MINUTES OF THE meeting
of the
ASSEMBLY Committee on Taxation
Seventy-Second Session
April 29, 2003
The Committee on Taxationwas called to order at 1:42 p.m., on Tuesday, April 29, 2003. Chairman David Parks presided in Room 4100 of the Legislative Building, Carson City, Nevada, and, via simultaneous videoconference, in Room 4406 of the Grant Sawyer State Office Building, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
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
COMMITTEE MEMBERS ABSENT:
None
GUEST LEGISLATORS PRESENT:
None
STAFF MEMBERS PRESENT:
Ted Zuend, Fiscal Analyst
Kyle Wentz, Senior Page
Mary Garcia, Committee Secretary
OTHERS PRESENT:
Kurt Brown, representing Capital Beverages, Carson City
Carole Vilardo, representing the Nevada Taxpayers Association
Jan Gilbert, representing the Progressive Leadership Alliance of Nevada
Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy
Jeremy Aguero, Chairman, Technical Advisory Committee to the Governor’s Task Force on Tax Policy
Paula Berkley, representing the Reno-Sparks Indian Colony
John Webb, representing the Direct Selling Association
Bryan Harrison, representing Alticor
Josephine Mills, representing Avon Products, Incorporated
Jim Avance, representing the Nevada Retail Gaming Association
Chuck Chinnock, Executive Director, Nevada Department of Taxation
Marvin Leavitt, former member of the Technical Advisory Committee to the 557 Committee
Janine Hansen, President, Nevada Eagle Forum
Curry Jameson, representing the Nevada Association of Realtors
Penny Mayer, Legislative Chair, Nevada Association of Realtors
William Freed, citizen
[Prior to the start of the meeting, the Nevada Taxpayers Association provided a summary of A.B. 281 (Exhibit G). Mr. Zuend also distributed a Bill Explanation of A.B. 281 (Exhibit H).]
Chairman Parks:
Good afternoon. I would like to call the Assembly Committee on Taxation to order. [Attendance was taken.] Today we are going to start a number of hearings on Assembly Bill 281.
Assembly Bill 281: Imposes and increases certain taxes and fees and makes various changes to provide additional state revenue and to stabilize revenue base of state. (BDR 32-756)
We are going to go through several of the particular sections of the bill, leading off with the alcoholic beverage tax increase, and then proceeding with the cigarette tax, followed by the restricted slot tax and, as time permits, property tax. Today we will have only 2 hours for our hearing, so I am going to ask you not to repeat what anyone has already said, otherwise your testimony may be cut short.
[Chairman Parks, continued.] The sections that pertain to an increased tax rate for alcoholic beverages are Sections 83 and 84 of the bill. Since everyone has just signed in on the bill as a whole, I guess what I will have to do is ask those individuals who would like to put testimony on the record related to Sections 83 and 84, dealing with the alcoholic beverage tax, to please come forward to the table.
Kurt Brown, representing Capital Beverages, Carson City:
Thank you, Mr. Chairman and Committee members, for letting me have the opportunity to speak in opposition to the alcoholic beverage taxes. [Introduced himself.] Some of the myths that are associated with raising alcoholic beverages taxes are:
[Mr. Brown, continued.] That concludes my comments, and I am open to any questions, if there are any.
Carole Vilardo, representing the Nevada Taxpayers Association:
[Introduced herself.] On this particular section of the Task Force bill, the board took a position in opposition. However, knowing how these things move, if the Committee should choose to pass this legislation, I believe there is an amendment that should be considered, and that is the fact that alcoholic beverages can be purchased by contract. You would probably want to hold harmless any contract that has been entered into if it does not have a reopener clause or non-escalating clause. That would be standard language that we have done before, and it would be upon contracts entered into prior to passage and approval of this bill. In the meantime, I am not going to repeat the testimony, other than to say that this is an extremely regressive tax.
Chairman Parks:
Thank you. Are there any questions for Ms. Vilardo? Before you leave, I think that when we dealt with previous legislation, as far as the hold harmless, is there not normally a limitation? In other words, if Mr. Brown had a contract for ten years, it probably would not extend that far, but it would extend at least for a reasonable period of time.
Carole Vilardo:
There is a difference between the way we did these hold harmless in the 1990s versus what we did in the 1980s, but the current provisions are that the contract does not have a reopener provision or a non-escalating clause. Many contracts today allow you to reopen to renegotiate prices, or they have escalating clauses relative to the price. The provision is if you do not have this, you have to actually show the Department of Taxation the contract so that they agree, but if that contract is for 10 years, it is for 10 years. We have not put a different time on it.
Jan Gilbert, representing the Progressive Leadership Alliance of Nevada (PLAN):
[Introduced herself.] In the interim we did an extensive study of the tax structure. We participated in every single meeting of the Governor’s Task Force on Tax Policy. It is hard for us to lift one item up out of this, because we do support the package. We sat through many of those hearings on why these taxes were raised. There was a lot of discussion about the alcohol tax not having been increased in over 16 years. I think a look at raising this tax is deserved. The overall expense to the consumer was going to be very little; I think it was a nickel a six-pack. We have had so many of these bills, all with different changes, but I think that was what this one was. We support it.
[Ms. Gilbert, continued.] We are very concerned about the regressivity of our tax structure. We are the most regressive-tax-structured state in the country. We are at the bottom. My group and the 43 member groups that belong to PLAN voted that we felt the importance of prevention and health care, the issues that are affected by alcohol and cigarettes, needed to be addressed. Raising the tax does tend to diminish the amount people drink and smoke.
Rather than come up to testify multiple times, I would like to say that we do support this whole package. We support the alcohol tax, the gross receipts tax, and the amusement tax. We felt it was a very well‑crafted bill, and that it had been built on the idea that everyone was going to pay. I would urge you to support some kind of comprehensive package that has a tax on alcohol, a tax on cigarettes, a tax on business, a tax on all of us. I think we have got to make it a complete picture, not just piece by piece. Thank you very much.
Chairman Parks:
Thank you. Is there anyone else who would like to speak on Sections 83 and 84? That includes not only beer, but also distilled spirits and wine. We know that there have been some other recommendations in some other tax packages that have had slight variations of these. If there is no further interest on anyone’s part to comment on these two sections, I will ask Mr. Guy Hobbs and Mr. Jeremy Aguero, joining us from the Grant Sawyer Building in Las Vegas, if they have any comments they would like to make regarding this proposed tax.
Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy:
[Introduced himself.] One thing I would note, in respect to the comments made by Carole Vilardo, is that we agree there probably needs to be some hold harmless for a limited period of time. If I could, for a moment, just think out loud about that one, I think it should probably be limited to contracts that were entered into at some date prior to now, and be limited for some period of time, perhaps no longer than 2 years. I think if we went back to January contracts that were in place at that point in time and went forward for a couple of years, we would probably be extending a reasonable amount of recognition to the existence of those contracts.
Having been involved, as I know many people in the audience were, with the Task Force deliberations on this, I just want to make note of a couple of things. We obviously recognized that this was a tax that had not been modified since 1983, which is quite a long time. The adjustments that we were recommending mirrored the impact of inflation over that period of time, so in effect we are simply restating this tax to a level equal in purchasing power to what it was when it was last changed in 1983 and no more.
Clearly, I agree with Ms. Gilbert as well. There is a clear health care public cost/public benefit relationship involved in this one.
[Mr. Hobbs, continued.] Even though the tax we are proposing sounds like a fairly aggressive increase from a percentage standpoint, it is still relatively low and competitive. We understand the argument of regressivity, but we are dealing a product here that is a non-necessity. From the standpoint of regressivity, it is not the same type of product as groceries purchased at a store for consumption. Alcoholic beverages obviously fall into a slightly different category there, as do tobacco products. With those comments, Mr. Chairman and members of the Committee, I will be here, and so will Jeremy, for any other questions you may have about the Task Force’s deliberations on this.
Chairman Parks:
Thank you. I have a question. Could you share with the Committee what the current rates in are in adjoining states? Maybe Mr. Aguero has that information. I think our concern is, at least in part, that the increase we are proposing is not terribly out of line with the rates charged in many, if not most, of our neighboring states.
Jeremy Aguero, Chairman, Technical Advisory Committee to the Governor’s Task Force on Tax Policy:
Mr. Chairman, members of the Committee, in the Task Force report there is a section specifically allocated to questions of the state-to-state comparison on taxes on beer, wine, and spirits, including hard liquor. Of course, the state of Nevada allocates this tax into four categories. Most states just allocate it to three categories. That is something we need to be cautious about. If you want to see any of these documents, we would be more than happy to provide them to you at any time, but they are in exhibits 7C-29 through 7C-31. They are current as of November 15, when the Task Force concluded. They were the information that was available from the Federation of Tax Administrators, dated 2002.
Mr. Chairman, I do not know what the best way is to go about doing this. I would be more than happy to read off some of the taxes imposed on beer in our surrounding states, if that would be appropriate. Your direction would be appreciated.
Chairman Parks:
Yes, Mr. Aguero, thank you. Why not do that? Since they are split into various categories, it would probably be most helpful to start off with beer.
Jeremy Aguero:
Okay. Beer in the state of Nevada currently ranks 43rd among the states at $0.09 per gallon. The state of Arizona is at $0.16 per gallon, ranking 32nd. California is at $0.20 per gallon, ranking 22nd. Colorado is $0.08 per gallon, ranking 48th among the states. Idaho is $0.15 per gallon, ranking 34th. Montana is at $0.14, ranking 35th. New Mexico is at $0.41, ranking 8th. Oregon is at $0.08, ranking 46th. Texas is at $0.19, ranking 23rd. Utah is at $0.35, ranking 10th. The state of Washington is at $0.261, ranking 17th, and Wyoming is at $0.02, ranking 51st.
Going to taxes on wine, one thing to be cautious of is that there are a number of states that have state-operated liquor stores for wine and hard alcohol, so I will not read the state rankings, because those may be somewhat deceptive. I will read the rates imposed by these various states. The state of Nevada is at $0.40, ranking it at 35th for what we do have. Arizona is at $0.84; California at $0.20; Colorado, $0.32 per gallon; Idaho, $0.45; Montana, $1.06; New Mexico, $1.70 per gallon; Oregon, $0.67 per gallon; Texas, $0.20 per gallon; Washington, $0.87 per gallon; and Wyoming and Utah both have state-operated liquor stores in which the complete profit is the amount of the taxation, so it is neither indicative nor reported.
The third of these reports, Mr. Chairman, is a comparison of spirits and hard liquor. Of course, many more states operate state-operated liquor stores for the sale of spirits and hard liquor. Again, I will not reference state rankings, as it may be somewhat deceptive. There are actually 18 states where the government controls the distribution of spirits. In Nevada, the rate is $2.05 per gallon. In Arizona, it is $3.00 per gallon. California is at $3.30; Colorado, $2.28; Idaho has a state-operated liquor store, as does Montana. New Mexico is at $6.06. Oregon also has a state-operated liquor store, as do Utah, Wyoming, and Washington. Finally, Texas has $2.40 per gallon.
Chairman Parks:
Thank you. Could you comment, either you or Mr. Hobbs, with regard to the general applicability of the 89 percent? I know Mr. Hobbs commented that he felt that rate increase was consistent with when the tax was last increased, which was approximately 20 years ago.
Jeremy Aguero:
Yes, Mr. Chairman. Essentially, the way the Task Force came to that 89 percent was by adjusting the rate that is currently imposed, and looking at the rate of inflation based on the Consumer Price Index for all Western urban consumers and applying it to each category. Thus, the recommended rates are effectively what the rates were 20 years ago, adjusted for inflation.
Chairman Parks:
Great. Thank you very much. Do any of the Committee members have questions relative to this? If there is no one else that would like to make any comment related to Sections 83 and 84, we will go ahead and move on to Sections 85–87. Those are the sections that increase the cigarette tax from $0.35 per pack.
Paula Berkley, representing the Reno-Sparks Indian Colony:
[Introduced herself.] I think an issue that gets constantly raised is the justifiable concern that cigarette taxes are regressive. If you ask me point-blank, “Are they regressive?” I would answer, “Yes, more poor people smoke than rich people.” It is more a question of education, I think, than money, but it is a regressive tax. I have a single page on regressivity that is being handed out (Exhibit C).
There are three measures implemented by the tobacco companies that literally have generally taken away the regressive nature of cigarette taxes and cigarette price increases across the nation. In the last year, 25 states have increased their cigarette taxes and another 20 are expected to this year. The average weighted tax increase, because some populations are bigger than others, is a $0.66 cent tax on cigarettes. It is predicted to go up to $0.73 by the end of 2003.
The tobacco companies are giving discounts to retailers of between $6.50 and $10.00. That means that, nationally, that totally nullifies all of the tax increases, which are significant. Last year, $2.9 billion was raised by cigarette taxes nationally. The most frequently induced tax of any kind in the nation is the cigarette tax. So, I think there are a lot of people looking at this for good reason.
The next reason that the regressive nature is nullified is because tobacco companies have introduced generic brands, which makes them cheaper. They are supposedly lower-quality tobacco. What this basically means to the purchasers is that they can buy a carton of generic brand for the same price as they used to pay for a carton of Marlboros 13 years ago. You name me anything that you are buying today that you will be able to pay the same price for 13 years later. Certainly, that is another consideration.
The final option out there for the poor is to roll your own cigarettes. We snicker at that a bit, but the fact of the matter is if they did, they would be, in essence, paying $0.75 per pack. So, there are inexpensive options. In Europe, they take that very seriously because the taxes are much higher. Literally 25 percent of the consumption in some parts of Europe is in roll-your-own cigarettes. Maybe if we could get over the emotional aspect, there would be a cheap alternative.
[Ms. Berkley, continued.] These facts literally have nullified the regressive nature of cigarette taxes. There are two reasons why those 25 states took that information and then raised taxes. The first reason is the spiraling cost of health care. I think most of the legislators are starting to say that the smokers should pay for their habit. The most specific and close-to-home example for the state of Nevada is that it costs $96 million out of the General Fund just for Medicaid costs for illnesses directly related to smoking. When you compare that number to the $44 million that goes into the General Fund from cigarette taxes, smokers are just not paying their way. Certainly, the $96 million is just the tip of the iceberg.
Finally, when you think of excise taxes, rather than thinking “regressive,” because we have already disproved that one, I need you need to think “luxury tax,” because that is what it is. It goes back to Adam Smith, who defined that it is a luxury tax because no one is obliged to pay for it. It is not a necessity. I think that is what makes it a luxury tax. Some people call it a sin tax; that is a value judgment. I think it is a fair tax, as long as that tax generates the dollars that non-smokers currently have to pay for smoking. Thank you very much.
Assemblyman Goldwater:
Paula, will you explain to us how the Indian tribes are taxed?
Paula Berkley:
Yes, I would be happy to. The inter-governmental agreements between the state and the tribes require the tribes to collect equal or greater taxes, so as it is $0.35 right now, the tribes are also charging $0.35. If it goes up, we, the colonies, would go up as well. We cannot raise ours by ourselves, because then we put ourselves out of business. So, we have been waiting.
Assemblyman Goldwater:
What is the competitive advantage that the tribes have in selling cigarettes?
Paula Berkley:
There is no competitive tax advantage. The reason that you get some people getting cheaper cigarettes versus others, and this goes for all discount marketers including tribes as well as Wal-Mart and Costco, is that, because of volume, they get better shelf contracts than their smaller competitors. Quite often, the tribes do not have lowest price. Costco and those guys are bigger.
Assemblyman Anderson:
The other part of that is that the revenue from the tax is relegated back to the tribe, rather than back to the state government. That is where the Native American groups have the opportunity to use those dollars for other kinds of programs in lieu of what the government might support in another venue. Would that be fair?
Paula Berkley:
Thank you. Mr. Anderson is the representative for the Reno-Sparks Indian Colony, and you can see that he has learned a lot. Yes, that is true. Just like you, we spend the tax dollars to provide services for the people. If the excise tax agreements went away, the tribal governments would fold immediately. Forty percent of our revenue is from taxes, just as the state revenue is, I think, about 45 percent from taxes.
Chairman Parks:
Ms. Berkley, I am looking at the materials that were handed out to us, and one of them does indicate your name on it, saying, “Don’t buy the regressive issue.” There was another one that said, “Don’t buy sticker shock.” Is that yours as well?
Paula Berkley:
Yes. I did not know how much time you were going to give me, but I would be glad to talk about “sticker shock.” I think it has been presented that you do not want to raise cigarette taxes too much all at once, say in one year, because people will go into sticker shock and will be angry, and it is not fair to be in sticker shock. This sheet of paper kind of overrules that.
Seventy percent of all cigarettes are bought in packs, not cartons. Smokers buy for convenience because they are addicted. Sixty percent are purchased from convenience stores. Seventy percent of all cigarettes purchased are major brands, not those cheap generic brands. They have a lot of brand loyalty. I went around last week and priced cigarettes. I went to an AM‑PM, a Sands Casino, a Safeway, a Wal-Mart, and a Smoke Shop, and I got the prices as posted. I just walked in and looked to see what the highs and the lows were, and then averaged them. For the pack-sale kind of milieu, which is the convenience store, the Safeway, and the Sands, the average price per pack was $3.63. Incidentally, R.J. Reynolds has said that right now the average pack in Nevada is $3.60, so that ended up being pretty accurate. If you went in and bought them by the carton, you would pay $2.34 for a pack of cigarettes. So, right now, every day, these guys are paying an average of $1.29 more than they need to.
[Ms. Berkley, continued.] You cannot tell me they are going into sticker shock with a $0.35 increase. No way. They already needlessly pay three times more than that every day. If cigarette prices were raised tomorrow, maybe they would buy their next purchase as a carton instead of a pack, but I suspect, with them being able to manage $1.29 every time they purchase a pack of cigarettes, that $0.35 is not going to be an issue. There will not be any sticker shock.
Assemblywoman McClain:
When you talk about 70 percent of cigarettes being sold by the pack, you are talking about Nevada?
Paula Berkley:
No, actually that is a national figure.
Assemblywoman McClain:
I would suspect that cigarettes sold by the pack in Nevada would be much higher than many other states just because of our tourism.
Paula Berkley:
That could be. I know that you see the highest ones in the Sands. People do not leave their slot machines, so they get the $5.00 packs because the lady will bring those to them. That is fair.
Assemblywoman McClain:
I want to bring this up just one last time. I really think that if we get carried away on this tax, we are going to lose more money to Internet sales, because I know people will go to the Internet where right now it is pretty much the same price. The price of a carton of cigarettes in Nevada is about what you can get it for on the Internet. We are going to start raising these taxes and people are going to say, “I’m not paying it; I’m going to the Internet.” Then we lose the $0.35 or $0.70 we are going to add on, plus the $0.35 we have been getting. That is my statement about regressive taxes and sticker shock. It is not sticker shock; it is going to be plain common sense for people to not buy them in a store. Thank you.
Paula Berkley:
Mr. Chairman, can I respond to that one? In California, the General Accounting Office called all the high-tax states and asked how much they were losing to Internet sales. They are charging $5.00 more per carton, and they are estimating 0.5 percent go to Internet sales. R.J. Reynolds just did a national study last October, which I can produce if you want. They said that Internet sales nationally were 0.7 percent. That includes New York, at $30.00 per carton, as well as all the other states around Nevada that are higher.
[Ms. Berkley, continued.] I do not doubt that people will go to the Internet to buy cigarettes. I think a lot of people are addicted to Internet purchases anyway. They buy anything they can on the Internet. But I cannot imagine why Nevada would be the only state in the Union going into double digits on that, or even the single-digit percentages. It is always going to be less than 1 percent, or at least for a while. There is also legislation coming your way that would nullify that, but you do not want me to get into that.
Jan Gilbert:
I will be very brief. I have some fact sheets for the Campaign for Tobacco-Free Kids (Exhibit D). The main reason we supported the raise in tobacco tax was that it is going to prevent young people from smoking. They are the ones that will be affected, because they cannot afford the pack. Right now, rates of high school students who smoke are 25.2 percent higher for girls than for boys. I will submit this for the record. Every year in Nevada 14,500 children under 18 start to smoke. Some of those will not if the price goes up. I think that is a good enough reason to raise the price. There are 56,000 kids alive in Nevada today who will ultimately die from smoking.
Paula already mentioned the annual health care expenditure. We are talking about $96 million for our Medicaid program because of cigarette-related illnesses. There is another sheet that also talks about the savings that you have when individuals do not smoke. There will be fewer smoking-affected births. In the first year, you would save $300,000; the next year, $700,000. The next year would be $1 million, and it goes on up from there. I think it is worth it to raise it whatever amount you think will not hurt Nevada, but also make it so that we do prevent children from smoking. I would like to give you this so that you have it for your record.
Chairman Parks:
Thank you. We appreciate receiving that. Are there any questions for Ms. Gilbert?
Assemblyman Griffin:
I do not think you and Paula were testifying together, but does what you just said compete with what Paula just said? Paula essentially said that the taxes will have very little impact on consumption, and you are saying one of the benefits of taxation is that it will reduce consumption, at least among the young smokers.
Jan Gilbert:
From what I know regarding this, it will reduce consumption for children, but it will not affect the consumption for adults as much. With our population growth and the increase in the amount of smokers, it does not have an enormous effect overall. It affects mostly children.
Chairman Parks:
Is there anyone else who would like to comment on Sections 85–87 of A.B. 281? If not, we will go ahead and close that. I know that we have several people here who have indicated that they will be here today, but will not be able to be here at subsequent hearings. I think they are related to the Direct Selling Association. If they would like to come forward to make a comment, I would be happy to receive it. I am presuming that, as referencing the Direct Selling Association, their interests deal with that portion of the bill that corresponds to the gross receipts tax. We will go ahead and take their comment.
John Webb, representing the Direct Selling Association:
Yes, sir, thank you for the opportunity to testify here today. [Introduced himself. He referred to a prepared statement, Exhibit E.] The Direct Selling Association represents direct selling companies, about 150 in the United States. Many of them are well-known companies like Avon, Mary Kay Cosmetics, The Pampered Chef, and Creative Memories. There are approximately 12.2 million direct sellers in the United States, and they sell through personal demonstration and explanation. Many of you may be aware of a party-plan type of situation where someone meets them at someone’s home to sell products anywhere from cosmetics to home cookware.
Eighty-one percent of direct sellers are women. Who are direct sellers? Well, they are your friends, they are family, and they are the neighbors down the street. Many of them are stay-at-home moms. They are people in your community. Most people get into direct selling part-time. It is very low-cost start-up. They get into it because of job flexibility and also because it requires minimal business experience to get involved in the opportunity.
As many of you obviously know, under current Nevada law there is a business activity tax and a business license fee. There is an exemption in current law for natural persons who do not have employees within a quarter, which basically takes into account those who are sole proprietorships. This obviously takes into account direct sellers, who are allowed on that exemption. A.B. 281 gets rid of that exemption and leaves the business activity tax and business license fee to apply to direct sellers. We believe this would be extremely detrimental to direct selling activities in Nevada.
[Mr. Webb, continued.] Like I said earlier, most people get into direct selling for its very low start-up costs. Many of them do it part-time. They do not expect to get a lot of money out of it, but they do it because they love the product and because they maybe want to make a little bit of extra money for Christmas, for a vacation, or for something along those lines. We think any increase in either one of those fees as applied to direct sellers would be very detrimental to the industry. We were speaking earlier about increasing the cost of a six-pack and things like that. Potentially, for direct sellers, you are talking about doubling the cost of the activity for those folks.
If someone comes into, say, a Pampered Chef party, they like the product, and they say, “Hey, I would like to sell this as well,” in addition to the start-up cost that you might have to buy, you say, “Well, you also have to pay a $25 business license fee and, by the way, you also are going to have to keep up with every hour that you work in an individual quarter, and you have to pay a tax based upon that.” We feel that many direct sellers would forgo the opportunity just because of the hassle factor. That is not what they are wanting to get into, to become some full-blown business required to keep these types of records. We have basically told you that direct selling is a unique entity, a unique type of business. That is already recognized in Nevada law. In Nevada Revised Statutes 612.144, Nevada law already designates or defines direct sellers as a unique class for the purposes of unemployment compensation. What we are basically asking of you today is to consider an exemption based upon that particular statute.
One other thing I would mention is that direct sellers already pay a significant amount of sales tax into Nevada. We estimate approximately $12 million to $14 million. The vast majority of the companies collect and remit the sales tax to Nevada to make sure that they get the money that they are owed. We do feel that we are paying into the system. In fact, what we feel will happen is that if direct sellers go away, the sales tax the companies are collecting will go away as well. We think it actually would be a negative for the underlying budget issues. That is all I have. If you have any questions, I will turn it over to Mr. Harrison from Alticor.
Assemblyman Goldwater:
I am not sure I understand exactly what you are opposed to. You are already registered to collect sales tax.
John Webb:
The companies are registered and they pay sales tax through an agreement. To be honest with you, most of the companies do it just because it is easier for the state to do it. They could require that individual direct sellers themselves to handle the sales tax. We found through experience that it is easier for the companies to do it, and it is easier for the state as well. The companies collect and remit for the individual direct sellers that work for them, that are independent contractors for them.
Assemblyman Goldwater:
So you are saying that you are opposed to a gross receipts tax?
John Webb:
No, we are opposed to a business license tax and business activity tax. Those are two taxes that direct sellers are currently not required to pay. There is an exemption under current law that is based on natural persons who do not have employees. There is also language within the business activity portion of the law.
Assemblyman Goldwater:
Thanks for clarifying that for me.
Assemblyman Mortenson:
I would also like to mention some testimony regarding this tax that was in the Judiciary Committee. We saw some charts, for example, that showed the largest number of corporations in Nevada is made up of very tiny corporations, one-person corporations, for example. I, for one, happen to be one of those. I mothballed my corporation when I got elected to the Legislature. I have to think every year whether I want to pay the $85 to renew my corporation. If I have to add $100 to that, there is no question; I am going to do away with my corporation. I think there are an awful lot of people in that category. They keep a corporation around just in case they might have another business. It will not cost $85, but $185, and I guess we are even going to increase the $85. I think that tax will have a lot of unintended consequences. Thank you, Mr. Chairman.
Bryan Harrison, representing Alticor:
[Introduced himself.] Alticor is a member company of the Direct Selling Association and the parent company of Amway and Quixtar direct selling companies, which you may be familiar with. In the interest of time, I will just be brief. We have approximately 5,000 direct sellers taking advantage of Amway or Quixtar here in Nevada. We have heard from many of them, and we have encouraged them to contact you regarding their concerns about these new costs and licensing fees and taxes on their part-time businesses. These are the smallest of small businesses, people trying to earn a little extra money to support their families. They are very concerned that that opportunity is going to be taxed away from them. They currently are not taxed. They will be taxed. Again, just for clarification, this is not in relation to the gross receipts tax.
[Mr. Harrison, continued.] We as a company recognize your concern as state leaders trying to raise revenue, but we believe this will have the absolute opposite effect. Again, we as a company collect and remit sales tax to your state, but if there are no sales, there is no remittance of sales tax. If you price people out of being able to take advantage of this opportunity, there simply will not be sales. We ask you to look out for the hard-working direct sellers of your state and consider exempting them from the business license tax and the business activity tax. Thank you.
Josephine Mills, representing Avon Products, Incorporated:
[Introduced herself.] I do not want to get into all of the same issues that John and Bryan just mentioned, due to time constraints that you have, but I do once again want to stress the point that we believe the imposition of a business license fee and a business license tax would cause a lot of direct sellers to decide that being in the direct selling industry just is not worth the effort for the amount of activity that they do. We are concerned that the number of direct sellers would certainly be reduced dramatically in the state of Nevada, and that sales tax remittance to the state would be reduced as well. We just want to bring that to your attention. With that I say thank you. Do you have any questions?
Chairman Parks:
I do have one question, and I think it came out in Mr. Webb’s testimony. I thought I would wait till the end. As it now stands, direct sellers in the state do collect sales tax on their sales, but then when they send the money, they send the money to whoever they work for as far as remitting the sales tax, so it is not an individual sales tax account that the Department of Taxation has for each and every direct seller?
Josephine Mills:
What most companies do, and what Avon does, is, when Avon sells products to the individual direct sellers, Avon charges them a sales tax not on the price they pay, but at the suggested retail price. The tax that Avon collects is then remitted to the state. It ensures that the state will receive sales tax on every product that is sold within the state, and it relieves the direct sellers of the individual burdens of having to do sales tax reporting and filing. It works out in everybody’s favor.
Bryan Harrison:
It is the same thing with our company, sir. We remit a sales tax based on the retail value, even though it is sold to the direct seller at wholesale value. Therefore, you receive the full benefit. Some of our sellers do not sell all of their products, but consume them themselves. This is common in our industry; people will become direct sellers because they get involved with the product. I would point out that we are collecting sales tax on those as well, even though they are not selling them to an end customer. There is a gain for the state there as well.
Assemblyman Mortenson:
To the last person to testify, you were in my office and you told me that probably the largest number of your direct sellers are people who just want to buy a product at a discount price, and they may just buy $25 or $30 dollars per year, and maybe even sell a little to the family or something. They probably sell less than $100 dollars per year in product.
Josephine Mills:
There certainly are a lot of people who sell very little. Direct sellers usually get into the business because they like the product and they like buying the product and using the product. At some point in time they will start selling to friends and family and relatives. The vast majority earn probably in the range of $1,000 to $2,000 per year. There are some that earn higher, but about 80‑90 percent are very modest wage earners.
Assemblyman Mortenson:
So if they have to pay $100 extra, they are just going to stop buying and drop out. [Ms. Mills agreed.]
Assemblywoman McClain:
I think this does not affect just direct sellers, because by repealing this exemption for sole proprietors, you are going to get your barbers, hairdressers, and manicurists. That is a whammy on those people. They do not make a whole lot of money, anyhow.
Chairman Parks:
We will have to refer that to Commerce and Labor. I want to thank you for your testimony. We will certainly take it under consideration. The next area that I wanted to cover would be Section 172 of the bill, which deals with increases in the restricted slot tax. I know that there are also provisions relative to the slot route operators in the Care/Amodei bill.
Jim Avance, representing the Nevada Retail Gaming Association:
[Introduced himself.] The Retail Gaming Association is the slot route operators’ association. I testified before you a couple months ago on the bridge version of this and will try not to repeat anything. Briefly, let me tell you that my Association went to the study committee last summer and offered them a 33 percent increase in our tax as the maximum that we could do, and we will stand by that. We would appreciate it if it was less, but that is the most we could afford to do. They were not aware when they made that offer that there was going to be, in their retail convenience stores, an increased tax on their employees or tax increases on cigarettes and alcohol, their major products. They were not contemplating that, but our word is good.
I would also tell you, though, that there is no pass-through on gaming tax. That comes right off the bottom line of any gaming operation. There is no way to reduce that or pass it to the customer. However, we will stand by our word if you need that full 33 percent. If you can see fit to do less, and the state needs less, then we would appreciate that, too. Thank you, Mr. Chairman.
Assemblyman Marvel:
Jim, just for the record, how much would what you are suggesting bring in to the state?
Jim Avance:
Roughly $2.2 million per year, I believe.
Assemblyman Marvel:
How many slot route operators are there?
Jim Avance:
There are currently 61 slot route operators scattered around throughout Nevada. A lot of them are in small towns, mom-and-pop operations. As a follow-up to that, there are approximately 20,000 restricted slot machines out there, and we are in the category of a flat base, which is what we prefer and what the state prefers because it is easier to collect the tax and easier for us to do the accounting.
Assemblyman Hettrick:
Jim, we had some testimony at one of the hearings where a couple of the smaller slot route operators indicated this was really going to be a major hit on them and effectively would put the smaller guys out of business and leave only the two largest slot route operators to control 99 percent of the market. Could you comment on that at all? Have you had that input from your members?
Jim Avance:
No, sir. It is a serious tax, but we feel that we are good Nevada citizens, and we understand that we have not had a tax increase in 10 years. We anticipate a tax. There would be very few people, I think, whom a tax would put out of business, but of course, the smaller the tax, the more they would appreciate it. In a lot of cases, the slot revenue in the small mom-and-pop operations constitutes 50 percent of the revenue in these little stores, convenience stores, gas stations, and the like. It is a major hit to them, and it could affect whether they send their kids to college or not, but I do not think it would put them out of business.
Chairman Parks:
Is there anyone else who would like to speak to Section 172 of A.B. 281? What I might do is ask either Mr. Hobbs or Mr. Aguero if there was any comment they wished to make related to the proposal on Section 172.
Guy Hobbs:
This past year Task Force did sit down and have several meetings with representatives from the slot route group, and we did come to that understanding. I will just note again that the recommended increase of roughly 32‑33 percent, much like the increase we were talking about for tobacco, liquor, and business license taxes, was set at this level to reflect the loss of purchasing power due to inflation over the period of time since it was last adjusted.
Chairman Parks:
Is there anyone else here who would like to speak to speak to Section 172? I notice that members of the Department of Taxation are in the audience. From the testimony we received, it appears that this would be a reasonably easy tax to collect on since it is already established and it is just a change in the rate.
Chuck Chinnock, Executive Director, Nevada Department of Taxation:
[Introduced himself.] If you are talking about the business license fee, yes, it would be merely a change to the rate, and we could implement that beginning July 1, 2003. The proposal in the bill is to make that an annual fee. In this particular bill, it is for a 2-year period. Again, we can implement that beginning July 1, 2003. We would make that due on an anniversary date, so each month we would process approximately 12,000 accounts. Currently, we have 60,000 businesses signed up, and if you applied this to sole proprietors, our indications show that we would sign up about an additional 60,000 businesses.
Chairman Parks:
Okay, thank you. Let us go to Section 172 on the restricted slot tax.
Jim Avance:
Speaking as a former chairman of the Gaming Control Board, let me tell you that the Gaming Control Board collects that tax, and they would be prepared to collect that tax starting July 1. It is very easy to simply change the number.
Chairman Parks:
Thank you. Straying off just a little bit, I know that one of the other proposals, I believe Senate Bill 382, had made some recommendations for putting something on a percentage basis. That would have created a greater difficulty in collection.
Jim Avance:
Yes, sir, it would have required probably more employees and fiscal impact than it would have generated.
Chairman Parks:
Great, thank you. If no one else appears to speak to the restricted slot license fee, we will go ahead and move on from that. The other area we wanted to talk a little about this afternoon was that of a state property tax increase. In the bill there are a number of different places where property taxes are referenced. Perhaps we could ask Mr. Hobbs to come forward and give us just a brief overview of the thinking behind the Task Force’s recommendation on the increase in state property taxes.
Guy Hobbs:
There are probably a couple of areas that we need to discuss relative to property tax. The simpler one to digest, I suppose, is the recommendation in this particular bill, A.B. 281, for an increase in the rate of property tax for use by state government. I will begin with that one.
We were recommending an aggregate increase in the state’s property tax rate of $0.15 per $100 of assess valuation. Unlike the Governor’s bill, the Task Force was looking for the $0.15 to be somewhat mobile between both capital purposes and operating purposes for the state. In other words, in the projections that we did, we recognized a particular need each year for a certain amount to go the operating side, or the state General Fund, with the remainder of the $0.15 to be available, if needed, to fund state capital projects. We did that for couple of reasons. One was to help manage the cash flow on the bottom line.
The second was to recognize the fact that the state has limited itself on the capital side to $0.15 for some number of years now. Effectively, the state is limited to the amount of growth in assessed value times the $0.15 rate. That limits what the state is allowed to leverage each year, as far as what the state can acquire, whether or not that meets the state’s needs or not. It was our view that it did not meet the state’s needs from year to year and that it forced the state to look at less economical ways of acquiring some capital over time, including some leases that would be comparatively more costly than doing general obligation financing, which a higher capital side would permit the state to do. That would have a direct offset to some of the expenditures on the General Fund side, thus helping the General Fund as well, even though we are talking about capital dollars.
[Mr. Hobbs, continued.] In the Governor’s version, I believe the entire $0.15 is dedicated to the state General Fund, with a $0.01 additional tax rate for the capital side. Again, ours is somewhat variable on a year-to-year basis as far as how much of the $0.15 goes to the General Fund for operations and how much goes to the Capital Fund for capital acquisition. I will come back in a few minutes to the reasons why we included a state property tax rate among the assortment of recommendations that we made.
One thing that is very important to understand is that in certain parts of Nevada, the combined property taxes are already at $3.64, or the current statutory cap. Increasing the state’s rate would encroach on local revenue if we did not provide some mechanism for offering some relief in those areas. This as an area that the 557 Committee took under advisement during the last interim as well, recognizing that we do have those tremendous constraints in the rural areas. Consequently, one of the things we were also recommending, which is in line with the 557 Committee’s recommendation, is that we make an adjustment to the $3.64 cap.
We were suggesting reducing the total combined cap for local government purposes, including schools, cities, counties, and special districts, to $3.14, and taking the state components of the school district operating rate as well as the state’s debt rate outside of that particular cap. That would actually have the effect, if we look at it a slightly different way, of raising the combined cap from $3.64 to $4.04. To be perfectly clear about that, I did not mean to describe it as a lowering of the overall cap, just the cap for local government purposes, taking the state components outside.
That would mean that a $0.25 rate for school operations, as well as the $0.15 rate that is currently applied for capital on a statewide basis, would come outside of that particular cap. This would provide enough relief that, if the $0.15 rate were actually imposed on a statewide basis, it would not encroach on any of the local government revenues in any of the rural areas at this point in time. In order to increase the state property tax, we would need to have changed the cap to provide for room within the cap for that revenue to flow to the state without, at the same time, creating a problem for any of the entities that are at or near the $3.64 cap.
[Mr. Hobbs, continued.] Clearly, the Task Force held the view that one of our major objectives was to improve the stability of the overall revenue system. As most of you know, there are few revenues that offer the stability of property tax over time. We were very interested in providing that additional stability, but we did not want to rely on the property tax so heavily as to impose a hardship on the taxpayers. We felt that the $0.15 increase would provide for some added stability while not leaning too heavily on the property tax as an overall cure for the state’s problems. We felt that that, combined with some of the other revenues that also provide some stability, would be the best mix at the end of the day.
Hopefully I have covered some of the areas, Mr. Chairman, that you wanted covered. I would be pleased to answer any questions about the Task Force’s deliberations, should you have any.
Chairman Parks:
Thank you, Mr. Hobbs. I think you have pretty well covered a lot of the areas. We certainly have had previous presentations on that. We have some questions.
Assemblyman Marvel:
Guy, what are you talking about? What is going to be your overall cap now?
Guy Hobbs:
The way that the cap will be written into statute, local government, including school districts, cities, counties, and local districts, would be at a combined cap of $3.14. Outside of that would be anything that the state would levy, including what the state already levies in the form of the $0.25 school rate and the $0.15 current capital, or debt rate that it levies. Actually, the effect of it would be taking the current $3.64 cap and moving the $0.25 and $0.15 outside of that, so it is, in effect, like raising it to $4.04.
Assemblyman Hettrick:
I understand where the rate goes. I have to say that I have real concern with increasing the property tax. I understand the intent to do it. I understand the Task Force’s justification for it. I do not argue with any of that. I think we would agree that it is stable. My problem with it is that $0.16 for the state, in rural counties that are dying on the vine and having assessed valuation go down, will increase the cost for the residents who live in those rural areas, making them even more apt to sell their property and move away because there is no economy to support them there. It is ultimately just going to keep driving down assessed values in those counties.
[Assemblyman Hettrick, continued.] We could raise the cap and say that the county can raise more money by adding taxes, but the reality is the little counties will die. I think we are kidding ourselves if we do that. I think Clark, Washoe, and the two or three other exporter counties are going to pay the bill in one fashion or another for all the services in the rural counties if we do this. I just think it is unfortunate. Again, I am not faulting the Task Force. I understand perfectly why that tax was chosen and what the rationale is. I just think the end result would be devastating for the rural counties. I have a real tough time thinking that we can raise this tax, raise the $0.16, and make this work.
Guy Hobbs:
We, as a Task Force, submit our recommendations to you for your consideration and do not necessarily argue any of the philosophical points that may come up. There really are two important points here. One has to do with the relief under the $3.64 cap, which we feel is necessary, given what has happened over the past 20 years. We do have counties that are at the $3.64 limit. As Assemblyman Hettrick noted, we also have several counties that are experiencing declining assessed valuation. If you hold the rate constant and assessed valuation declines, the real dollars that you are taking in each year are on a decline as well, and there is very little you can do to recover any of that through rate adjustments.
We did feel that in order to deal with unforeseen circumstances or a situation that is peculiar to a particular county, whether it is urban or rural, some relief from the 20-year-old $3.64 cap is very much in order. That is an ideal shared by both the Task Force and the 557 Committee. Obviously, from a Task Force perspective, we were looking at both providing additional revenues to support state programs and increasing the overall stability.
There was sentiment on the Task Force to use property tax more heavily than what was finally recommended to the Legislature. I think, through discussion and compromise, many people felt exactly the way Assemblyman Hettrick felt when he made those particular comments. Others felt quite different from that about positive points of property tax. We settled in at a $0.15 level for your consideration as one that we thought did make a substantive contribution but was not so onerous that it would create doom and devastation throughout the state.
[Mr. Hobbs, continued.] I do want to make the point that there are two important policy considerations here, one related to the bifurcation of the cap, that being the state’s portion from the local government portion as important on its own, and the second being whether or not there is an appetite to consider some amount of property tax. The $0.15 amount is what the Task Force had recommended as part of a mixed solution at the end of the day.
Marvin Leavitt, former member of the Technical Advisory Committee to the 557 Committee:
I have just one comment as relates to the capping mechanism. The $3.64 cap was originally put into place in 1979. Subsequently, we had a substantial reduction in the actual rate of the tax when we had the tax shift 2 years later. There was a certain amount of tax that was available to local governments at that moment in time. Essentially, the state was not levying a tax, and the schools were levying a total of $0.50. Since that time, the state has levied $0.15 and has also levied $0.25 for the schools, which is a direct offset by formula against the state contribution to education.
What Mr. Hobbs was talking about a few minutes ago would, if you passed that provision in this bill, essentially put local governments, as far as available property tax rate, in exactly the same position as they were subsequent to the 1979–1981 legislative actions. What it would do would be to free up to local governments the $0.40 cents that has been added by state action subsequent to that time. One other comment is that the $0.15 in general is somewhere between a 5 percent and 4.5 percent increase in what you are actually paying in property tax, considering you have a stable assessed valuation. If you are in an area where assessed valuation is actually going down then, of course, that would be slightly moderated.
Assemblyman Hettrick:
I do not want my comments misunderstood. I understand exactly where Mr. Hobbs and Mr. Leavitt are coming from. I would just comment that that assumes that all of those counties were against the cap at the time that rate was established in 1979, and assumes that the $0.40 the state levied took $0.40 away from them. If that were not the case, we did not eliminate any tax rate. They have actually increased the tax rate and they are experiencing a reduction in assessed valuation in many places. This would only compound that, in my opinion. That is my concern. Where we had counties against the cap when we levied the $0.40, I would totally agree that we would just be making them whole, but if they were not against that cap, then we are just making it harder and harder for those small counties to exist.
[Assemblyman Hettrick, continued.] I think we have to be very, very careful about what applying property tax at these rates and raising the cap is going to do to those counties, and who is ultimately going to pay the bill. I keep coming back to the fact that you are not going to close the schools or shut down the services, and the exporting counties are going to get to pay for that if the little counties cannot afford to do it themselves. I think we had better be very careful here.
Marvin Leavitt:
I would like to just make one comment, if I might. I am not disagreeing with what Mr. Hettrick has said. We have a situation right now in the rural counties, if you think about it, where they are essentially not able to do anything relating to capital. If they have a school that has deteriorated to the point where they need to replace it, there is absolutely no revenue availability. In some counties at least, if they go to their voters, and even if they approve it, there is no available rate left for these capital improvement situations.
We made a rural tour as part of the 557 Committee and talked to elected representatives in some of these counties. They are very concerned about the tax burden on their own people, particularly in those counties that have a declining economy. When we specifically asked them if they wanted to increase the rate themselves, “Should we recommend an increase in the rate so you could have additional money?” most of them said, “No, we do not want to impose an additional rate on these people for our ongoing problems.”
Consequent to that, I do not think we are actually recommending to any of the counties that they increase their rates. What we are talking about is making a rate available to them so if they have a situation where they feel they could raise the rate, or if you have a situation where they have needed capital, say, for instance, they have a school that has deteriorated or they have other facilities that are deteriorated, they would have the ability to do that. I have an idea that if you make it available, you are not going to see any of these rural counties increase their operating property tax rates, not immediately anyway, even if you allow them to. I think they would probably believe that their economies are in such a situation that they cannot do it. Maybe if things change in the future and they can, perhaps they will, but I think that is the situation.
I think you could increase the rate in Clark and Washoe Counties right now, since there are other caps we have not talked about today that also control the rate. If you increase the allowable rate for local governments by $0.40, I do not think you will see any change in Clark and Washoe as a result of that. Washoe is getting closer. It is possible you would see something in Washoe, but definitely you are not going to see anything in Clark on the local government side as a result of you changing the cap.
[Mr. Leavitt, continued.] I personally believe there is great wisdom in having equal rates throughout the states so you do not try to bifurcate this and say that we ought to have different rates in different counties. I do not think it is wise for you to do that, and it is not good long-term policy for the state to adopt that. At the same time I think right now you have got, as far as a stabilizing force on state revenues, the $0.15 that you levied directly for yourselves. You have the $0.25 that is levied on behalf of the schools, which you know has exactly the same effect as if you were levying that directly by the state for the state. Essentially the $0.50 also does that, even though it is not part of the formula. So, even though it may not be technically right, effectively it is right that you have $0.90 of property tax that goes into the state General Fund budget. That provides some stabilizing force as it relates to state government.
You have political and practical considerations as to what additional money you put in there. As far as a reasonable mix, the work that Jeremy and Guy have done is absolutely the best possible work that can be done, I think. We are still talking, in many areas, about taxes that we have never levied before. We are talking about trying to predict taxes based on general economic data. I think there is a reason for having a stability factor in there, since if you adopt some of these others, you do not know for sure what they can bring in. They could be 10–20 percent off as far as the total revenue they bring in. Sometimes we think once we get a number on paper that guarantees that there is actually going to be a dollar figure there. I think there is logic for having enough of these taxes that we understand exactly how much they are going to bring in as part of the mix. You can consider that when you do your overall package to offset this revenue problem.
Assemblyman Hettrick:
I will not beat this horse to death, because I think Marvin and I really pretty much agree. I think the comment he just made that the rural counties are already saying, “We cannot do this to our own citizens,” sums up my concern, and we would tack on $0.16 at the state level, which would even prohibit them from being able to do what Marvin just described, which is ultimately to have some flexibility to put in a tax to cover themselves. The state would already have enacted $0.16. This is counterproductive, and it bothers me no end. I appreciate his comment, and, again, I appreciate exactly what he and Mr. Hobbs are saying about stability and predictability. I agree with every single word they have said; it is just that I believe it would be counterproductive to the rural counties.
Assemblywoman McClain:
Maybe I missed something on this, but if you are lowering the cap $0.50 by taking out $0.40, where is that other $0.10? Who takes the hit on that one?
Marvin Leavitt:
What we are essentially doing is removing from the total available to local government, which is the $3.64, the $0.40 cents so that they have essentially the same amount available. We are eliminating the $0.25 and the $0.15. We are not eliminating the $0.50 that was in existence prior to the cap. So, if we simply take the $0.50 that was in existence prior and subtract $0.50 from $3.64, we get $3.14. None of the school portion is in there. I think that would be the computation you would want to make. $3.64 less $0.50 is $3.14. There is nothing to do with schools’ operating portion now, and the $3.14 is clean of that, and that is what is available to local government.
Assemblywoman McClain:
So, what you are saying is that there was a $0.10 gap in there that nobody was assessing or charging people.
Marvin Leavitt:
The $0.50 cents was levied at the time of the 1979 and 1981 actions.
Assemblywoman McClain:
We only use $0.40 cents of it, though.
Marvin Leavitt:
No, you have increased $0.40 since that time. In other words, we are taking the $3.64 as it existed then, we are eliminating the $0.50 which existed then that was related to schools, so that leaves $3.14 for the local government portion as it existed in 1981, clean of any rate for schools. There is no levy for schools left at all in the $3.14 except debt for schools, which we have always just termed a local responsibility. This can be voted on by the voters. The $3.14 would be the amount available for the cities, counties, and special districts as an overlapping rate. Anything above $3.14 would be for state operating purposes and any rate levied directly for the state.
Assemblyman Grady:
Marvin, if we give monies where local governments can, in fact, adjust their fees, how do we control the competition between the hospital districts, the swimming pool districts, the city, and the county, before we are right back up to the maximum? I think that is what is happening now. Everyone knows they are getting to the $3.64, so they are using every penny that they are allowed under the present law to get their share before the other one does. Have you any solution to that?
Marvin Leavitt:
I do not know whether there is a solution or not. Let us talk about the practical way it would work, and then we can talk about a solution. First of all, there is the second cap that we have sometimes referred to as the 6 percent cap, which is the limit on how much local governments can raise for operating purposes. That cap in general, in a lot of the counties at least, is the controlling one. They are not at the $3.64, so that secondary cap, which controls the rate levied for operating purposes, is the controlling cap.
You do have a situation in some counties, particularly in the rural counties, where if you gave them their total allowed rate, they could probably go up to $4.00 from $3.64 right now, because there are always overlapping districts. What would happen would be the same as when they do that right now. Let us suppose the local governments, when they file their budgets, show a rate that is $0.10 in excess of whatever the cap is. There is a provision by which you try to get them voluntarily to agree to some lower rate.
We used to have a provision we called “buying down” the rate, where essentially you gave the rate to the county and they bought down everybody else. The problem with that, and I think one of the reasons the Legislature eliminated that from the law, was that you could have county taxpayers financing benefits or services within a city. In other words, taxpayers throughout the entire county could be financing benefits directly, either through a city or through a special district. You eliminated that possibility.
What happens now, if they cannot agree at this meeting, is the Tax Commission eventually becomes the arbitrator. They are the ones that determine how the rate can best be used. The problem we get into with this situation is that you could have a little tiny district that has an assessed value equal to 1 percent of the total county, and it is the rate in that district that is throwing you over the $3.64 limit. So, if you do not have some means of arbitration, and you have a little district that levies an additional $0.10, the county is then precluded from levying that $0.10, which would have raised 100 times as much revenue. There has to some way of arbitrating such situations, and right now that arbitration is done by the Nevada Tax Commission.
Chairman Parks:
I think that this is obviously going to be an area that we will discuss some more. I think that there is probably a need for a better understanding of how all of that pieces together. I know Mr. Leavitt did a great job of explaining how one little district can create a big problem for a county. We will try to get some exhibits and some better explanations in writing so we can look and see what that is. Ms. Vilardo, did you have a comment on property tax?
Carole Vilardo:
For the record, Carole Vilardo speaking in favor of the cap. I think that we have wrestled with this since the 1995 Legislative Session, and the original bill discussed moving the cap to $4.04. The Board took the position of supporting the creation of the local government cap. You are not only dealing with the $0.15 that exists for the debt rate, and the potential increase of $0.01 cent, which is in the budget to increase the debt rate, but you also have the passage of Question 1. Last legislative session, that was estimated to cost an additional $0.02. The way Question 1 was worded, not the question but the actual legislation that allowed Question 1 to go on the ballot, that $0.02 was outside the cap. So, you have already started to erode the effectiveness of the cap by doing something like that. Good, bad, or indifferent, I think this at least acknowledges that you have what is actually three parts for your cap. If you pass this, you have created that local government cap, you have then given the state, whether it is for operating or debt or for school operating, that room between $3.64 and $4.50. The limit in the Constitutional amendment is $5.00, but we have another provision in statute that says that if there is a severe financial emergency in a county, you can levy up to an additional $0.50. At this point, that rather precludes the state from going higher than $4.50. That is the position on the cap.
The position relative to the tax rate was concern. When I originally surveyed this, because of the proposal that we were making to the Task Force, we looked at something that would be a little more nominal than $0.15. That is a relatively heavy hit to the average taxpayer. The way the breakout is, approximately 52 percent of the property tax payers would be homeowners versus 48 percent, which is actually quite a good split compared to some of the other states. That being said, there are obvious political consequences to that. The Board’s position was that if we needed additional property tax because of the stability component, maybe it was more logical to look at $0.05 at first, and then possibly going to $0.10. That was conditioned on the passage of Question 8, which provided the homeowner relief. Now, fortunately, if you do use the property tax for the state, at whatever rate you use, the enabling legislation is moving in the form of Assemblyman Hettrick’s bill and a bill from the Senate side that would provide relief to that person who might suffer severe financial hardship. You have already passed Assemblyman Hettrick’s bill out of this house, so that is another thing you can use in balancing this. I will say that in the Task Force bill, the increases were set to go starting July 1, 2003. In the Governor’s bill, those increases first started on July 1, 2004.
[Ms. Vilardo, continued.] I would make one other comment on that. Using an amount in the Task Force bill for operating and an amount for debt is something that we did not support. If you are going to bifurcate the use of whatever rate you choose, should you choose to do this, then possibly the only other way to bifurcate it would be to give school operating versus state operating, because you can always do capital out of state operating. In fact, prior to 1985, we did pay-as-you-go funding for the state. We did not bond except on very rare occasions.
To reiterate our positions, we definitely support reducing the cap. We have a concern about going the full $0.15, preferring to see $0.10, possibly even phased in over 2 years. In addition, we would prefer not to see you specify the breakout of the amount between operating and debt for the state. Thank you. I will answer any questions if I can.
Janine Hansen, President, Nevada Eagle Forum:
We will have an opportunity later to speak on other portions of the bill, I am assuming, Mr. Chairman. Thank you. I am speaking in opposition to the changing of the property tax cap, because I think our citizens are already under serious economic problems. If we look at the situation in this state, we see economic problems. When businesses determine whether or not to come here, they do not necessarily take the total amount of taxes we are looking at in deciding whether or not to come. They look at the direction of where our taxes are going and whether or not we are going to continue to increase them, whether they are going to have a situation where they are going to be in a state where they are continually trying to reach where other states are. So, I think to raise these property taxes, many of which are going to affect businesses, could have an impact on the economic climate of the state. I will discuss that later when I talk about those issues in here.
My most serious concern is for the homeowner. My mom is 87 years old, and she is not one of those people that would fall under this special exemption of those who are going to lose their homes if their property taxes were increased, but it would severely affect her. She has lived in that home for more than 50 years. Because of inflation and the increases in the cost of property, her taxes now almost exceed what she paid for the home. We see the circumstances for someone who is on a fixed income become significant when you increase the property taxes. They have no way to recover that. They have no way to increase their income. In fact, their income continues to decrease. Because of the high cost of other items at their age, their health care, this is a severe impact for them.
[Ms. Hansen, continued.] This has an impact not just on individuals who are elderly, like my mother, but it also has an impact on families. Families right now are struggling to survive economically. In most cases, you have to have two parents working. One of the parents’ incomes goes almost entirely to pay the taxes, if you look at the statistics. Recently, Reader’s Digest reported that 50–60 percent of every family’s income goes to federal, state, and local taxes. We could have a lot of parents in the home taking care of their own children if one of them did not have to be working just to pay the taxes.
When I go and speak at the high schools, the kids are not much interested in taxes, but I always tell them that taxes determine all kinds of decisions in their lives. Taxes will determine what kind of a car they can drive, what kind of a school they can go to, what kind of clothes they wear, what kind of a home they have, and whether or not they can choose to be a full-time parent. These taxes, as they continue to increase and force more and more parents out of the home, increase our social costs to our society, increasing the costs of prisons and remedial programs, increasing the costs of delinquency, increasing the costs of government having to supervise children because there are no parents there to do it.
I encourage you to look at the real costs of increasing taxes, and that is the cost to families who simply cannot afford to pay for the increase in government. We have to look at it in terms of long-term costs: What is enough? How much is enough? When it is 70 percent or 80 percent of the total income of a family rather than just 50 or 60 percent now? Then we can depend on the government for everything and forget about families at all? I think it is a serious problem.
The other problem is, I am not sure what the cap is if we remove the state outside the cap. Is there still a cap? Is there something limiting that? I am not well enough informed on this to be able to tell.
Chairman Parks:
Yes, there would be a cap. The cap would simply be changed from $3.64 to $4.14.
Janine Hansen:
Essentially, there is not much meaning to a cap if we keep increasing it, is there? Why have a cap when every time we want to increase it, we just change the cap? So, it is meaningless, and it certainly creates distrust among constituents.
[Ms. Hansen, continued.] Now, one of my last concerns that I will mention is the issue of the rural counties. We know that in counties like Mineral County we have a former city like Gabbs that had to be disincorporated. They are not even a city any more. Why? Because they did not have the tax base to even be able to afford to pay the basic costs of their community. We have areas like Lincoln County where 1 percent of the county is private property; the rest is controlled by the federal government. Assemblyman Hettrick has introduced some resolutions that address this, but this is an area where we have a tremendous loss of property taxes, over $300 million per year that the federal government is receiving the benefit from, and which should be coming to our state. That would help tremendously in covering the needs of our state if the tax money with regard to those lands, our land that that the federal government is controlling, would be compensated to the state. We are losing over $350 million per year because of the feds controlling our land. That would go a long way. Thank you, Mr. Chairman.
Chairman Parks:
Thank you very much. We are approaching the end of the allotted time that we have. What I would like to do is leave the balance of the time available for individuals who would like to make comment. I believe there were two individuals who left documents. William Freed left one (Exhibit F). Another, which may be a fax, is from Arthur Geldbach. Also, I believe that there is a comment relating to page 29 by Mr. Zuend. Do you want to make some statement related to that?
Ted Zuend:
I just wanted to point out, based on Mr. Hobbs’s testimony that clarified it, the language on page 29, line 4. If the Committee decides to pursue this idea of providing some cap relief to local governments, it is incorrect. It should say, “commissioners pursuant to subsection 1 of NRS 387.195,” because the full section also provides for the Board of Commissioners to impose debt rates on behalf of school districts. I do not believe there is any intent to exempt these school district debt rates from whatever new cap is authorized. On line 4 of page 29, after the word “to,” you would insert ”subsection 1 of NRS 387.195.” That is all.
Chairman Parks:
Thank you, Mr. Zuend. I believe we had some individuals in the audience who are from real estate. If they would like to come forward, I would be happy to hear comments from them.
Curry Jameson, representing the Nevada Association of Realtors (NVAR):
[Introduced himself.] Penny Mayer and I are here to talk about those we represent on a daily basis. We are both practitioners. First of all, we are in full support of the property tax increase. We recognize as a body, and the NVAR Board of Directors has had a long discussion and voted this way, that when you people are faced with the kind of deficits that you are, you have to find money somewhere. We in the real estate business felt that we had to come to the plate, and this is a tough plate for us, too, when you are talking about property tax. It was not taken lightly, but you have heard the words “broad-based,” which our organization is really behind, and we felt that property tax was a broad-based tax situation, number one.
Number two was the stability of the tax, the consistency. Our concern is that you have a tax starting right away that goes on forever. By the way, it is put out more evenly for the homeowner to afford. Some of the comments in previous testimony said that the owners could not afford it. Well, I do not think anybody can afford any tax. Nobody likes taxes, but the reality is that when the state is growing the way it is in the towns and cities, and even in the rurals, which we will talk about here in just a second, somehow we are going to have to pay the piper.
This Association has taken it upon itself in a risk fashion to support a full property tax, as you said. We think it is the only way. There are other tax proposals out there that we were more than happy to discuss when we sat down to listen to them, but we think this is more even. If the homeowner and the great American dream are going to survive, this kind of tax can be probably begrudgingly paid, but they recognize that they have the ability and the luckiness to live in the state of Nevada. As values go up, although they could go down, these taxes are fairer than any other tax we can see. With regard to rurals, Penny has a comment, because we also get involved in the rural counties a lot with our customer base.
Penny Mayer, Legislative Chair, Nevada Association of Realtors:
[Introduced herself.] Just to follow up on what Curry has talked about, we have come out in favor of an increase in the property tax. We do feel that this is probably one of the most broad-based taxes that there is. Occasionally people will mention that the only people that pay this tax are property owners. That is true, but tenants also pay this tax, because if you are a landlord, you are able to pass through this increase. If you look at it, everyone that is living in some sort of a structure is really going to pay this tax, and this is what makes it a broad-based tax.
[Ms. Mayer, continued.] We have mentioned before that one of our concerns is the transfer tax increase. We just wanted to talk a little bit about that in the rurals, because there has been talk today about how the property tax will affect the rural counties. The transfer tax does not really affect some of the rural counties because there is not going to be any transfer tax paid in some of those counties. A perfect example right now is in Elko County, where there are more than 300 pieces of residential real estate on their market and very little selling. People are actually walking away from their homes in Elko, there is therefore no transfer tax being paid on those properties. Just this weekend I was able to have dinner with some friends whose son and daughter‑in-law and grandchildren live in Elko. He has had the opportunity to take a new job here in Reno with one of our major employers, and he cannot take it because he cannot sell his house there.
When a house does not sell, there is no transfer tax. There is always property tax going to be paid somewhere. I find it interesting talking about the increase in property taxes. I have the privilege of living in a newer area in Sparks, and our taxes are high because we live in new homes. There are people, I think, that could have their property taxes as high as their house was worth 30 or 40 or 50 years ago, but you also have to take into that fact the depreciation factor, which Mr. Anderson is well aware of, as he is also a Sparks resident. We have had this conversation many times. So, we are here today to support the property tax and explain once again that we feel that the transfer tax is totally unfair, a very narrow-based tax that will not achieve what is expected of it
Assemblyman Anderson:
My parents paid $3,000 for a cinder-block home on a corner in the city of Sparks with a large garden and a huge piece of property and a 4-bedroom home, which my brother and I still own. Our property taxes are higher on it than my father paid for it, but so was the first car that I bought. It is all relative to when you buy and when you sell, as you all in your business know better than I. I recognize when you live in a fast-growing community you can expect that the price of homes is going to constantly change. Ms. Mayer and I used to live on the same block, so I am very well aware of the price changes. I appreciate the realtors’ support of the property tax. I think it is a really important part of this process. I hope that if we move forward we are going to be able to be realistic, particularly for the smaller counties. I think that cap has really become an overburden, an artificial barrier that we put in there without thinking about what the long-term effect was going to be.
Assemblyman Hettrick:
The first thing I would say is I probably support the increase in the property tax. I do not support the state taking the $0.16 out of it when we do it, or the increase in the cap. My argument was if you want to leave the small counties with flexibility to increase the cap, and I think Mr. Leavitt said they probably would not increase the tax, and then have the state take $0.16 right off the top, it is wrong to believe that the counties are ever going to be able to raise the tax, because it is killing them already.
[Assemblyman Hettrick, continued.] In regard to the transfer tax, I am a major proponent, as every one of the folks in real estate know, of the transfer tax. I appreciate the comments in regard to it. I would point out that I think your very comments speak to why I do not like property tax. When you have the situation you have in Elko, those 300 homes that are sitting there where somebody cannot make a living and cannot sell the home, they still have to pay property tax. The fact that they are not paying a transfer tax is true, but they do not pay it until they sell it, and then they will pay on the basis of the negotiated price, and they may work that out with the would-be buyer to pay the transfer tax, for all we know. Talk about a regressive tax; there could not be a more regressive tax in Elko County than property tax on a house you cannot sell, compared to a transfer tax you do not pay for until you sell the home. That is my very point.
The other thing I would say to the Committee in regard to a transfer tax is that property is on assessed valuation, which is one-third of value, and on depreciated improvements. A transfer tax is on market value. Our problems in this state are being driven by growth, which drives market value on homes in many of our counties. I believe the tax is a very fair tax, and it goes exactly to where it should go. It is driven by growth and paid for by growth. I think that is a fair tax. The seniors who are in those homes that we have talked about where the tax today is worth more than the home would never pay the transfer tax as long as they stay in that home. They are immune from that tax. It is not a regressive tax. I think it is one we need to consider, and I understand the concerns for property tax as well. We have been through that.
Curry Jameson:
Mr. Hettrick, I appreciate that we have looked at that and we worked with you for years, and I appreciate that. I apologize for making this transfer tax an issue, but it is a key. When you take a look at the increase of the property tax of the $0.15 versus what the potential increases are in that county on the transfer tax, it would take you probably 6–7 years on a normal yearly property tax payment as opposed to one transfer tax. That is the problem. As Penny has mentioned, people at that time would not sell because the transfer tax could be as high as $750 or $800, as opposed to $100 or $150 dollars per month for property tax. It makes a difference. I am talking from a practitioner level. That is the concern we have, first of all.
[Mr. Jameson, continued.] Second of all, I think, from all the testimony I have heard in the past months, that the state needs the money now. The transfer tax is a very cyclic tax. Today, and since January 2002, this market has been tremendous. I cannot tell you what it is going to be in January 2004. I do not think anybody at this table knows that, and a short turn of interest rates could turn this whole market around.
Chairman Parks:
Thank you, Mr. Jameson. We have a couple minutes left before our members in Elections, Procedures, and Ethics have to move to that Committee. Is there anyone else in the audience who would like to have a one-minute comment?
William Freed, citizen:
I am not sure I can do this in one minute. Let me say that I am speaking on behalf of myself, even though I am registered as a non-paid lobbyist for the Religious Alliance in Nevada. I wanted to bring to the Committee’s attention, and you have handouts (Exhibit F), certain information regarding the State of Washington Tax Structure Study. They have done something very similar to what Mr. Hobbs’s committee has done. This is a major blue-ribbon task force in the state of Washington, headed by William Gates, Sr. You may know his son is chairman of Microsoft. Their final report was published in December, so, as an aside, Mr. Hobbs’s committee did not have the benefit of this information.
What has developed in the state of Washington is they have what is effectively a gross receipts tax called the business and occupations tax. They have found it very unsatisfactory and very costly to business in terms of a pyramiding of taxes collected from one product stage to the next. I am a salesman, and let me cite two examples. I sold the city of Lathrop, California, a five-node personal computer network system. We held a gross margin of about 5 percent on that. Very shortly thereafter, I sold some fiber optic cabling to Stanford University and the University of California. We held well over 50 percent margin on that. That is common between those two types of data processing and service business. To have each transaction bear the same amount of tax reduces to almost nothing the horizontal equity of a business tax, whereas a value-added tax, as cited in this study, would eliminate the pyramiding and level the playing field between different sorts of industries, in other words, provide what is called horizontal equity.
A value-added tax was mentioned twice in Mr. Hobbs’s Task Force’s Executive Summary, but of all the dozens of taxes analyzed, value-added tax was not, and I assume it is somewhat complex, although more even-handed, and also because the Task Force did not have access to this information. I will mention that the Washington Tax Study Board seems to be very forthcoming. They have a voluminous Web site; their final report is 303 pages, some of it in mind-numbing detail, but it is all, with time, clearly understandable. I am here as a private citizen to urge the Committee to consider an alternative of value-added tax as opposed to a gross receipts tax. Thank you. I will answer any questions.
Chairman Parks:
Thank you, Mr. Freed. On Thursday we will be taking up the gross receipts tax part of this bill, so I certainly invite you to come back at that time.
Assemblyman Mortenson:
Guy Hobbs is still down in Las Vegas, and I wanted to ask a question some time earlier and missed my chance. I was wondering if I could ask Mr. Hobbs if he could furnish the Committee with a number on how much tax would be gathered or lost if the exemption to a single proprietor were put into the tax bill or if it were left out. What difference would that make in taxation and amount of income?
Guy Hobbs:
We are working on the number at this moment. I am going to presume the question to mean all sole proprietors and not simply the direct sellers as were being discussed earlier. [Mr. Mortenson indicated that was the case.] That is being worked on. We should have it momentarily.
Chairman Parks:
I want to personally thank Mr. Hobbs and Mr. Aguero for taking time out of their busy schedules to participate from Las Vegas, and also thank Mr. Leavitt for his keen knowledge on property taxes today. Mr. Hobbs, if it is going to take any further time, we might just pick this up on Thursday, if that would be preferable.
Guy Hobbs:
Mr. Chairman, we would be happy to provide that. We can e-mail that information to Assemblyman Mortenson, and also bring that information with us to the Thursday hearing. The computers are fast, and Mr. Aguero is, too, but there is a lot to sift through here, actually more volume than the Washington report, if you can imagine that.
Chairman Parks:
Thank you and thanks to Mr. Aguero. We are going to carry on this discussion on Thursday. We are adjourned.
RESPECTFULLY SUBMITTED:
Mary Garcia
Committee Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE: