MINUTES OF THE JOINT meeting of the
Senate Committee on Taxation
AND THE Assembly Committee on Taxation
Seventy-second Session
March 4, 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 1:37 p.m., on Tuesday, March 4, 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, Fiscal Analyst
Ardyss Johns, Committee Secretary
OTHERS PRESENT:
Michael Hillerby, Deputy Chief of Staff, Office of the Governor
Charles Chinnock, Executive Director, Department of Taxation
John P. Comeaux, Director, Department of Administration
John Guedry, President, Nevada Bankers Association
Chairman McGinness:
We are here to begin the discussion on Senate Bill 219 and Assembly Bill 204. It is our intention not to take a lot of public testimony at the end of today’s hearing. However, we will make accommodations for anyone who is only here for the day. Today we will hear from the Governor’s office regarding the necessity of these bills and then will ask our fiscal staff to talk about exactly what the bills do.
SENATE BILL 219: Provides revenue in support of state budget. (BDR 32-1209)
ASSEMBLY BILL 204: Provides revenue in support of state budget. (BDR 32‑1210)
Michael Hillerby, Deputy Chief of Staff, Office of the Governor:
Charles Chinnock is here today from the Department of Taxation and John Comeaux from the Department of Administration who is our budget director. With your permission we would like to walk you through the bill, which is deceptively short. Section 1 begins with a discussion of the business activity tax (BAT) imposed on full-time equivalent counts for employers per quarter. Page 2, section 4, shows the tax increase for the final quarter of this year from $25 to $75. You will find how the calculation is done in Nevada Revised Statutes (NRS) 364A.150. Just to be clear, the calculation is based on full-time equivalence and not a head count per se. It is calculated by dividing the total number of hours worked during the quarter by 468 to approximate roughly 2000-hour full-time employees. This bill would take affect on April 1, 2003, and would sunset June 30, 2003.
Section 2 shows the increase to the liquor tax. Liquor containing more than 22 percent alcohol by volume would go up from $1.90 to $3.72 per wine gallon. Section 3, subsection 1, shows liquor containing more than 22 percent alcohol per wine gallon goes from $2.05 to $3.87. As indicated in subsection 2, the liquor containing between 14 and 22 percent of alcohol would go from 75 cents per wine gallon to $1.42 and liquor containing 0.5 percent up to 14 percent goes from 40 cents per wine gallon to 76 cents. Malt beverage, or beer primarily, would go from 9 cents to 17 cents per gallon. To put that in perspective, it is about 4.5 cents on a six-pack of beer and roughly between 8 and 10 cents on a typical bottle of wine. The liquor tax is calculated on volume and not by price.
Section 4 of the bill covers the cigarette tax which would move from a rate of 17.5 mills per cigarette to 52.5 or, in English or real currency, from 35 cents per pack to $1.05 per pack. Section 5 talks about how the existing cigarette tax is divided between State and local government and the Department of Taxation and its operations. Line 36 makes that consistent with the existing law whereas 47.5 mills of the 52.5 goes to the State treasurer for credit to the account of the tax on cigarettes in the State General Fund. The rest of the language on page 3 stays the same.
Section 6 talks about the use tax for cigarettes not otherwise having revenue stamps affixed to them or not exempt from tax. Section 7 of the bill deals with the slot route operators. Paragraph (a) on line 17 increases the license fee by 33 percent, or from $61 to $81 for each slot machine up to five. Once you go over five, you pay $405 plus $141 for each slot machine in excess of five. As you can see in section 8, this does not affect the amount of taxes or license fees due for any calendar quarter or month ending on or before March 31, 2003. It affects only those taxes due for the final quarter of the fiscal year, April 1 to June 30. As shown in subsection 2, it does not apply to any taxes precollected on or before March 31, 2003, pursuant to NRS 370.
Last, the important operative provision of this bill in section 9: the act becomes effective April 1, 2003 and expires June 30, 2003.
Chairman McGinness:
Regarding the business tax in section 1, subsection 4, there was talk of extending this to sole proprietors. That is not intended in this last quarter bill?
Mr. Hillerby:
That is not included in this language.
Charles Chinnock, Executive Director, Department of Taxation:
You should have in front of you a handout from the Department of Taxation (Exhibit C). The first page refers to the business tax and, as you see with respect to the heading, this is a change only to the per quarter amount of the tax. The prior tax was $25 per quarter and under this bill would be $75 per quarter per full-time equivalent employee and distribution is to the State General Fund. The yield would be $41 million for the remaining portion of fiscal year 2003. We currently have 80,000 active business accounts and with this change, do not anticipate growth in those accounts. We do not anticipate a need to change any regulations, nor do we anticipate a need for additional resources. As far as lead time, we prefer as early as possible, but can go as late as the beginning of June to implement. That is when we send out the notices and billings and the tax would then be due July 31, 2003. The collections would be received in August and would be attributable to the prior fiscal year. As far as our information technology, we would only have to reprogram our existing Automated Collection Enforcement System (ACES).
Senator O’Connell:
Page 1 shows a $41 million yield “for fiscal year 2003” and yet the yield shown for the liquor tax on page 2 and the cigarette tax on page 4 shows “additional revenue for fiscal 2003.” What “additional” revenue would be generated with this business tax?
Mr. Chinnock:
It would be approximately $26 or $27 million.
Senator tiffany:
Do the new businesses get billed through mail or electronically?
Mr. Chinnock:
All of our billing is currently done through the mail.
Senator Tiffany:
How will businesses be notified they have to submit a different number this next quarter?
Mr. Chinnock:
We would do it primarily through mailing, but would also post it on our Web site.
Senator Tiffany:
You are hoping you will catch all of the fourth quarter people?
Mr. Chinnock:
We will catch them because we sent all the existing businesses a billing already.
Senator Tiffany:
You do not expect this to change your budget?
Mr. Chinnock:
No. We see no need to change the budget.
Next is the liquor excise tax on page 2 and the statutory authority for it is in chapter 369 of NRS. It is a tax on the importation, storage and possession of liquor. The tax is paid when the liquor is brought into the warehouse. The existing workload is a total of 66 wholesale accounts. Notification to the wholesalers and retailers will be made in the normal manner in place already. We do not anticipate a need for new regulations nor do we anticipate a need for additional resources. From the standpoint of good accounting practices, our lead time is to implement on the first of the month. As far as how we implement from a standpoint of information technology, we have a pretty basic system wherein it is relatively easy to change the tax rate and then process the billings to our wholesalers. Page 3 shows the required changes to statute. Primarily we will leave the consolidated tax distribution at 50 cents and leave the 15 cents per gallon to the alcohol and drug abuse fund. It increases the amount going to the General Fund from $1.40 to $3.22 per gallon.
The authority for the cigarette excise tax is in NRS 370. This tax is administered through the sale of tax stamps to the manufacturer wholesalers who then affix the stamp on the cigarettes. The rate and the distribution have already been discussed by Mr. Hillerby and are shown again on page 4. The yield would be $30 million in additional revenue for the remaining part of the fiscal year.
Assemblyman Griffin:
Is the yield calculated by simply tripling the current yield anticipated during the quarter?
Mr. Chinnock:
Yes.
Assemblyman Griffin:
Is there any concern that by tripling the tax, purchases would decline in Nevada?
Mr. Chinnock:
Not from the standpoint of the department because we are looking at a flat distribution as far as sales.
Assemblyman Griffin:
I know there are other states that have experienced some loss of sales volume when these taxes go up by certain amounts.
Mr. Chinnock:
The primary impact will be notification to the wholesalers and the retailers. We do not anticipate the need for new regulations or additional resources for this bill. From an accounting standpoint, it would make sense to implement on the first of the month. Like the other excise tax, it is in a Microsoft Access database and will be relatively simple to change in our desktop. The statutory changes are shown on page 5.
Assemblyman Goldwater:
These taxes plan to raise $83 million in aggregate?
Mr. Hillerby:
The total is approximately $77 million.
Assemblyman Goldwater:
Forty-five million dollars of which is going to the Rainy Day Fund?
Mr. Hillerby:
If it is okay, we will answer that question when we get to the discussion about what happens with the rest of the quarter based on the projections.
Senator Rhoads:
Did you ever consider a half a cent increase on sales tax to bridge this time instead of all these proposals? I believe the half a cent would raise about $80 or $90 million.
Mr. Hillerby:
The Governor considered a number of things and ultimately decided the recommendations from the tax force made a great deal of sense. Some of these rates have not been changed for some time. For example, the slot route was last done, I believe, in 1983 and 1984. Some of these are essentially key to an inflationary factor had those rates gone up. Therefore, after a great deal of discussion the Governor chose to recommend these over a general increase in the sales tax.
Senator Rhoads:
So there was some discussion on raising the sales tax?
Mr. Hillerby:
It was one of the options on the table. The Governor talked about a number of things in the discussion and ultimately decided the recommendations from the tax force were the ones, based on testimony, he felt comfortable recommending for the short-term package.
Assemblywoman McClain:
To follow up on what my colleague Assemblyman Griffin said, I contend, and I know I am going to be right, you are going to see an immediate flight to Internet sales on cigarettes. Right now cigarettes are the same price in Nevada as they are on the Internet. I think you are going to see a huge loss of revenues. You are not only going to lose the 70 cents, you are going to lose the 35 cents you are getting now. I just want people to be aware of that.
Mr. Hillerby:
Obviously, that is one of the considerations which we need to keep an eye. There has been great discussion of that elasticity point and where it kicks in. According to the information we have, for example, California increased some of their taxes and saw a loss of about 0.5 percent of the revenue. The increases in revenue more than offset that. Based on what we have seen, if you look over time at the increases from the manufacturer level and costs and our demand, we would be right up there along with them. If California and some of the other states’ experiences are indicative, we do not believe this kind of increase fundamentally subjects us to that level of risk. However, certainly it needs to be a part of this discussion.
Ms. McClain:
You might be right if a lot of the cigarette sales are to tourists because they will come here and buy them by the pack, but the majority of your tobacco sales are to residents who can afford to order the cartons over the Internet and have them delivered. This is where I think you are going to see a big decline.
Senator Neal:
My question goes to section 7 of the bill on page 4, line 13. How often are those restricted licenses renewed?
Mr. Hillerby:
I do not know, but I will get an answer for you.
Senator Neal:
In reading the language, you are only talking about taxing those new entities coming onboard. The $400 plus the $14l would hardly raise anything.
Mr. Hillerby:
Line 22, subsection 2, says “The Commission shall charge and collect the fee prescribed in subsection 1,” and paragraph (a) further states “On or before the last day of the last month in a calendar quarter, for the ensuing calendar quarter, from a licensee whose operation is continuing.” We collect the same tax from a new licensee and those that are continuing.
Senator Neal
How much will it produce?
Mr. Hillerby:
The adjusted revenue from the slot tax would produce roughly $600,000 in the last quarter of this year.
Senator Neal:
Would it be the same for future quarters?
Mr. Hillerby:
It would be about $2.5 million next year.
Senator Neal:
The license fees as listed here in paragraphs (a) and (b) would be collected on or before the last day of the last month in each calendar quarter. Would we expect this to be ongoing?
Mr. Hillerby:
This bill only deals with the last quarter of this year as stated in section 9, line 40.
Senator Neal:
What is the reason?
Mr. Hillerby:
This bill is only designed to address the revenue needs for the current biennium ending June 30, 2003. You will see some of these same proposals in the larger package the Governor is proposing, which should be introduced tomorrow in both Houses.
Senator Neal:
We are essentially talking about slot route individuals?
Mr. Hillerby:
Yes.
Senator Neal:
We are not talking about the big boys on The Strip like Mandalay Bay and all of the large casinos?
Mr. Hillerby:
No, Senator. Not in this bill.
Assemblyman Mortenson:
I am continuing on Ms. McClain’s idea regarding Internet sales of cigarettes. Do you have statistics on Internet sales in California where the tax is extremely high?
Mr. Hillerby:
I know from the information we have seen, after the last tax increase they had a hit to their revenue from the cigarettes of about 0.5 percent attributable to cross border into Internet sales.
Ms. McClain:
You said after the last tax increase in California, it lost 2 percent to Internet sales.
Mr. Hillerby:
No. California believes about 0.5 percent of its revenue was lost.
Ms. McClain:
I am just concerned we will lose money.
Senator O’Connell:
Have you done the timeline on the collection of these? I understand the liquor and cigarette collections do not come in until August. Will the new bill coming out tomorrow compensate for this? Is the major purpose of this to replace the money in the Rainy Day Fund?
John P. Comeaux, Director, Department of Administration:
To answer your question, let me first refer you to the handouts I provided. You should have three schedules labeled “Exhibit 1” (Exhibit D), “Exhibit 2” (Exhibit E), and “Exhibit 3” (Exhibit F). Exhibit 1 (Exhibit D) is the “Statement of Projected Unappropriated General Fund Balance – Fiscal Years 2003-05.” Exhibit 2 (Exhibit E) is simply a revised version of the same thing. The week before last, we sent over a package of proposed budget adjustments and Exhibit 2 simply takes those adjustments into account.
Exhibit 3 (Exhibit F) is actually what I would like to talk from and I think I can answer your questions. First of all, you are correct in saying a large part of the revenue these bills before you today will generate will not physically be collected until July or August 2003. However, the State operates on a modified accrual basis and many of our obligations from this fiscal year are not due and payable until July and August as well. That revenue is counted as fiscal 2003 revenue. We have been doing it this way for a long time.
Exhibit 3 (Exhibit F) starts out with the unappropriated balance of $105 million as of July 1, 2003, originally provided for by the Executive Budget. The budget adjustments we submitted the week before last resulted in a $5 million improvement producing an adjusted balance of $110 million. It has come to our attention though that part of the original temporary revenue package the Governor had proposed, namely, the increase in the Secretary of State fees included in these numbers, will not be collected in time to do us any good for this fiscal year because they take up to 90 days to implement. Therefore we need to subtract the $6.8 million from the $110 million giving us a revised ending fund balance of $103 million. If these temporary tax increases are not approved, we would further need to subtract the net of those tax increases, or $77.2 million. However, we could then add back the $45 million we proposed to put back into the Rainy Day Fund, or stabilization fund. We would end up with a net, unrestricted General Fund balance at July 1, 2003 of $71 million. After we take the $100 million proposed by the Governor out of the stabilization fund, we would have $36 million remaining. We would have an ending fund balance of about $107 million, which represents about 5.3 percent of expenditures, providing the revenues forecast by the Economic Forum come in.
So far, we are down a little in sales tax and up a little in gaming tax, so it is going to be a crapshoot, but we are not too far off the mark right now. If we do not end up with any additional supplemental appropriations required for either the Distributive School Account (DSA) or others for which we have provided in the budget, this is what we would end up with.
Mr. Comeaux:
One hundred and seven million dollars sounds like a lot of money and it is, but to put it in perspective for you, that amount represents about 19.4 days worth of expenditures for the State. The federal government, which is notoriously stingy with their money, will allow internal service funds to maintain a 60-day cash reserve. We operate on about 19.4 percent. To further try and put it in perspective, our average monthly distribution to the school districts out of the DSA now is a little over $67 million. Our monthly distribution to the University and Community College System of Nevada (UCCSN) is just under $31 million per month. We spend an average of about $8 million per week or about $35 million per month on Medicaid. We spend another $2 million on Temporary Assistance to Needy Families (TANF). If we end up going into a war or having another kind of terrorist event or anything affecting our tourist traffic, this $107 million reserve can disappear very quickly.
For example, in November of 2001, which was the month representing our collection in September of 2001, our collections were nearly $19 million below where they should have been. By the end of fiscal year 2002, our tax revenues were down cumulatively over $68 million and the local school support tax, which we guarantee for the school districts, was down another $38 million. One hundred and six million dollars disappeared in 10 months. At the same time, our caseloads for Medicaid, TANF, and others, were going up. Our revenues were coming down while the demands for our services were going up. As a result, we spent down other reserves we had built up over the years. I am talking about the intergovernmental transfer account and our federal TANF reserve. Those are gone. We spent them. What will we do if something similar happens?
We need the money this early tax increase would provide, not only to help us get out of this biennium, but we are proposing putting $45 million of it back into the Rainy Day Fund. That would leave us with roughly $81 million in the stabilization fund, which we would have to fall back on if our revenues disappeared. If we do not have those reserves, I do not think the Governor or the Legislature could react quickly enough to prevent us from having to make some severe cuts in the budget. We would have to make the cuts we could make and not the cuts that would necessarily do the least amount of damage.
Senator Rhoads:
If we do not increase any taxes between now and the first of July, how big of a hole do we have in the budget?
Mr. Comeaux:
If revenues come in the way the Economic Forum forecasts, and if everything else comes in, we do not have a hole in the budget. After all the cuts the Governor has already made, we would end up with an ending fund balance of approximately $71 million and we would have $36 million in the Rainy Day Fund.
Mr. Hillerby:
What Mr. Comeaux said is a very big “if.” The reason the Governor is presenting this to you is to lay out the case for what happens if we do not do this. There is a huge unknown out there. If we go to war, or the preparations and rumors of war have the kind of impact on the economy they are likely to have, just after April 1, 2003 is essentially the point of no return. There is a point where we cannot raise revenues attributable to this quarter and where the cuts we can make become very few.
For example, the vast majority of our workforce is subject to the NRS provisions stating you have to give employees 30 days notice before you can do layoffs. After 30 days, the clock runs out and you can begin layoff proceedings. Because you would still owe those people some payment for their vacations and sick leave, you would not see any savings for some time. If we decided to make cuts to Medicaid, the federal government requires us to provide a minimum of a 30-day notice to amend the State plan to change eligibility requirements. If we simply did not have the money and did it anyway, we would be subject to federal sanctions. We would find ourselves paying fines and paying people back the money they were not given, both providers and those who were eligible. The same for TANF should it have to be cut. There are a number of problems there.
The other piece of this is, because of the downfall of the local school support tax since about September 2001, we owe the school districts better than $70 million. As Mr. Comeaux very clearly pointed out, when you owe $67 million a month for the general ongoing DSA and do not have the money, you have to make some very painful cuts. Those could include extracurricular activities, layoffs, and changes to contracts.
Again, the reason the Governor feels so strongly about making this option available is it is the right thing to do. Right after April 1, 2003, there is a point of no return where you cannot raise the money and where there are very few cuts you can make fast enough to take care of the revenue downfall. As Mr. Comeaux said, if everything goes well, we will make it to the end of the year. The problem is, there are some great unknowns out there we have every reason to believe are highly likely to happen. The ramifications of those are very serious.
Mrs. Gibbons:
How much reserve money was in TANF and the intergovernmental transfer account and when was it taken out?
Mr. Comeaux:
I do not have those exact numbers with me, but it was something like $20 to $30 million in the TANF reserve 2 years ago and we have spent down over the past 1½ to 2 years. The reserve in the intergovernmental transfer account was at one point in time over $100 million, maybe 6 years ago. Over the last couple of years we gradually spent approximately $30 million or $40 million pretty much polishing it off.
Mrs. Gibbons:
We must have known we were getting this low for a while.
Mr. Comeaux:
Oh, absolutely. The Legislature approved, if not all, certainly most of it.
Senator Neal:
Are you privileged to any type of study indicating the impacts September 11, 2001, or a proposed war would have on the State? I keep hearing you using these things and am wondering what knowledge you have to say we might be in dire straits if these things happen again.
Mr. Comeaux:
I think we have very clear information on the effect September 11, 2001, had on the revenues of this State. We have very good information on what happened to our tourist traffic and as a result, our gaming and sales tax revenues. Those just disappeared for a while.
Senator Neal:
Well, how do you account for the fact that some of our major hotel executives gave themselves 100 percent increases in salary shortly after these occurrences?
Mr. Comeaux:
I have no idea, but it has nothing to do with the revenues the State is able to collect.
Senator Neal:
If it comes from your major industry of gaming, I would think it would have a lot to do with the revenues. When you see these people giving themselves these types of raises, would you not be suspicious?
Mr. Comeaux:
All I can tell you is what directly happened to our revenues. We ended up collecting a lot less than we otherwise would.
Senator Neal:
We have laws on the books that say the Legislature cannot get certain information from the various casinos as to what their profitability is in terms of what they make. Does the Governor have access to this information through the gaming commission or the gaming control board?
Mr. Hillerby:
I am not aware of the Governor having access to anything from the gaming control board.
Senator Neal:
He cannot get information as to what these casinos actually make either?
Mr. Hillerby:
I am not aware if he has access to that.
Mr. Goldwater:
Have we looked at other alternatives such as redirecting certain revenues for a short period of time or prepayments of some of the taxes already in place? I just want to know what the thought process was in going through this.
Mr. Hillerby:
I think the Governor considered a number of options, but ultimately felt these recommendations were the ones he wanted to present. These are closely tied to the longer-term package to be introduced in both Houses tomorrow. I believe in 1991 and 1993 there were laws changed requiring some industries to prepay their taxes a quarter in advance or a year in advance based on revenue projections. While it is certainly an option, there is some danger when you start picking certain taxpayers to pay in advance. Again, this ultimately was the set of recommendations the Governor felt comfortable making and there is a direct tie-in to the longer-term plan.
Mrs. Gibbons:
One of my real concerns is this bill seems to be targeting the business community by tripling their license tax in a quarter where people have probably done the poorest performance in business since the late 1970s. I think it is a lot to ask. I am wondering why you did not consider maybe a quarter percent sales tax increase so every Nevadan would participate in this burden. It seems we have targeted the slot fee tax for small business operators. I think it is really going to affect people. I understand we need money, but on the other hand, the people out there making the money are having a tough time making it right now. This is going to come at a time when they are really being hit the hardest.
Mr. Comeaux:
I am not sure exactly why the Governor decided to go with the cigarette tax, the liquor tax, the business license tax, and the restricted slot tax for his bridge to get us from where we are now to where we want to be. As Mr. Hillerby pointed out, those increases are included in his longer-range tax proposal. However, in my opinion, the fact we already very heavily rely on the sales tax is one of our biggest problems. There are a lot of things wrong with the sales tax. The only good thing about it is it produces a lot of revenue when the economy is strong. However, in my opinion, increasing the sales tax rate is not a very good idea.
Mrs. Gibbons:
I think since we are looking at this proposal, it would have been nice to look at a sales tax increase proposal as well. It is one I would consider in an emergency situation where it would end on June 30. This looks like something that will not end on June 30. It is going to start over again July 1 with a new budget, so how can you call this an emergency bill? It really is not.
Mr. Hillerby:
Obviously, some of these same recommendations will be in the larger tax plan the Governor is recommending. This bill however, we were very specific, does expire on June 30, 2003. Whatever package of taxes passes or does not pass, moving into the next biennium, is really unrelated to this. This talks only about the short term. To address the sales tax question, the cornerstone of the Price Waterhouse study of the task force’s recommendations and others over the years has been an identification that the sales tax is very regressive. The sales tax has been raised a number of times in the same years the slot route was not raised. It has been almost 20 years since the slot route was raised. It has been about 20 or 22 years since the liquor tax has been raised and it has been some time since the cigarette tax was raised. The BAT tax has not been increased since its inception in 1991. The broader pool of taxpayers, the general citizens who are paying the sales tax, have seen it increase in those ensuing years.
Mrs. Gibbons:
I just wondered why a sales tax increase was not one of the considerations since this is an emergency measure just until June 30 to get us over this crisis. We need to look at everything and not just target certain people.
Senator O’Connell:
When the Governor was looking at his cuts during the budget process, did he look at all of the entitlement programs to see if indeed we are means-testing them?
Mr. Hillerby:
Yes, the Governor looked at the immediate aftermath of September 11, 2001, and made decisions about welfare and TANF regarding what would be counted as earned income for those recipients who found themselves out of work. The Governor feels very strongly the set of benefits we have now work for Nevada. They make sense. Despite the fact we provide some optional services under Medicaid, we are still 51st in the country on spending. The Governor decided the levels we already had made sense and were really crucial to helping those Nevadans most in need when they found themselves out of work and eligible and in need of health insurance. That level of benefits was as far as he was willing to go in making cuts at this point.
Senator O’Connell:
I have been sitting here trying to remember which entitlement we have where we removed the assets test.
Mr. Hillerby:
It was the Child Health Assurance Program (CHAP) assets test. Last session you agreed with the Governor’s proposal to eliminate the assets test. Removing the assets test allowed pregnant women who were otherwise eligible for Medicaid to get into the program faster and therefore get their predelivery health care moving quicker. It ultimately was not implemented during this biennium because of the budget cuts. The Governor recommended the assets test be eliminated going into the next budget.
Senator Tiffany:
I want to clarify some terminology. The Rainy Day Fund has $136 million in it and the ending fund balance as of June 30, 2003, will be $77 million. It is called ending fund balance?
Mr. Comeaux:
We have a statute requiring the Governor, when he presents the Executive Budget, to provide for an unrestricted ending fund balance in the General Fund of at least 5 percent of expenditures and no more than 10 percent.
Senator Tiffany:
What is our cash flow balance right now?
Mr. Comeaux:
The information I got from the Office of the State Controller today indicated we have a negative cash balance. Yesterday it was 90 something million.
Senator Tiffany:
Is that normal?
Mr. Comeaux:
I cannot say it is normal, but it happens a number of times during the year.
Senator Tiffany:
You used another term “reserves,” so are you using what I call the ending fund balance which is the 5 percent, no greater than 10 percent; is that called reserves too?
Mr. Comeaux:
Well, it can be. I probably used that.
Senator Tiffany:
You are switching some terms. There is no reserve. The reserve then is the ending fund balance which is also taking into account all the cash flow we are talking about. Basically we will spend out of the Rainy Day Fund, we will spend out of the cash flow, and these taxes then are to fill back the Rainy Day Fund and some of the cash flow?
Mr. Comeaux:
It will not actually fill up the Rainy Day Fund because we are proposing taking $100 million out and only putting $45 million back in.
Senator Tiffany:
The next tax increase would fill the rest?
Mr. Comeaux:
Not until the second year of the biennium.
Senator Tiffany:
If we use the Rainy Day Fund, and if we use the cash flow we have, even though we are going to get down to $71 million at the end, we would not have to raise taxes. We would actually be able to do this through the Rainy Day Fund.
Mr. Comeaux:
If the revenues come in the way the Economic Forum has forecast, that is correct.
Senator Tiffany:
Therefore, it would be up to us to decide whether we want to do that and if a crisis should occur then we could raise taxes.
Mr. Comeaux:
What taxes would you raise? If we are past April 1, 2003 you could not raise taxes fast enough to do us any good this year.
Senator Tiffany:
Then we would have to go into cuts.
Mr. Comeaux:
That is correct. I do not want to leave the impression we are pressing a panic button. Most of you know until 1993 we did not have a Rainy Day Fund and we operated generally with a 5 percent-ending fund balance. However, I would like to point out this is not 1993. September 11, 2001 made most of us realize things can happen to us that have not happened before and just as a matter of good fiscal management, we need to protect ourselves as best we can, which is what the Governor is proposing.
Mr. Hillerby:
I think there is one other point to bear in mind. We have talked about the Economic Forum and our sales and gaming tax numbers which obviously drive the majority of our General Fund. Sitting here in the first part of March, we only know sales and gaming tax figures through the month of December. We have 6 months left of this year for which we do not know revenue and obviously a lot can happen. A lot may have already happened that has not manifested itself because we do not have those numbers. The Governor believes this is fundamentally very prudent and the right thing to do given the circumstances. He believes we need to have the ability to respond to the things that could happen to us between now and the end of this fiscal year.
Assemblyman Marvel:
Is there a difference between what your office and the legislative fiscal staff came up with?
Mr. Comeaux:
The only difference I am aware of is they are forecasting a potentially higher supplemental appropriation requirement for the DSA. We are at about $71 million and they are a little higher.
Assemblyman Marvel:
What is the difference between the two?
Rick Combs, Fiscal Analyst:
There is a very small discrepancy between the unappropriated fund balance as of July 1, 2002. It is a totally insignificant amount, something like $8,000. I think the rest is the same. The Governor’s office may have a better idea than we do about what some of the supplemental levels might need to be.
Assemblyman Marvel:
The supplemental for the DSA, particularly, is what I am talking about.
Mr. Comeaux:
We get information from agencies every day and supplementals may go up and down a little, but the only potential significant difference I am aware of at this point would be the supplement for the DSA. As I mentioned earlier, right now we are at about a 4.8 percent for sales tax. I think the Economic Forum forecasts a 5.2 percent for the year. If we stay at the same collection rate for the rest of the year, I do not think the difference will be significant.
Assemblyman Parks:
In coming up with the numbers for these various revenue sources, did the administration look at the rates our adjoining states pay for things such as cigarette and liquor taxes? I know the state of Arizona is now at $1.18 per pack for cigarettes, California is at 87 cents, Idaho is at 28 cents which is below what we currently have, Oregon is at 68 cents, and Utah is at 69.5 cents. With regard to liquor tax, the numbers are really quite far apart. While we are at 9 cents and Oregon is at 8 cents, Arizona is at 16 cents, California at 20 cents, and Utah is at 35 cents. Were these other state rates taken into consideration in the request by the administration for these increases?
Mr. Hillerby:
Yes they were, and looking at the transparency and portability was obviously a large part of the discussion of the Governor’s Task Force on Tax Policy in Nevada. They went through this at some length with your committee at the beginning of the session. We used the information the task force prepared. There is also other information about the general business taxes our neighboring states pay and how those compare with the load on Nevada. We tried to look at all of it in order to talk about where it puts us, who the primary taxpayers were for those things, what it does for future economic development, and cross‑border sales. We looked at all of those areas to try to make the best decision we could in putting this package together.
Assemblyman Parks:
We know there is going to be a request from the fund for the stabilization of resources. Do you know when a bill draft request may be coming forward to request the initial drawdown of the $100 million?
Mr. Comeaux:
The bill to transfer $100 million from the stabilization fund into the General Fund is being prepared by the legislative counsel and should be presented very soon, though I cannot say exactly when.
Assemblyman Parks:
Will the bill also include the restoration of $45 million?
Mr. Comeaux:
No. It will be a separate bill.
Assemblyman Parks:
I am trying to visualize what might happen if we were to have the worst world situation facing us. If we do not act on either of these two bills and then find a significant downturn in the economy before the end of the year, have we looked at the possibility of a temporary inter-fund loan from other funds the State has? It would be paid by the General Fund to cover any shortage. Are you aware of any restrictions or how the mechanics might work?
Mr. Comeaux:
To my knowledge, we have not looked at that possibility. I can only think of one place we could go where there is a significant amount of money. We would definitely have to look and see if there was a restriction on a loan from that fund.
Chairman McGinness:
Could you explore that possibility? Considering where we are, literally and figuratively, this committee’s back is to the wall. You have presented us with a number of ifs and unknowns but you have also indicated these things are highly likely to happen. Why then were deeper cuts not proposed or even thought about? If these bills do not pass over the next 10 days, then we will have to take a roll of the dice for the rest of the quarter.
Mr. Hillerby:
We will look into what restrictions there are, if any, on some of the inter-fund loan ideas and explore the possibility. In terms of further cuts and changes to the existing biennial budget, I think the Governor has been fairly clear. He feels the primary things driving our budget in kindergarten through twelfth grade education, the services we provide through the Departments of Human Resources and Corrections, and the level of public safety funding are appropriate. He did not want to cut any further which is why he recommended the option of new revenue. If new revenue ultimately does not take place and we are forced to, then he is fully prepared to make those cuts. Those are not cuts he wanted to make and he did not believe there was anything more he was comfortable doing with the level of services we provide. These are very difficult times. There are hard decisions to be made affecting every Nevadan’s life including those people who are paying taxes, those who are the recipients of services, and those people who do both. Those decisions will affect the vast majority of Nevadans who have a child in school, who drive on our roads, and who use public safety. The Governor worries about those things every day as we all do. We are very concerned and we want to make the right decisions and do the best thing we can. The Governor believes this is a prudent course and offers it to you with the recommendation to pass it.
Chairman McGinness:
We are going to ask our staff to go through a scenario they have put together. Committee, if you will look at the “Bill Explanation” staff has put together (Exhibit G) along with the “Statement of Projected Unappropriated General Fund Balance - Fiscal Year 2003” (Exhibit H), I will ask Mr. Combs to go through it.
Mr. Combs:
This document (Exhibit H) basically shows you a comparison of the original recommendation from the Governor in the Executive Budget and the revised recommendation submitted to us on February 21, 2003. Mr. Comeaux mentioned this in his presentation. The next column is “SB 219/AB 204 with LCB Revenue Projections.” I will go through the shaded lines to show you what our projections are of what the taxes in those two bills will generate. The first one is the business license tax, which appeared to us to be overstated. It seems it is possibly based on the issue of the sole proprietors and the first partner in a partnership issue. Even if this is not the reason, we still feel it is overstated. Basically, we took the Economic Forum’s recommendation for 2003 and divided by four to get one quarter’s worth of the Economic Forum’s estimate for that period. The Secretary of State fees mentioned earlier were not included in the two bills, so they were not included here. The cigarette tax would increase by 70 cents to $1.05 per pack, which would be roughly a 17.5 percent increase. According to research, for every 10 percent increase in price, there is a 4 percent reduction in consumption. Therefore we basically reduced our projection for a 7 percent decline in consumption, which brings the total to roughly $27 million. We projected the liquor tax the same way. However, one piece of the liquor tax goes into an alcohol and drug abuse program at the State level, and not into the General Fund, so we felt we could bump that up a little. We were very close on the restricted slot so we did not make any change there. As you go down the column, the “Transfer from Rainy Day Fund” is shown at $100 million and then skip one shaded line and go to the next shaded line which shows the $45 million being transferred back into the Rainy Day Fund as proposed by the Governor. By our calculations it brings the fund balance to about $98 million at the end of the fiscal year.
Clearly, there is some room to play with this scenario because you could either increase the transfer from the Rainy Day Fund or decrease the payment back to the Rainy Day Fund to get the fund balance up to where our calculations show it needs to be. If you look at the second line down after the lines on the table stop, our interpretation of NRS 353.213 would require a $100.5 million ending fund balance if you were to stay at 5 percent.
In the next column entitled “No New Taxes Alternative,” the shaded areas are now zeroed out. By our projections, you would have to drain all but roughly $1.3 million of the Rainy Day Fund. If you look at the shaded line that was $45 million in the previous column, it is now zero, indicating there would be no ability to repay any of the drawdown of the Rainy Day Fund. Under this scenario you would still end up with a $106 million ending fund balance.
The next column is a scenario in which you increase the taxes recommended in these two bills, but only by rates recommended by the Governor’s task force rather than by the amounts included in the bills. By our calculations, the business license tax would generate about $8 million and would be an increase from $100 per year per employee to $140 per year per employee. The cigarette tax would be increased from the current 35-cent rate to 70 cents, or an increase of 35 cents, which would generate by our calculations approximately $14 million. The liquor tax recommended in the bills, as well as the restricted slot tax, is the same as what the task force recommended so those figures do not change. To generate a fund balance over the statutory requirement and with some comfort level in case supplementals do increase or the Economic Forum projections do not come in as they are currently projected, you would have to increase the transfer from the Rainy Day Fund balance by $10 million to $110 million. Similar to the previous scenario, you would not be able to repay any balance at the end of fiscal year 2003.
The next scenario is to not increase the business license tax at all, but instead increase the other taxes as they are increased in the two bills. In this scenario there would be nothing generated by a business license tax or the secretary of State fees. The cigarette tax would generate $27 million with the 70 cents per pack increase. The liquor tax and the restricted slots would stay the same. By our calculations, to arrive at about a $108 million fund balance at the end of the year, you would need to increase the transfer from the Rainy Day Fund by $5 million. Again, you would not be able to repay any of the transfer.
The final alternative is to again have no business license tax increase, but to use the task force’s recommended cigarette rate increase and the increases shown in the bills for liquor and restricted slots. Under this scenario, with nothing from the Secretary of State or the business license tax, you would have roughly $14 million from cigarettes while the other two stay the same. By our calculations, you would need to increase the transfer from the Rainy Day Fund to $115 million and again, there would be no ability to repay and maintain the statutorily required fund balance.
Chairman McGinness:
As I indicated earlier, we had not planned on taking general testimony today, but if there is someone who has flown in from Las Vegas for today and will not be here Thursday, please let us hear your comments.
John Guedry, President, Nevada Bankers Association:
I speak today on behalf of the Nevada Bankers Association which supports the proposal to increase the business license tax from $25 to $75 per full-time equivalent employee during the fourth quarter of the current fiscal year. This support is an indication of our good faith as an industry. We are willing to pay our fair share of the new business taxes necessary to fund the State’s needs in the fourth quarter of the current fiscal year.
We believe this business license tax increase is a fair and sensible way to obtain additional tax revenues from business and from banking. It is the most broadly‑based business tax of all, since it collects from every business having an employee. Larger businesses and larger banks have more employees and therefore these companies will pay more tax than smaller companies. As an existing tax, it requires no additional staff or infrastructure and businesses are fully familiar with how to pay it. It is a simple tax for smaller businesses with no staff to calculate and pay.
As responsible corporate citizens, the members of the Nevada banking industry are fully committed to helping your committees and the Legislature develop a tax structure for the long term enabling a high quality of life in Nevada with excellent health care, quality education, care for senior citizens, and robust infrastructure. We commit to pay our fair share of the new broadly-based business tax you adopt for the future, based on the financial service industry’s proportionate share of the State’s economy. A tax that is fair, equitable, and grows with the economy will enable Nevada to provide an attractive environment for continued economic growth, diversification, and prosperity.
Chairman McGinness:
If there are no questions and no one else to testify on S.B. 219 and A.B. 204, this meeting is adjourned at 3:01 p.m.
RESPECTFULLY SUBMITTED:
Ardyss Johns,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE:
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Assemblyman David Parks, Chairman
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