonprofit organizations, activities already taxed by the State, like the casino entertainment tax, and boxing and wrestling fees. The advantages of the admissions and amusement tax are they generate additional revenue, broaden the State tax base, and increase overall stability of the fiscal system.
As with any of these kinds of plans, there are disadvantages. The consumer costs for admissions and amusements is going to go up under this plan, and it requires the Department of Taxation to establish new accounts and educate those tax payers who are going to be filing these forms. Some may be new to this system. They may be filing the BAT now, so there will be some taxpayer education.
This is the breakdown on phase 2, where the revenue is coming from and how much it amounts to. I can provide further breakdown later in this presentation to Senator Tiffany’s question. Looking at the next to the last line, the taxes we propose to increase the end of this biennium, to collect one quarter, will generate $344.6 million in the first year of the biennium, 2003 through 2004, and will generate $362.5 million for 2004 through 2005.
Going through the complete table, you can see how much this brings in. I just want to point out the property tax increase begins the second year of the biennium on the proposal to bring in approximately $100 million. Total revenue for phase 1 and phase 2 to get through the next biennium is $436.2 million in the first year and $558.1 million in the second.
Phase 3 involves the GRT, which I think most of the questions coming in today will concern. Phase 3 covers the 2006 and 2007 biennium and will impose a GRT on business revenues above $450,000. The BAT will decrease from $300 per FTE to $140. The gaming percentage fee will increase by 0.25 percent and again, we have just pulled out the top tier on this chart, which is the one people talk about the most because it generates the most revenue, but all of the tiers will also go up by 0.25 percent.
Let us look at the GRT overview. The tax rate is 0.25 percent with a standard deduction of $450,000 per year from the gross receipts and a credit of $100 per FTE. The number of employees with a credit is the same as those that they pay for the BAT. The tax base is all of the gross receipts from business activity which takes place in Nevada except for those receipts expressly excluded. The exemptions include governmental entities and gaming activity currently covered by the GRT and chapter 463 of NRS. Again, the gaming percentage fee would go up 0.25 percent when the GRT kicks in and all of their nongaming revenue would be subject to the GRT.
Rental receipts received from four or fewer residential units by natural person are exempt under an average and this mirrors, to some extent, local laws. Henderson, Las Vegas, Clark County, and Reno do not define an individual, such as a retiree who owns a duplex or home and rents this out, as a business. These people would be similarly exempted from being considered a business if the units were residential. Insurance premiums subject to the current State insurance premium tax would also be exempt from the GRT calculation along with nonprofit organizations.
Nevada law currently provides that nonprofit organizations that enjoy a 501 (c) designation from the Internal Revenue Service and meet the other requirements in the existing Nevada statute are exempt from sales and use taxes and the current BAT. The Governor’s proposal recommends the same philosophy be carried forward to the GRT.
Other deductions to the GRT are bad debts, fund-raising activities and dues to nonprofit organizations, income unconstitutional to tax, such as the net proceeds on minerals for mining and insurance payments you receive from an insurance claim. The payment is treated like the federal government treats such income and not considered income for the calculation.
Financial institutions, mortgage companies, real estate and travel agents and the like, who handle money in a disclosed agency capacity for the consumer, would not pay the GRT on past due revenue. They would pay the GRT, if eligible, on commissions and profits made in the mortgage business and real estate business so you would not pay the GRT for, example, on the purchase price of the home, if you were a large enough real estate firm or individual, to be over $450,000; you would be subject to the tax on the commission only. Once again, past due revenue in a disclosed agency capacity is not included.
Moving onto the second column, other deductions are income from governmental sources received by hospitals and healthcare providers, where Medicare, Medicaid and similar kinds of programs would be deducted from their gross receipts. Operating income of public, electric, gas, sewer and water utilities would be subject to a local franchise tax by local governments.
Agricultural products sold at wholesale are very important and include ranching and farming. Those prices include cross-border sales difficult to adjust within such businesses and also end products for the end user, those currently groceries, exempted from the sales and use tax and are a continuation of that philosophy. So, the proceeds from agricultural activities, farming and ranching, would be exempt from calculation or deduction on the calculation of gross receipts.
Assemblyman Arberry:
It is interesting you have all of this information. Now you are going to put all this burden on the Department of Taxation, how many people are they going to need to take care of all this?
Mr. Hillerby:
I will defer this to Mr. Chinnock who will be here on Thursday to do a full presentation on their budget proposal, the number of people, how they are going to be divided between the different tax areas, and talk more about implementation.
Assemblyman Arberry:
Once this is done, how long will it take to transition all this so they know what they are doing when you have all the people?
Mr. Hillerby:
The proposal is to begin hiring and making an investment in technology in those people this biennium, so we are better at the taxes we currently collect and more efficient. We can implement the taxes proposed for the end of this current biennium and the upcoming biennium and be ready to implement the GRT at the beginning of the following biennium. This is the investment, roughly $32 million, the Governor has put into the Department of Taxation. I will let Mr. Chinnock handle the details of this on Thursday.
Assemblywoman Gibbons:
Can you give us an example of what deductions would be clarified, how it would help the businessperson with operating income of utilities, and the agricultural products? It says wholesale, but then your last statement made me think it was all agriculture. Would you explain this in more detail to me?
Mr. Hillerby:
Currently, it is food products other than those prepared for immediate consumption. Most of the things we buy in a grocery store are exempt from the sales and use tax. This same philosophy would apply to the products grown or raised such as cattle and sheep. Agricultural products grown and raised in Nevada sold on the wholesale market would be exempt from the GRT. A lot of the alfalfa and hay are sold across the border and again, most of those are in a commodity market. Milk, as a good example, is set at a commodity market and has a large impact to these businesses. If they engage in other business activity, at a level high enough to subject them to the GRT, this deduction would come into play. If this is the core of their business and all they do, then these businesses would largely be exempt from the gross receipts portion. They would still be subject to the BAT and other State levies currently set.
On the utility question, businesses pay franchise fees in jurisdictions in which they operate. Those utilities would essentially be double-taxed. The Public Utilities Commission of Nevada, in most of these cases, regulates them. The increases would be passed onto customers in the form of increased utility rates and this is part of the rationale for the exemption. I will have to get back to you, but I think there are some other legal ramifications, because of the franchise fee, that actually prevent us from doing that.
I want to take a moment to show you how the GRT is calculated. It has clearly been the source of discussion, and news reports. We want to be very careful. We have had businesses write us, call us, come in to see the Governor, wanting an explanation of GRT. The Governor is an excellent salesman of this plan; they generally leave feeling they can afford it and like doing business in Nevada. But there are some frequent mistakes made and I want to do a very simplistic example about how this is calculated.
It assumes a business with $1.1 million in gross revenue and 3.5 FTE will immediately get a standard deduction of $450,000, which means their taxable revenue is now $650,000. At 0.25 percent, the tax liability for the GRT is $1625. They are entitled, under the Governor’s proposal, for a credit of $100 per full-time employee or $350, leaving their liability for the GRT, in this simplified example, at $1275.
It is amazing the number of people we talk to who do not realize about the $450,000 deduction from their base income. But a quarter of a percent is not 0.25 on your calculator it is actually 0.25 percent or 0.0025, and it does make a difference.
Here is a company with $1 million annual gross and 7 employees. Again, $1 million minus the standard deduction of $450,000 gets you at your taxable revenue, taxed at 0.25 percent is $1375. This particular business, by having 7 employees, would enjoy a $700 credit against the GRT liability.
In no case under the Governor’s proposal could you have a credit for your BAT larger than the amount you own in the GRT. For example, if this company had 20 employees they would not be entitled to a $2000 credit against their $1375. They would be entitled to a maximum of $1375. We are not going to carry that credit forward. Looking back to the example of the credit of $700 leaving their GRT liability at $675. They then pay the BAT, which again goes down to $140 in that biennium, times the 7 employees for $980, leaving their total at $1655. Compared to the $300 BAT, this particular company would save $445 under the GRT plan.
Assemblywoman Gibbons:
How would you envision the businesses pay this, on a quarterly basis such as prepaying?
Mr. Hillerby:
Probably quarterly, in arrears.
Assemblywoman Gibbons:
Is there any way you would be able to combine the two so businesses would not have to do all the paperwork for the BAT tax?
Mr. Hillerby:
That would be on one form, they would do that at one time.
Assemblywoman Gibbons:
They would not pay twice and then get their deduction?
Mr. Hillerby:
No. They would do that all at one time. Part of the rule-making process could talk about businesses doing this annually versus quarterly. One of the things Brenda Erdoes and her staff is helping us with is which things are best spelled out in the law and which are best handled administratively with the commission to withstand the constitutional challenges with the implementation of the tax.
Assemblywoman Gibbons:
It seems as if it is going to be costly to implement this program.
Mr. Hillerby:
These are some of the conversations the task force had with the Governor and his staff. One of the things the task force did was to address the impact of the BAT and to talk about how do you spread that burden. Again, the Governor firmly believes there are lots of other people with good ideas and we have the next 3½ months to discuss simpler ways to do this and still generate the kind of revenue and essentially keep the basic initiative of A.C.R. No. 1 of the 17th Special Session in mind.
Moving to the example of a $2.5 million annual gross business with 17 employees, it is fairly straightforward to calculate the GRT that is due. They enjoy a $1700 credit because they have 17 FTE, so their GRT due at this point is $3425. They owe $2380 in the BAT for a total tax burden of $5805. Compared to the $300 BAT at $5100, this particular business would pay $705 more next biennium than they would the upcoming biennium in gross receipts and BAT.
One last example is a smaller to midsized company with $5 million annual gross and 33 employees. Again, their total gross receipts and BAT due would be $12,695 compared to a $9900 liability under the proposed $300 BAT. This company would be paying almost $2800 more with the $5 million annual gross under GRT.
Senator Townsend:
When we bring in the GRT and we give back a credit, I would think as you move up to these larger companies from the $5 million to the $100 million annual gross, we are giving back a lot of revenue based on an individual. It costs the same amount of money to educate an individual no matter if they live in Clark County or Washoe County, with whatever income. The same with fire and police, so was there a thought given to just leaving the BAT? Leaving it at the original $300 dollars as opposed to bringing in new revenue, which might have a substantial cost and tough time implementing some of those things. Was there a look at this?
Mr. Hillerby:
The Governor did give a great deal of thought in working the formulas in two areas. One, trying to deal with how much revenue was out there, and what the market could bear. There is an inference that if you have some number of employees, you are generating a fair amount of revenue and there may be some room. Obviously, because these are not profit taxes, they do not directly take into account the ability to pay. To do both of those things, the Governor was very concerned that leaving it at $300 and having the GRT was going to be too big a burden on many businesses.
Senator Townsend:
I am looking forward to growth in this State. I am hoping we can use some philosophical premises for debate and start to work together on where we want to go. We need to consider the basic premise on where we want this State to go and how we are going to fund it.
Mr. Hillerby:
We would like that also and encourage what you term today as good jobs we would like all of our working Nevadans to have: those paying an appropriate wage with benefits.
Senator O’Connell:
In your presentation, you referred to the property tax as 15 cents.
Mr. Hillerby:
Yes.
Senator O’Connell:
Have I misread that? I thought it was 16 cents?
Mr. Hillerby:
The Governor has two recommendations, one being an increase to the General Fund at 15 cents per $100 of assessed evaluation. He has also asked, as a part of the capital improvement project, for an additional 1 cent above the 15 cents we currently have for debt service. This will also necessitate exactly the same process we have for the 15 cents; so in essence, I think it is fair to say this is a 16-cent issue, because we have counties at the cap that could not be taken out of the existing tax revenue and I do not believe it is the Governor’s intention to force those counties to lower theirs so we can fit in more of ours. We need to honestly address either raising the cap or exempting the State’s portion from the cap, but either way, acknowledge many of those counties are up against the cap and are still having difficulty.
Senator O’Connell:
Initially, the task force was looking at the 15 cents as a bridge until the time you brought in the GRT. Is that no longer being considered as the bridge and now are you looking at the BAT as the bridge?
Mr. Hillerby:
The Governor’s proposal does continue the property tax increase into the future and the increase in the BAT, essentially, yes, becomes the bridge for the next biennium.
Senator O’Connell:
What about the proposal to reduce property tax as soon as the GRT starts? Is this no longer a part of the proposal?
Mr. Hillerby:
That is no longer a part of the Governor’s proposal.
Senator O’Connell:
Then, the 16 cents is permanent.
Mr. Hillerby:
Yes, Senator, that is the proposal.
Senator O’Connell:
Thank you.
Assemblyman Griffin:
Two questions, if I may. Page 14 of the handout (Exhibit C) states all the gross receipts from business activity that takes place in Nevada will be exempted except for the other exemptions. We have some concerns about Microsoft, in Reno, which has a pretty high gross, but I do not believe the gross receipts are generated in Nevada. If it were not Nevada gross, would it be exempted as out-of-State gross that comes to Nevada and be exempted from the GRT?
Mr. Hillerby:
Yes, it would. The same holds true for some of the large banking firms in the State and we want to talk about Nevada-based revenue. This topic is obviously going to take some considerable work, more than we have done to date on the bill, and by the time we get out of here, probably a lot through the tax commission and ultimately, potentially, even in the courts to really identify how you go about doing that. There is a lengthy discussion to be had on the issue of allocation versus apportionment. I know your fiscal and your legal staff have looked at this as well. Whichever is most constitutionally defensible combined and factored with the tax easiest to collect which generates the most revenue, this is the balance we have to strike.
Assemblyman Griffin:
Does the GRT also apply to business done by the resident agents, which have all kinds of business activities they can conduct on behalf of other corporations, or do they file here? The resident agents doing the filing, of course, are subject to the tax, but a bulk of their clients outside Nevada would not be subject to it.
Mr. Hillerby:
That would be my understanding.
Assemblyman Griffin:
Is this the same way it works in the state of Washington? I believe it is the only other state with an integration of the GRT.
Mr. Hillerby:
They have spent a great deal of time on apportionment and allocation. New Mexico and Hawaii have taxes that operate in similar ways and have dealt with the apportionment allocation. We have the benefit of their experience, some Supreme Court rulings, and how they, as members of the Multistate Tax Commission compact, deal with financial institutions and how those revenues are apportioned amongst states versus allocation. There is some track record for us to follow.
Assemblywoman Gibbons:
Being a businessperson, I try to think of ways not to hit the everyday taxpayer. I do think businesses are willing to pay their fair share and do not want a lot of bureaucracy and waste. Is there a way you could tax businesses or the cost of doing business and collect it through the State industrial insurance system?
Mr. Hillerby:
I think we would have constitutional problems because we would have to tax people equally and likely cause a problem with the taxpayer’s bill of rights which would probably necessitate a constitutional change. To identify a tax rate for a business based solely on a subjective factor of value to the community would likely lead to serious legal questions.
Senator Tiffany:
I want to go back to the BAT. When I look at page 13 of your handout (Exhibit C), it shows the BAT decreases from $300 to $140. You pointed out, at the top of that page, the annual $100 business license renewal was actually the number for the BAT. It looks to me like the “business license” is very different than the BAT.
Mr. Hillerby:
These are two separate issues. There will be an annual business license fee of $100 and an annual BAT. It will be the BAT, per employee, at a charge of $140.
Senator Tiffany:
You said my question was answered by how much the BAT was when you pointed to the business license. I want to make sure I was clear on that.
Mr. Hillerby:
I thought you had meant by capturing the sole proprietors and others currently exempt from the BAT, not the license tax. The business license tax does generate a number and we do have some figures on that tax.
Senator Tiffany:
There are line items on here and it looks like you give $100 per employee credit back against the GRT. Are those $40 kept somewhere?
Mr. Hillerby:
Yes.
Senator Tiffany:
I did not see it anywhere.
Mr. Hillerby:
When you look at the actual calculations for business, in this case the $100 million business next to the last line for BAT, we collect the $140 for every employee. Those businesses subject to the GRT can enjoy a $100 per employee credit against the GRT liability. The $40 net difference is a tax they are still paying.
Senator Tiffany:
So, what you have done is you have shown the $40 back in the example.
Mr. Hillerby:
Yes.
Assemblyman Hettrick:
You mentioned New Mexico and Washington State. New Mexico, as I understand it, is phasing out GRT. The state of Washington just did a study by a task force like ours and said the GRT was an unfair tax. They recommended a wholesale change in it. If we are going to take advantage of their Supreme Court decisions, why are we not taking advantage of their actual experience in regard to this tax? This was a rhetorical question. But what if the $264,000 GRT and BAT due on this company was their total return on investment?
Mr. Hillerby:
We acknowledge there is a problem in this tax and it does not directly address the businesses’ profitability. No tax is inherently 100 percent fair and some are better than others. The Governor feels comfortable going with the core recommendations of the task force on tax policy and making it a part of the budget proposal. The Governor believes this is an important process.
Assemblyman Hettrick:
I understand no tax is a good tax and we all understand services have to be paid for. But what really concerns me is a little company and a $100-million company might have 400 employees with insurance and another one might have 400 without. They are both going to pay the same tax. Taking the one with health insurance, if $264,000 was their total return on investment and they decided to quit, or move, not only do we put 400 people out of work, but we lose 400 people with health insurance and we are going to pay. These are major concerns. I am wondering if we have done enough work down the line to really figure out what the impact would be? Do we have a list of how many companies there are in the State of Nevada who make $100 million annual gross and would be subject to this kind of tax?
Mr. Hillerby:
I do not know. I will have to find out the answer.
Mr. Hettrick:
How did we calculate the net income we generate from the GRT, ultimately?
Mr. Hillerby:
Again, I probably would have to refer to Mr. Hobbs and the members of the committee.
Assemblyman Hettrick:
My concern is simply we have to come up with a way to develop the net income figure. We have to have some idea of how many companies there are making money over the $450,000 and how many employees they have. We need something to understand how we are getting to these numbers.
Mr. Hillerby:
We received information from the Department of Employment, Training and Rehabilitation, the Department of Taxation, and other federal sources. There are all kinds of information about companies and their employee numbers. I simply do not have that information here. It sounds as if you want to be part of the conversation with Senator Townsend and others as an incentive for those employers who provide health insurance, other meaningful benefits, and wages.
Assemblyman Hettrick:
Thank you.
Mr. Hillerby:
Going through some of the advantages, it does meet the objectives of A.C.R. No. 1 of the 17th Special Session in providing a stable, broad-based revenue source. It does not fluctuate during economic downturns to the extent some other taxes do. It can be deducted as a cost of doing business on the federal income tax return, just as State and local taxes can be deducted from your personal income tax. We believe it is fairly easy to understand and simple to calculate.
It provides tax relief for small and new businesses through a standard deduction and credit for employment. Nevada Revised Statutes do exist about tax abatement for new businesses with the BAT. This is something we ought to discuss. What, if any, do we want to have carried forward in the gross receipts. There is no discrimination due to the structure of the firm; everybody is going to pay the BAT and GRT regardless of the structure of the business. In 2006, the total income we will see from GRT is $198 million. The tax those corporations would have otherwise paid by being able to deduct it stays here in Nevada.
Disadvantages are it clearly contributes to the tax burden on low profit margin firms. That has been a great concern to the Governor and a great concern to many of you and the task force.
Assemblyman Goldwater:
Just for a point of clarification, you say this is something we want to talk about; this is something we want to visit. You are presenting the Governor’s proposal to us. Will the Governor’s proposal apply the GRT to abatement programs?
Mr. Hillerby:
The Governor has not recommended any changes to the existing tax abatement language. That is a discussion he thinks is important to have in this forum.
Assemblyman Goldwater:
The Governor is not recommending anything on the abatement?
Mr. Hillerby:
No, he is not recommending anything specific on the abatement language.
Assemblyman Goldwater:
So what is the Governor’s message, “Here are some suggestions,” or “Here is my proposal?”
Mr. Hillerby:
No. The Governor has a very specific proposal on balancing the budget and producing the revenue needed to balance this budget. He has said and maintains he is not the only one who has ideas. Your two committees are an important part of this, as well as others and business groups who have proposals. At the moment, by law, the Governor is the first one to put his proposal out on the table, along with the budget and tax plan to pay for it. There is a very specific proposal. We acknowledge there are other provisions in the statute we may want to take a look at and ultimately everyone may want to vote. Any credit we give on one side has to balance the other. It has an impact on the bottom line in balancing the budget.
Assemblyman Goldwater:
Are there some things in this proposal that are matters of principle on which he absolutely would not bend?
Mr. Hillerby:
The Governor is strongly supportive of the proposal as it comes over to you. The BAT, the need to raise property tax, both the 15 cents for the General Fund, and the extra penny for debt service to the Capital Improvement Plan (CIP), and the cigarette and liquor taxes. If there are modifications to these that meet the ultimate objectives of A.C.R. No. 1 of the 17th Special Session and create a broad and stable tax base and balance this budget, he is happy to engage in such discussion.
Assemblyman Goldwater:
Thank you.
Mr. Hillerby:
With the disadvantages, there has been talk the tax can have a tendency to pyramid as it moves through the economy and is not transparent. Meaning, it is not obvious to the people engaged in this as to what the tax is going to be as they make decisions on buying and selling goods, particularly at the wholesale level. Here is a new revenue for phase 3 coming in the second biennium. The GRT and gaming together would generate $222 million the first year and $229 million the second. There would be a reduction in tax revenue from the BAT, going from $300 down to $140. This would be a reduction of $130 in the first year, $132 in the second and you can see the total new revenue carrying forward what was done in phase 1 and phase 2, projective for 2006 through 2007.
I want to give some very specific examples. A couple of these are on the chart behind me. Here is a family of three nonsmokers with roughly a median home price of $180,000. The total increases they would see starts with $94.50 in their property taxes. Assuming they consume two six-packs of beer a week, they would see a total annual increase of $4.68. Going to two movies a month, two adults would be $44.66 for the year, and three concert-type events are $32.85 a year. Total increase using this model for the three-person family is $176.71, including the property tax.
The second example is a family that includes a smoker. One pack a day at a 70 -cent tax increase gives a total tax increase of $432.21. You need to be careful taking the total tax package and dividing it by the number of citizens. We do not pay taxes on a per capita basis. There has been a lot of talk, asking if this is a $490 or $500 hit on every man, woman, and child. On paper, per capita, this is what it looks like.
Tourists pay a lot of our taxes. Sales and gaming taxes are paid in other ways, and large businesses are going to pay taxes, some of which will be passed on to Nevada consumers. Some of them will be passed on to consumers from out of state, either through export or through purchasing goods while they are in our State.
I want to give examples to show the increase on some of these businesses. This particular business makes less than $450,000 a year, so it is not subject to the GRT. It would see an increase of $40 to its BAT. This is compared to today, for what it would be paying when the GRT kicks in. It would pay an extra $40 for each of those 3½ FTE and an annual license fee of $100. The corporate filing fee would increase $42.50, its property tax would increase $49.20, based on this example, and the value of the property the business leases or buys. Total tax increase for this business is $331.70.
The same methodology is used for a business with a $1.1 million gross with 3½ FTE. This is a consulting firm based here in Nevada and we are using real numbers. Business tax, again, we increase $40 per year times those 3½ FTE, then apply the same business license, property tax, and corporate filing fee increases. It would be paying a GRT on $650,0000 worth of revenue at $1625, and a $350 credit against this for the BAT it pays. The increase for this company in taxes is $1606.70. This is the annual increase it would see under the plan. A medium to large-sized business of $2.1 million gross, using the same math would have a total tax increase of $3111.74.
This concludes my presentation. Thank you and I would be happy to answer any questions that you may have at this time.
Assemblyman marvel:
Did you consider looking at the exemptions on the sales tax and doing away with some of them?
Mr. Hillerby:
Not specifically. The Governor has supported the general recommendation of the task force. He wanted to focus on the pieces presented for now and believes other recommendations are very important. Items such as sales tax exemptions, better collections, and other things the task force has identified that the Taxpayers Association and other groups have talked about for a long time.
Assemblyman marvel:
What ratio did you use for student to teacher in developing your K through 12 budget?
Mr. Hillerby:
We used 16 to 1 in class size reduction.
Assemblyman marvel:
Have you adopted the Elko plan?
Mr. Hillerby:
The Governor is recommending (the Elko plan) and will have a bill to that effect in the education bill. When this comes out, the class size flexibility will be extended to all school districts with some very tight controls and they will make those decisions.
Assemblyman marvel:
Have you calculated how much savings there would be?
Mr. Hillerby:
We have not done anything specific. The Governor’s submitted proposal has class size reduction. It is funded following a formula and would give the districts the freedom to use an existing amount of money. Then the decision would be made going forward whether there would be decreases in this funding. It would stay flat or increase, depending on the outcomes.
Senator Neal:
I am trying to understand some of the charts here. You talk about the disadvantages of the GRT and under this you have phase 3 new revenue taxes.
Mr. Hillerby:
Yes.
Senator Neal:
Explain to me what the phase 3 chart represents. I see GRT as 0.25 percent, a quarter of a percent, and you are raising the gross on gaming tax a quarter percent. Is that correct?
Mr. Hillerby:
Yes.
Senator Neal:
And you show a figure of 24. Is that $24 million?
Mr. Hillerby:
The $24 million is only the amount generated by the 0.25 percent increase in gaming, not the total amount generated by the 6.5 percent.
Senator Neal:
Why the figure disturbs me is because when Mr. Hobbs was here, he showed the 0.25 percent would raise $21 million. Does your math compute with his?
Mr. Hillerby:
The difference in those numbers are, the task force had the gaming tax coming in earlier, obviously that is going to grow with time. The Governor’s recommendation is that the GRT for all businesses and the increase in the gaming tax not happen until the beginning of the 2005 through 2006 biennium. Some natural growth would have incurred by then to raise number from $21 million to closer to $24 million. Our numbers with our State economists and our budget office were very close in essentially every respect with the task force numbers. We were off a little bit in our projections.
Senator Neal:
Your numbers are an estimate of approximately $3 million over and above Mr. Hobbs’ report.
Mr. Hillerby:
Yes. This is, in part, because we are waiting one more year to implement. The task force recommended implementing both of them, the gaming increase and the GRT, as I understand it, the second year of the coming biennium. The Governor’s proposal is to wait until the beginning of the following biennium.
Senator Neal:
You indicate here on this same chart the reduction of the business activities tax is $140 million. Is that correct?
Mr. Hillerby:
No. The BAT reduction to $140 per person equates to $130 million the first year and $132 million the second year.
Senator Neal:
Now, explain to me if you are talking about $140 per person. This is what we are saying?
Mr. Hillerby:
Yes.
Senator Neal:
Are you saying an industry can have those deductions for each employee whether it is 1100, or 5000?
Mr. Hillerby:
If they are subject to the GRT, meaning they have revenues over $450,000 and have a liability for the GRT, they can take a credit of $100 off of $140 for each employee up to the maximum liability of the GRT. They cannot get a credit larger than their tax liability for the GRT.
Senator Neal:
If a company has a gross receipt tax, if it has a BAT, and the GRT is equivalent to, let us use simple figures, 100 employees, it would get $140 credit per employee?
Mr. Hillerby:
No, only a $100 credit. They would still pay the $40 per employee. They would pay the BAT of $140 on each employee.
Senator Neal:
Equal to the amount of the gross receipts.
Mr. Hillerby:
No. Here is an example of a company (page 18 of Exhibit C) with $100 million in annual gross revenue and 400 employees. They get a standard deduction of $450,000. The amount they are exempt is subject to gross receipts. Their taxable revenue is then $99,550 million, at 0.25 percent their tax is $248,875. They are then entitled to $100 per employee credit, a total of $40,000. That company still owes $208,875 and pays a BAT of $140 for each employee for another $56,000. In this particular example, even with the credit, the company’s final tax liability, combining BAT and GRT, is somewhat higher than it is just with the gross receipts. You can never take a credit for your per employee larger than your GRT due. In this case, the company would have to have thousands of employees to benefit. Does this explain it?
Senator Neal:
I would assume this is not a gaming company, is it?
Mr. Hillerby:
This is a hypothetical example based on some companies we have here. If it were a gaming company, this revenue would only be their nongaming revenue, given the rough figures at about 15 percent of all hotel casino revenue is nongaming, they would be paying their gaming tax on the other $100 million revenue in whatever fashion is imposed. They would be paying the GRT on all of the nongaming revenue, in this case the $100 million.
Senator Neal:
Do you have a chart with a breakdown using your $100 million to show $50 million nongaming and $50 million gaming? What kind of figures would you show in terms of the application of the credit in this scenario along with whatever taxes would be imposed?
Mr. Hillerby:
My understanding is those would be two separate processes. One would be through the State Gaming Control Board and the way they collect tax on gaming, the other would be the company reporting to the Department of Taxation.
Senator Neal:
If these are two separate processes, should they not be worthy of our consideration for the benefit of this committee?
Mr. Hillerby
Absolutely. I would ask for the assistance of the gaming control board, which could better explain how the gaming tax is collected on win versus net and gross on the gaming revenue.
Senator Neal:
My concern is how these formulas work. With that scenario, we have one company with two different revenue pitches you have to consider.
Mr. Hillerby:
If this particular company was a casino which filed its business activity and GRT form, and reported to the State $100 million in nongaming revenue and had 400 employees, this is exactly what it would look like.
Senator Neal:
Since we would be imposing, legislatively, those different taxes, as far as the feds are concerned, would this not be a write-off for those taxes?
Mr. Hillerby:
You would be able to deduct and have a deduction against your federal income tax for the taxes you paid in Nevada. This company with $100 million would be able to deduct the $264,000 they owe in the business tax. That is as far as I am comfortable within tax advice. Obviously there are issues on individual companies and law.
Senator Neal:
We are trying to make sure we understand the dynamics of the total picture to make the proper decision; if we do not, we might wind up missing something here.
Mr. Hillerby:
We will try and find one for gaming and work with the gaming control board to be sure we can adequately explain the implementation and how they collect the gaming taxes versus the nongaming portion of the revenue.
Senator Neal:
Was this part of your consideration when you put this scenario and the charts together for us?
Mr. Hillerby:
It was part of the consideration. Those casino companies are going to pay GRT on all of their nongaming revenue. This shows how that applies to nongaming revenue. Their existing gaming revenue and gaming taxes would be collected just as they are now with the exception of the 0.25 percent increase across all of the tiers.
Senator Neal:
I would like to see something to show me how all of this works and what the offsets would be when we utilize these credits for the megaresorts we have.
Mr. Hillerby:
They do not receive any credits for the employee against their gaming tax. This is the complete picture.
Senator Neal:
But they do receive a credit when you apply the BAT minus the $140, do they not?
Mr. Hillerby:
They receive credit against the GRT of their nongaming revenue, just as any other business in Nevada would.
Senator Neal:
I would like to see how it plays out in terms of figures so I can to talk to my constituents and say the Governor has done the right thing.
Mr. Hillerby:
We will provide you with the information.
Assemblyman Goldwater:
Will you walk me through a real estate transaction, for example for a broker who might purchase a property for $10 million and sell it for $11 million?
Mr. Hillerby:
If the broker sold it for his or her own use rather than you or I contacting a real estate agent?
Assemblyman Goldwater:
Understanding gross and where gross fits in.
Mr. Hillerby:
Two examples, one is you and I go to buy a house and the real estate agency facilitates this process and handles it for us. Its potential tax liability would only be calculated on the commission, not on the price of the house. Secondly, if a real estate broker, as part of his or her business, invests in property and sells, it would likely be considered a business activity and would be taxable.
Assemblyman Goldwater:
For the full amount of the purchase price or for the property?
Mr. Hillerby:
For the full amount of the purchase price if that is the business they are in. I will talk with the Department of Taxation about how this would be implemented. If the business they are in is buying and selling property, essentially for themselves and for profit, then it would be business revenue.
Assemblyman Goldwater:
So it is the full price of the property, not their profit.
Mr. Hillerby:
Potentially, and I will have to get an answer for that.
Assemblyman Mortenson:
Senator Neal raised a very interesting question. Let us say we had a hypothetical organization that was a resort with gaming and a hotel operation and this organization did $100 million in the gaming and $100 million in the resort area, and had 400 employees in the gaming and 400 employees in the hotel operations. They will generate a certain amount of money from which they will have to pay their GRT. Can they take 800 employees and credit it against what they have to pay in the GRT?
Mr. Hillerby:
As long as they are paying the BAT on all 800 employees, we do not separate gaming versus nongaming employees. The only distinction in the Governor’s plan is gaming revenue versus nongaming revenue. If for this example, they had 800 employees, they would owe $112,000 in BAT and would enjoy an $80,000 credit against this. They would still pay a net increase to us for those 800 employees. We do not separate those between gaming and nongaming employees.
Assemblyman Mortenson:
That is real interesting. I, like Senator Neal, would like to see a composite analysis.
Chairman Parks:
Members of the State CPA (Nevada Society of Certified Public Accountants) have approached me and they would be very happy to give examples and analysis of whatever bill draft might come and have some good analysis to represent a wide variety of scenarios to both committees. I think once we have a bill and start to analyze it, we will be getting analysis and be able to apply it.
I would like to draw attention to the chart on page 21 (Exhibit C). If I were this individual, with those circumstances applied to me, I would be paying an added $94 a year in property tax, which is a tax-deductible expense, and my incremental tax rate or burden is roughly 30 percent. This means $28 would apply to what is already money I send to the federal government. As an example, these are some of the things we will be able to see as to what offsets there may be, especially from a corporate perspective, as we look at these taxes and the long-range impact on them.
Assemblyman Hettrick:
Mr. Mortenson’s example of the 800 employees being deducted entirely from the GRT, if generated in the hotel operation, the 0.25 percent added on the gaming tax is on net win. If they have no net win, they have no tax liability, so they would not pay the 0.25 percent, but every other business would.
Mr. Hillerby:
They would pay the 0.25 percent GRT.
Assemblyman Hettrick:
Yes, on the hotel operations, but if we had a 0.25 percent to gaming and they have no net win, they pay nothing.
Mr. Hillerby:
I understand the question and I would agree.
Assemblyman Hettrick:
They get 100 percent of the employees charged back against the GRT from the hotel operation, correct?
Mr. Hillerby:
Potentially. It works both ways.
Chairman McGinness:
Mr. Hillerby, if you would look at the chart, you have not calculated what it might cost this family of three, because of the increase in taxes, if they go out and buy a new lawn mower at the hardware store and he has to add $3, $4, or $2 on to that lawn mower, this has not been calculated in this chart anywhere.
Mr. Hillerby:
No, it has not. We wanted to provide a fairly simple chart which addressed directly those taxes they would see and was easy to calculate. This is going to be different for each family. I am sure this is a projection we could find experts to help provide.
Chairman McGinness:
On Thursday we are going to hear from the Nevada Tax Commission, the Department of Taxation. When we get the 175-page bill from legal, we will have something to talk about and will be glad to take your testimony at that time.
This meeting adjourned at 3:21 p.m.
RESPECTFULLY SUBMITTED:
Gale Maynard,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE:
Assemblyman David Parks, Chairman
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