MINUTES OF THE meeting
of the
ASSEMBLY Committee on Taxation
Seventy-Second Session
May 20, 2003
The Committee on Taxationwas called to order at 2:21 p.m., on Tuesday, May 20, 2003. Chairman David Parks presided in Room 4100 of the Legislative Building, Carson City, Nevada, and, via simultaneous videoconference, in Room 4401 of the Grant Sawyer Office Building, 555 E. Washington Avenue, 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.
Note: These minutes are compiled in the modified verbatim style. Bracketed material indicates language used to clarify and further describe testimony. Actions of the Committee are presented in the traditional legislative style.
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
Mary Garcia, Committee Secretary
Kyle Wentz, Senior Page
OTHERS PRESENT:
Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy
Jeremy Aguero, Technical Advisory Committee, Governor’s Task Force on Tax Policy
Ken Lange, Executive Director, Nevada State Education Association; Member, Governor’s Task Force on Tax Policy
Jan Gilbert, representing the Progressive Leadership Alliance of Nevada
Chuck Chinnock, Director, Department of Taxation
Bill Bible, President, Nevada Resort Association
Billy Vassiliadis, representing the Nevada Resort Association
Mark Nichols, Executive Director, National Association of Social Workers, Nevada Chapter
Vicki LoSasso, State Cochair, Nevada Women’s Lobby
Carole Vilardo, representing the Nevada Taxpayers Association
Janice Flanagan, Citizen
Will the Assembly Committee on Taxation please come to order? [Roll called.]
Today we will discuss a couple of areas of the gross receipts tax, including one that we have not yet covered. At the request of Speaker Perkins and myself, Guy Hobbs and Jeremy Aguero have agreed to come back before the Committee this afternoon to explain about further refinements to the GRT (gross receipts tax).
Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy:
We were asked to do some work beyond the scope of the work we performed on behalf of the Task Force created by ACR 1 of the 17th Special Session. We are very pleased to be able to do that for you and provide you with some additional information today.
One of the obvious issues that came up when the gross receipts tax was first discussed were concerns about equity, particularly margins. These were issues that could be portrayed as [not having] the type of equity everybody would have wanted. At the suggestion of Chairman Parks and Speaker Perkins we were asked to look at ways where liability based on margin might be limited somewhat under the application of such a tax. I’ll try to describe for you as best I can the regimen that we’re discussing, the unified business tax. I apologize that today we don’t have a PowerPoint presentation for you, but we’ll be happy to take whatever discussion we have here today, reduce it to examples in writing, and get those right back to you as quickly as we possibly can.
[Mr. Hobbs, continued] Under the concept of the unified business tax we would be looking at total revenue much the same as we were under prior proposals and applying a tax rate of 0.25 percent to those total revenues. I failed to mention that we would still be suggesting consideration of a threshold exemption, which I think for discussion purposes has most commonly been set at a minimum level of $450,000 of total revenue. The Task Force’s version had it set at $350,000 and the Governor’s version had it set at $450,000, not a significant difference as it pertains to the amount of total revenue that’s produced under this. To the total revenue of a business [less the threshold exemption] a tax rate of 0.25 percent would be applied and that would determine the total potential tax liability under a unified-type of structure.
You would then look over to the margin side of the equation, and let me speak for a minute about how we viewed “margin” for the purposes of the calculations we made at the request of the Chairman and the Speaker. Margin we viewed to be the total revenue less cost of goods sold, with cost of goods sold defined as follows: “The beginning inventory, plus purchases, less ending inventory,” or the turnover of material through a business either to create something else through manufacturing, or purchase for resale. We focused only on those components and did not go any further as far as apportioning labor, shipping, storage, or those types of line items. We felt that the definition should be hard and fast, because once you get into apportionment of other components, the more creative world of professional accountancy can take over and it’s less certain as to what you’re dealing with. For purposes of this analysis, we confined the definition of “cost of goods sold” to “beginning inventory, plus purchases, less ending inventory.” That’s subtracted from total revenue to equal margin.
For purposes of creating a ceiling for the tax liability under the application of the unified business tax at 0.25 percent of total revenue, we applied 1 percent of margin as previously defined. Thus, if the amount computed under the margin part of the computation is less than what would otherwise come out of the calculation by applying 0.25 percent to total revenue, the tax liability would be limited to that lesser amount.
[Mr. Hobbs, continued.] I can give you a quick example without complicating it by throwing in the threshold exemption. If you had a business that had $1 million of total revenue, 0.25 percent applied to that would be $2,500. If that same business had cost of goods sold of $800,000, the margin would be $200,000 and 1 percent of that would produce a tax liability of $2,000. Thus, the tax liability for this particular hypothetical business would be limited by the margin side of it to the $2,000 as opposed to the $2,500 that they might have otherwise had as tax exposure. It acts more as a capping mechanism than an absolute election, but logic tells us that any business would elect toward the lower end of the tax liability anyway. Once again, we would apply the 0.25 percent tax against total revenue, and that would yield a potential tax liability that would then be constrained by the application of a 1 percent margin computation. To the extent that the margin computation is less than the prior value, the tax exposure would be limited.
Let me discuss the effect. To the extent that you’re dealing with businesses that have higher costs of goods sold, there’s more potential for benefit to be achieved under this than businesses that have lower costs of goods sold. Based on the 1 percent we used in this analysis, a break‑even point for benefit would occur at approximately the 75 percent cost‑of-goods-sold level. Those businesses that have costs of goods sold in excess of 75 percent would benefit by application of the limitation factor that we’re discussing. Those that have less costs of goods sold than that particular point of demarcation would not necessarily benefit. Again, it’s one that provides more benefit to those types of businesses that are characterized by a higher composition of costs of goods sold.
We could certainly have some discussion about those classifications of businesses. We did run an analysis to see which business clusters, by their descriptions, would be more likely to benefit. I should point out that in looking at it this particular way we’re using averages; and obviously, even within a certain category of business, whether talking about car dealers, grocery stores, developers, or any other one you want to pick, some potentially could have much higher costs of goods than others within their own classification so it’s not an absolute. At this point I would ask Jeremy Aguero if he would give you a run-down on some of our findings, and in particular, those that would probably find more benefit by application of this capping mechanism.
Jeremy Aguero, Technical Advisory Committee, Governor’s Task Force on Tax Policy:
As Guy mentioned, we took a look at what margins were in different types of industries, in particular what the cost of goods sold margin, the gross profit margin was, depending on how you want to look at that. We looked at it using two sets of data. The first set of data came from the Internal Revenue Service (IRS) based on tax returns for corporations nationwide. The second set of data came from information developed by the Minnesota IMPLAN Group, Inc.’s IMPLAN Model, and both were relatively consistent so I’ll go through some of the industries that have cost of goods sold margins in excess of 75 percent to give you an indication of what type of industries would benefit from this threshold.
[Mr. Aguero, continued] Automotive dealers and service stations are among the highest as well as food stores, general merchandise stores, and wholesale trade operations. A number of manufacturers, depending on the type of manufacturing, as well as any type of agricultural business generally have costs of goods sold that are very high. Those are rather broad generalizations and I’d be more than happy to go into more detail, but those types of industries generally have costs of goods sold as reported to the IRS and as reported to the Bureau of Economic Analysis in excess of 75 percent and would benefit. On average, those industries have a cost of goods sold of 80.6 percent.
Assemblyman Anderson:
In my district there’s a building supply company that has a huge inventory of materials. How would they fare under this kind of scenario?
Jeremy Aguero:
Wholesale trade generally has a cost of goods sold margin of about 82.2 percent, so it’s even higher than the average. We’re going to have to look at the income statement for every business within any industry separately, but we know for a fact that wholesale trade is notorious for having extremely high inventory costs. They merely purchase something from someone and then turn around and sell it to someone else. That cost of goods sold is relatively high, and I would suspect that if they were within the average or above the average they would benefit from the tax.
Assemblyman Anderson:
How would this tax be beneficial to them as compared to the other taxes that we’ve been discussing?
Guy Hobbs:
In this particular case we’re talking about something that acts as a limiting device on the total tax liability that might otherwise accrue. The other examples we’ve had before you in the past did not have any sort of limitation mechanism on them, so this capping mechanism would benefit those cases where the cost of goods sold is high. You would expect that to be the case in wholesaling and particularly for those businesses that have fairly high turnover of inventory. As compared to other mechanisms we’ve discussed before, this one has a limitation mechanism from which that particular example would benefit and so that’s one thing that distinguishes it from the prior models we’ve discussed with you.
Jeremy Aguero:
Let’s assume that this whole setup had gross receipts of $10 million a year. Their tax liability would theoretically be $25,000 under the standard gross receipts regimen, or 0.25 percent of that gross. At 82.2 percent, which is the average for wholesalers, that tax would drop to $17,000, or by roughly 28 percent.
Assemblyman Hettrick:
And under this scenario, Jeremy, that you just laid out, they save a little less than $8,000. What do you think it would cost a business like that with a $10 million gross and an 82 percent cost of goods sold to prepare a tax return proving their cost of goods sold?
Jeremy Aguero:
I would be cautious about suggesting what any individual business may do for an accounting practice today, but I can tell you that the vast majority of businesses are going to file an 1120 or some similar tax form. Schedule A on that tax form is going to have a cost of goods sold. Under that cost of goods sold, the information there is necessary to calculate the cost of goods sold, and it’s reported to the IRS every year. Certainly some smaller industries may have some difficulty if they don’t have the accounting savvy, but I don’t think it would be a terrible burden on any industry.
Assemblyman Hettrick:
Would you anticipate that we would have our tax department do any auditing of that form or would you anticipate that we would let the federal government do that auditing?
Jeremy Aguero:
I would tend to believe the answer to your question is “yes” on both fronts. I think that the Internal Revenue Service is going to be auditing taxpayers as they normally do and, depending on what policy question this Legislature determines, the Department of Taxation will probably set some kind of compliance mechanism into place as well. Hopefully, we’d be sharing information with the IRS to the extent reasonable and practicable to administer the tax.
Assemblyman Hettrick:
One of the problems I had with gross receipts and I still have with this proposal, as I understand it at this point, is that there’s no offset for health insurance. That concerns me some because I think we’re trying to encourage businesses to provide health insurance. If there’s no benefit to do so, and in fact if you’re going to pay a tax on it to do it, then I think they’re less apt to provide health insurance, which tends to leave the cost back on the state. I’d appreciate your comments, Mr. Hobbs.
Guy Hobbs:
I’m not sure there’s a specific answer as far as what I just laid out for you. We’ve had similar discussions in the past about the interplay between this particular element of an overall tax structure for the state and other elements. In the past there’s been discussion about the business license tax and whether or not, as you look at that particular component of tax or as it may interplay with this particular tax, relief could be provided by way of a crediting mechanism by combining the two; or individually providing a mechanism where good corporate citizenship, which may be measured by provision of health care or any other good public policy matters that may come up, can be worked into the equation. We’re viewing this as one component we’re discussing right now, not necessarily integrated with any of the others; but certainly, should there be a desire to provide for some type of recognition of good corporate behavior, we would be very happy to work with you to develop such a mechanism.
Assemblyman Hettrick:
Would you see this as replacing a proposed GRT if it were imposed?
Guy Hobbs:
Personally, I don’t believe that you would do both the universal business tax as described and the separate gross receipts plan as previously described. If you could find a tax that perfectly treats all taxpayers it would be something, and we understood that about the prior proposal. The efforts that we’ve made at the Speaker’s request and at the Chairman’s request were to try to recognize some deficiencies that had been brought to our attention, and to your attention, with the original proposal and try to make improvements upon that original proposal by virtue of the one we’ve discussed today. Those deficiencies being specifically the margin-related issues and providing some upward ceiling, so I would see this as a replacement for what had previously been discussed.
Assemblyman Hettrick:
So how would you deal then with a business, for instance a consultant, a lobbyist, with no cost of goods sold?
Guy Hobbs:
I think again, Mr. Hettrick, we have to view it from what eventually becomes the overall tax structure that the state is looking at. Certainly on the business license tax side, they are going to be participating in that but they don’t have high cost of goods sold. In the suggestion we made to you here we haven’t gone 100 percent to removing cost of goods sold as far as computing the tax liability, but we’ve gone far enough to set some limit on what the tax liability might be. The best answer I could give you, probably the most honest answer I could give you is, instead of tilting it over to a complete deduction for cost of goods sold we gave some recognition to it at a certain level. They still will clearly have the liability that they previously had, and being a service business myself I’m acutely aware of that.
Assemblyman Marvel:
Guy, have you given any thought of moving more towards net?
Guy Hobbs:
I’m going to try to give you how the Task Force viewed it. For all intents and purposes we saw certain problems with just going to net. One of the objectives we were given was to provide for something broad based that also stabilized the state’s revenue base. The stability associated with the net profits tax can be called into question. States that have relied on that in the last several years have seen declines of overall revenue as high as 50 percent but with an average of a 20 percent decline in revenue. Net profit seems much more volatile than do gross receipts or total revenue. We had some concerns about putting yet another revenue that had unstable characteristics into the overall mix. One other thing that concerned us about net profit was that the ability of certain classes of business to avoid the tax through creative accountancy are much greater at a net profit level than they would be with something that’s based on total revenue where there’s very little that can be done to adjust the values. Those were two points of great concern and as you move on a continuum from total revenue to net revenue, which is basically the discussion we’re having, as you move more toward net revenue those characteristics I just mentioned to you become more and more present. We tried to move a little bit further in that direction by recognizing the margin issue but not going so far as to make those problems as pronounced as they otherwise might be.
Assemblyman Marvel:
What about intangibles, people involved in an intangible business? How would this affect them?
Guy Hobbs:
Again, businesses that deal directly with services and don’t really deal with inventory would not be affected by the adjustments we’re talking about here. This is one that’s looking to portray margin more as something that’s affected by cost of goods sold. Service industries don’t have high, if any, costs of goods sold at all, so there wouldn’t be much relief provided there. However, if you went so far as to deduct cost of goods sold totally, as opposed to using it as a limiting factor, that probably would have gone too far in terms of providing favorable treatment toward those businesses that deal with tangible products as opposed to intellectual products.
Assemblyman Mortenson:
You are going to differentiate between the high-profit businesses and low-profit businesses by a particular point in the costs of goods sold, is that it? How do you differentiate one business from the other?
Guy Hobbs:
We’re dealing less with differentiating on the basis of profit because we’re dealing in this particular discussion with margin. You could have businesses that have high margins and low profit or low margins and high profit.
Assemblyman Mortenson:
Margins, okay. Can you be more specific? Using numbers and so on, how are you going to divide this business from that business?
Guy Hobbs:
We can certainly give a couple more examples. Let’s use a $10 million business that has a very low cost of goods sold and one that has relatively high cost of goods sold to compare their tax liabilities.
Assemblyman Mortenson:
I’m trying to find that fine line where you say, “This is a low-margin business and that is a high-margin business,” or is that not a factor? I’m trying to differentiate how you determine …
Jeremy Aguero:
When you’re talking about margin are you talking about the profitability of the company or are you talking about how much gross revenue is gross profit?
Assemblyman Mortenson:
I’m just copying your wording.
Jeremy Aguero:
Let me attempt to draw the distinction. When we use the term “gross profit” we’re talking about the total receipts of the company, less cost of goods sold. There are a slew of deductions: amortization, depreciation, labor costs, offices, rents and all the other things that would come off my gross profit number to get to my net profit number. When we speak of high-volume, low-margin industries there’s a tendency to talk about industries like grocery stores. Grocery stores have extremely high volumes and traditionally have extremely low profit margins at the bottom line. Those businesses generally have very high inventory costs as well, but that is not a universal truism. There are some companies, airplane sales for example, where if they purchase a wholesale airplane for $20 million and then turn around and sell it for $22 million, their cost of goods sold is going to be, assuming they have no other costs, that $20 million they paid for that airplane. They may make 2 percent on that sale; maybe they’ll make 15 percent on that sale. In general, companies that have higher costs of goods sold tend to have slightly lower profit margins. Again, I think it’s important to point out that that is not true in all industries.
Assemblyman Mortenson:
Here’s business “A” and here’s business “B.” Does somebody say, “A, you’re in one category and B, you’re in the other category?” Or does he have a tax form he’s filling out that automatically classifies him as he goes through filling out his taxes and automatically gives him his compensation if he happens to be a low margin business?
Guy Hobbs:
It would be more the latter. We would expect it to be a calculation where Part One of the calculation is the total revenue multiplied by 0.25 percent and it yields a particular value. Then, as you move across on the algebraic continuum, you’d have another calculation of margin applied at 1 percent and margin computed with the cost of goods sold as we’ve discussed. To the extent that one number is greater than the other, that number would fall to the bottom.
Assemblywoman Pierce:
You said something about giving other examples. The group I probably heard most from is car dealers. Could you say something about that group?
Jeremy Aguero:
In general, when the federal government reports information they lump auto dealers and service stations into one group, so I’ll talk about that first and then I’ll talk about some 10-K data we received from our national auto dealer.
An automotive dealer or a service station generally operates on a gross profit margin of 80.8 percent, so they would certainly benefit from the cap, and that’s nationwide data. One national auto dealer is Auto Nation, which has $19.4 billion-worth of sales nationwide and operates on an 84.7 percent margin. Certainly they would benefit as well. I could calculate their tax liability under any regimen that you’d like me to, but certainly they would pay less because 1 percent of the $3 billion that they bring to the gross profit line is less than what they would pay on their gross receipts.
Assemblyman Griffin:
To follow up on something Mr. Hettrick was talking about in terms of health insurance benefits and those kinds of things, does that count as labor costs? Is the labor a portion of cost of goods sold?
Jeremy Aguero:
In the cost of goods sold definition that we’ve been talking about thus far, it’s not included. Cost of goods sold includes only inventory, purchases, and tangible personal property used to manufacture a product or the purchase of property for resale. Generally when the information is reported either on 10-K statements by companies to the SEC (Securities and Exchange Commission) for publicly held companies or on the federal forms, wages and salaries are listed. Sometimes they include that but oftentimes there is an employment benefits line item as well where some of that information is broken out. It can be two ways on the form but it’s not included in the cost of goods sold.
Chairman Parks:
I’ve had some experience filling out form 1120, and I know that usually the first line on the form is your gross receipts less allowance for returns. I think the second line is the entry for cost of goods sold and then there’s a further worksheet in the 1120 form that you fill out for cost of goods sold. Could you explain, or is this pretty much your explanation or your understanding of how this would function, how an individual who would be complying with a unified business tax would draw those numbers from those particular forms?
Jeremy Aguero:
Mr. Chairman, I believe the information would be drawn from those forms. It’s not going to be exactly as what’s on line 2 because the federal government also has other line items including something called “263A capitalization.” It has other costs associated. It also has something called “Cost of Labor” that’s in there. As Guy alluded to earlier, those open the door for people to move any number of items up into cost of goods sold. It was the belief as we were analyzing some of this information as requested that it would be best just to include those purchases. The idea is to not re-tax the same thing over and over and to avoid those businesses with heavy purchase prices where they’re already being taxed.
Guy Hobbs:
The fact that those numbers exist is helpful even if we might be pulling them off of the forms in a slightly different order than taken for federal purposes. We do believe that the fact that those numbers are reported federally and are obtainable would assist greatly with compliance and auditing. We would thus have the federal oversight as well as any additional oversight we may wish to provide, and we’ve had those discussions with your Department of Taxation as well.
Chairman Parks:
For corporations that might operate out of multiple states, would they file those respective of the state they are operating in, or would there be a further gleaning of the numbers in order to get those figures?
Jeremy Aguero:
The cost of goods sold would be allocated exactly the same way as the revenues, depending upon the apportionment formula.
Guy Hobbs:
I would like to offer to put together several examples. We’ve developed quite a database of real businesses so we’ll try to use businesses we believe to be at certain extremes to show where that benefit might be and how it might be measured. We will be very happy to provide that to you within the next day or so. Beyond the discussion on universal business tax, is there another point you wanted us to discuss today?
Chairman Parks:
Yes, there is. First, several Committee members have questions.
Assemblyman Marvel:
Do you have any projections on what this tax would bring in compared to the gross receipts tax?
Guy Hobbs:
We have, and we believe the revenue production to be relatively similar. We believe we can produce, using the definitions that we’ve given you here today, somewhere just over $200 million in the second year of the first biennium and less than that obviously in the first year as we go through implementation. That revenue production in current dollar values would be at a mature functioning of this application.
Assemblyman Marvel:
Would it be more difficult to program than the GRT or would it be about the same?
Guy Hobbs:
I would believe it would be about the same. We’ve had these discussions with Mr. Chinnock. I would not speak on his behalf, but basically we’re talking about something from an algebraic standpoint, a mathematical standpoint. It would be fairly easy, once all the data is in the system, to compare two values and take the lesser of the two. We don’t see that part as being more difficult. I think the thing that probably is the greatest challenge for them would be the number of accounts and bringing those accounts on line as quickly as they can.
Assemblywoman McClain:
Jeremy, could you repeat what you were saying about the multi-state corporations?
Jeremy Aguero:
A multi-state corporation is, say, a corporation that has business activity based out of Delaware and is selling things into every state in the Union and has a physical presence in every state. Let’s just assume that takes place so we have the ability, the jurisdiction, to tax them. They will be required to apportion their sales to each individual state as they would in any other state that has an income tax. As far as the deduction for cost of goods sold goes, that would just be an equivalent. They would just use the same ratio to allocate their cost of goods sold. The cost of goods sold margin probably is not going to change. Or you could do it just based on gross profit. Either way it works.
Assemblywoman McClain:
Could you work up Wal-Mart for us, then, or an example of that type of business?
Jeremy Aguero:
I can probably get pretty close. Wal‑Mart has $219 billion in sales; they have 12 locations in the state of Nevada. Assuming that the average store operates in the state of Nevada, we could certainly work something up if that’s what you’re looking at, but it would function the same way.
Wal-Mart has a cost of goods sold margin of 78 percent so they would benefit slightly from the 1 percent cap. They would pay on whatever the share of those revenues that are attributable to the state of Nevada is. I can give you the actual figures if you’d like to see those.
Assemblyman Griffin:
It raises approximately the same amount of money but you’re seeing some level of a tax reduction from the margin tax versus the gross tax for retailers, car dealers, and probably manufacturers which I’m sure have a pretty high cost of goods sold. If their tax burden is reduced, whose is coming up to offset the revenue? If it raises the same amount of money, somebody is paying more under this circumstance.
Guy Hobbs:
The Task Force recommendation presented to you in A.B. 281 included interplay between the business license tax and the gross receipts tax, as it was termed, or state activity tax, under that particular proposal. At this point in time we’re simply talking about the unified business tax, and it’s completely independent of any interplay with the business license tax. Previously there was an offset because of the credit we were giving for the business license tax against the gross receipts liability. That doesn’t exist in this particular plan. That’s what would reconcile the two.
Assemblywoman McClain:
For the UBT (unified business tax), you put in a threshold of $350,000 or $450,000. Would that threshold now relate to whatever you get after deducting the cost of goods sold?
Guy Hobbs:
The calculation would be total revenue, less the threshold exemption. That amount remaining multiplied by 0.25 percent would be the tax. The exemption would come off first.
Assemblywoman McClain:
So if they ended up dropping under the $450,000…?
Guy Hobbs:
The rest of it would not apply.
Assemblyman Mortenson:
You said you are going to provide us with examples of various businesses. Are you actually going to give us dollar values so we can really see what these example businesses will pay and so on?
Guy Hobbs:
We would have liked to have had that information for you today, but we’ve been working on this and several other things right up until this point. We can provide them rather readily because over the last 18 months we’ve accumulated quite a database on actual businesses in the state so we can give you a reasonably good sampling.
Assemblyman Hettrick:
I really have the same feelings about this proposal as I do about GRT and I think it has the exact same problems. If you don’t include labor in cost of goods sold, and you do not, then you could have a start-up business that clearly is unprofitable, still getting taxed on a margin of gross profit that doesn’t exist by the time you subtract the labor and the cost of health insurance and the like. You have the same problem with health insurance that you had with GRT and that is, unless we start creating exemptions, we’re running away with a tax that doesn’t create the money it’s supposed to create. That bothers me.
Finally, we still keep working on this premise that government has to have its money whether or not the private sector is making any money and that the tax has to be on some kind of gross and not on their ability to pay, but on government’s ability to spend. I totally disagree with that and I’ll never agree with that. I think it’s wrong. I think government should have to move with the private sector and not be guaranteed its income no matter what’s happening in the private sector.
The Senate passed $730 million in taxes. We’re getting $340 million in new money, according to the Economic Forum. The way I count, that’s over $1 billion. How far are we going to go? When is this going to stop? This is a bottomless pit.
Assemblyman Goldwater:
When the state’s economy goes bad, people don’t look towards entrepreneurship to solve their problems; they seem to look towards government. Strangely enough, Medicaid caseloads go up and welfare caseloads go up. There are more kids in public school because there’s less ability to afford private school. More is asked of government in difficult economic times and I think a proper budget and planning on behalf of government for those ups and downs is prudent.
We in the Committee have passed economic development statutes that abate taxes. I’m sure this tax someday will be abated under the guise of economic development. We have loan programs, we have start-up programs, and we have redevelopment programs in the local districts. There’s not a business plan I know that doesn’t have a line item for taxes owed or due in 48 other states. It’s just going to have to be part of the business plan in the state of Nevada in the future. I don’t think we’re discouraging entrepreneurship. I know we are doing the right thing by planning stability rather than instability. We’re getting closer and closer to where we need to go, but I caution you; we cannot let the perfect become an enemy of good as we discuss taxes. This is not perfect; it’s good. It may be better, but why are we continuing to argue that perfect is the only solution? I commend you and thank you again for continuing to work on something good.
Assemblyman Hettrick:
I totally agree. Every tax plan is imperfect, but the problem with what Mr. Goldwater just said is that government, the way we’re going right now on what we’re planning to do, will spend every single penny of this tax. Then when you have that downturn that you just talked about we’ll be back here doing exactly what we’re doing in this downturn, and that is raising taxes again.
Why can’t we spend 80 percent now and save the money to cover the downturns? Why do we have to come back here and raise taxes every time we have a bad time? That’s the argument that’s going on here. If we’re going to raise $1 billion, how much is enough? How much are we going to spend? When are we going to decide 80 percent of spending is enough and that we need to have some kind of savings account like people do?
Assemblyman Arberry:
I’ve been in this Legislature for a good period of time and I’ve watched the money committee cut, cut, cut for the past 20 years. I knew sooner or later it was going to catch up with this body. We cut, cut, cut, and the services are being cut and now there’s no more room to cut but I know there are some people out there who feel there’s still some room to cut. Every session this body leaves here and goes back to their constituents and says, “We cut. We didn’t raise any taxes.” If September 11, 2001, hadn’t even happened, we were going to be driven into this corner at some point in time. The people are demanding services. They’re demanding a good quality of life and I’m sorry, but sometime we have to put it on the back of businesses and the taxpayers. We’ve got to balance the budget because the Nevada Constitution says we have to have a balanced budget. We cannot continue to think we’re going to survive on cutting, cutting, cutting, and thinking that people are going to stand in line at DMV (Department of Motor Vehicles), or be denied services for their children, or things of this nature. There comes a point and here we are, we’re right on the edge, so we need to make a decision as to where we are. That’s why we’re trying to raise the money. I’m not trying to say that we don’t need a savings account. We had a savings account. We spent the savings account; there’s nothing left.
At some point, this body’s got to take the responsibility just like we do at our homes and that’s why we’re all here to make the decisions. We’ve cut over the years and it’s time now that we stop trying to figure out how to cut any more. We’ll cut $10 here; we’ll cut $15 there; it’s still not going to take care of the real problem. We need to go ahead and do the taxes, so if we do these taxes, hopefully, these will be the last taxes that this body will have to be faced with over the next 10 years. I would never want to put this burden on anybody else having to come up here and raise taxes because we’re not only about raising taxes and dealing with just taxes. This body has other issues and it’s a shame that we have to deal with taxes or something 120 days and try to solve this problem that’s been going on for the past 20 years.
Chairman Parks:
I know, too, because of my involvement with the tax shift in 1981, that we all left the 1981 Legislative Session knowing full well that we had put a Band Aid on a big wound and that, given the decisions that had been made in that session, it was only a matter of time before we’d be back to address the issues again.
I’d like to go ahead and move on to the other issue we wanted to cover today and that we had asked Mr. Hobbs and Mr. Aguero to provide us some insight into. Many states have a commercial/industrial lease tax that is computed in a number of different ways. What we asked Mr. Hobbs and Mr. Aguero to do was to look at some examples of how that would be done and how it might be administered. At this time I’d like to turn the floor over to Mr. Hobbs to comment on that.
Guy Hobbs:
At the request of the Speaker and Chairman Parks we were asked to look at a tax on commercial leases. The values we were looking at were to give you some notion of revenue-producing capability at a particular level.
Jeremy Aguero:
The question that was presented to us dealt with what type of revenue could be generated by imposing a tax on the lease of office, industrial, and retail space. We looked at a number of different types of information, both from states that impose such a tax as well as from data that is compiled on office, industrial, and retail space for rent both in Clark County and Washoe County.
We conservatively estimated that the tax base for this tax would be about $1.2 billion per year. Imposing such a tax at a rate of 2 percent would generate roughly $25 million annually. Those are the base values.
Chairman Parks:
Offhand, as far as looking at numbers of states that have implemented such a tax…
Jeremy Aguero:
There are two states that have imposed such a tax; one is the state of Florida and one is the state of Arizona. In the state of Arizona it’s a local government tax, and the state of Florida also has this tax as a part of their retail sales and use tax regimen.
Assemblyman Marvel:
How would that be administered?
Jeremy Aguero:
It’s administered very similar to a retail sales and use tax. Let’s say I own an office building and you’re renting space from me. When you pay your rent, you’re required to add a tax on top of the cost of your rent.
Guy Hobbs:
Although the details have not been fully vetted on the question you’re asking, Mr. Marvel, it would seem to make more sense to have the collector of the tax be the owner of the property that’s being rented or leased because it reduces the number of collection points much the same as you have retailers collecting sales and use tax and remitting it to the state. They would in turn, as retailers do, transmit that to the state on a monthly basis.
Assemblyman Marvel:
Would they have to voluntarily commit themselves to the Department of Taxation? Is there any record now of who are the lessors?
Guy Hobbs:
I would have to defer to the Department of Taxation. I don’t know that there’s any reason that they currently have them as individual accounts. We would have to go through a process of identifying who all of the property owners are that actually rent or lease property.
Assemblyman Marvel:
Would that be apartments, too?
Guy Hobbs:
No, we’re talking about commercial office and industrial, not residential.
Assemblywoman Pierce:
Could you give me those numbers again?
Jeremy Aguero:
Sure. The estimated tax base is roughly $1.2 billion and the estimated tax yield in the first year is $25 million.
Guy Hobbs:
That’s at a rate of 2 percent.
Chairman Parks:
The thought that came to my mind was that we have a lot of individuals who have small leases for limited space. The little strip mall shops are somewhere in the range of 1,400 square feet. Could it be structured such that there would be an exemption on, say, the first 2,000 square feet maybe or 1,000 square feet of space?
Guy Hobbs:
To the extent that that data exists, obviously when we talk about doing an exemption, whether it be by dollar amount of lease payment per month or by square footage, our ability to tell you what the revenue impact would be on the numbers that we’ve given you is something we’d have to go back and research a little bit. Obviously, those kinds of floor limits or threshold exemptions could be constructed. What impact they’d have on the revenue we’d need to research depending upon whatever direction you might give us as to what those appropriate thresholds would be at a dollar or square-foot level.
Assemblyman Griffin:
Going back to the UBT. When you provide some of those industries you were talking about could we get banks included in that as well? Banks, at some level, borrow money to make a loan. Is that borrowing part of the cost of goods sold?
Guy Hobbs:
We would not view that as cost of goods sold.
Assemblyman Griffin:
It wouldn’t be a deduction then in this tax?
Guy Hobbs:
No, we would not view that as a deduction. Obviously, any time you’re talking about financial institutions vis-à-vis other businesses, you get into a number of other complexities, but we can certainly include a bank. We’ll try to give you as broad a spectrum. We know where a lot of questions have arisen in the past about certain types of businesses whether they be grocery stores or banks or auto dealers, wholesalers or manufacturers and we’ll try to give you as broad a spectrum as we possibly can.
Assemblyman Mortenson:
I’m really surprised that this hasn’t come up because it’s going to be on everybody’s lips. How does this affect the casino industry, the gaming industry? Will it affect them at all or will they just go on with the tax that they have?
Guy Hobbs:
It’s kind of hard for me to sit here and talk about certain things in isolation from other components of what you have but there was a presumption when the Task Force made its recommendations that there would be an increase in the gross gaming tax that currently exists. That said, if we hold that as an assumption for a moment, hotel casinos also have a lot of other businesses other than the gaming side, which make up about half their total revenue these days, and they would be subject to the same tax.
As far as cost of goods for hotel casinos, Jeremy, I don’t know if you have a notion on that, but it’s certainly less than you would see in manufacturing and maybe, perhaps, higher than one might otherwise expect.
Jeremy Aguero:
The average cost of goods sold, as reported in the Gaming Abstract for all major gaming companies, is somewhere between 8 and 10 percent. If we look at accommodations businesses or lodging facilities as reported by the IRS, that figure is about 36 percent. Taking either one of those, they will not benefit at all from the cap.
Chairman Parks:
Is Mr. Ken Lange here? Would you like to come forward? Mr. Lange was a member of the Task Force and we would welcome your thoughts.
Ken Lange, Executive Director, Nevada State Education Association; Member, Governor’s Task Force on Tax Policy:
[Introduced himself.] I’d like to make a few comments about the developments and testimony from Mr. Hobbs and Mr. Aguero.
NSEA (Nevada State Education Association) has long supported a broad-based tax on business. Two years ago we presented to you a tax on net profits. You know where that discussion went, where it ended up, and where we are today. I supported the Task Force’s proposal for the gross receipts tax because I felt that, in contrast to the net profits tax, it was superior, more stable, and perhaps more manageable.
[Mr. Lange, continued] Once we got over the threshold and looked at the other states that use it, the complexities that it purportedly had didn’t really exist; and much of the exemption and criticism that came forward was strictly isolated to non-profits.
As a part of this discussion the Nevada State Education Association has been relatively circumspect in settling down on any particular tax of any particular sort for a simple reason. We believe that our job has been to keep the needs of students and the education employees foursquare in front you. The changes proposed today [involve] essentially a name change and an attempt to modify what we believe has been the most potent criticism, at least politically, of the gross receipts tax. We believe you’ve been provided with a reasonable mechanism that should respond to at least some of the concerns about margins sufficiently to take another really good, hard look at this particular source of revenue.
We agree with Mr. Goldwater that there is no perfect tax. We think that by making reasonable steps, as you saw today, that we’re getting closer and feel much more comfortable with this proposal as a part of the entire package that helps us to meet the needs of Nevada’s schools, its children and education employees, and moves us more to a national average. We think the proposal today is extremely helpful.
Chairman Parks:
Are there any questions for Mr. Lange? [There were none.] The next person on the sign‑in sheet was Jan Gilbert.
Jan Gilbert, representing the Progressive Leadership Alliance of Nevada:
[Introduced herself.] During the interim we were active participants in the Governor’s Task Force on Tax Policy. We attended every meeting and learned a great deal. We also had our own proposal, I think you already received that, called the 2 Plus 2. We too started out thinking about a net profits tax. Since then we have come to agree with the Task Force that it would be very difficult to implement and would be a bit unmanageable. This is the second time I’ve heard about this unified business tax, and we think it’s a great idea. It seems to strike a wonderful balance between the gross receipts tax and the criticisms you received from many manufacturers that have a small margin. We think this bridged the gap. We also think that it could be implemented quite simply using the federal income tax, so hopefully we could implement it sooner because of that. I think the whole point is to get this money into the state.
[Ms. Gilbert, continued.] I think Assemblyman Arberry is absolutely right. We have seen the state of Nevada hemorrhaging in the last many years. This last interim, our Governor had to cut $211 million out of state government and you are seeing it in people retiring from state government. They’re having a hard time implementing programs because they don’t have enough staffing. Our teachers are discouraged. I had a call from a neighbor and she’s so frightened. The library program in her high school is being destroyed because they’re losing staffing in Washoe County. We’re discouraging people in our state because we are not serving the people that we’re intending to serve. I think we need to come up with a proposal that will balance all of this and I think this unified business tax is the way to go.
I also do not feel that this is going to hurt Nevada business. We’ve heard a lot of talk about businesses leaving the state of Nevada. I think that’s a bit silly when you look at our neighboring states. They have business tax, they have income tax, and they have a lot of taxes that are much more of a disincentive to settle in our neighboring states. I think Nevada still is attractive to business and will continue to be.
Finally, I’d like to address an issue that Assemblymen Hettrick and Griffin were interested in and it’s one I’m very interested in. That is an idea that arose regarding incentives to businesses that provide health care and disincentives to businesses that do not. Yesterday there was some proposal to raise the BAT (business activity tax) for businesses that are not providing health care and give some kind of an incentive to businesses that do. We know that businesses that do not provide health care end up with their employees at the local hospitals. It would be wise of us to encourage businesses to provide health care for their employees.
We had a proposal in A.B. 356 which we talked with some of you about at great length. We called it our “living wage” bill. The idea would be just that. It did not pass out of the Senate, but if you could incorporate that into your tax proposal I think it would benefit all of us.
This is going to provide stability. We have to give and take and I think this is a meeting of all the minds to come up with the best tax proposal we can. I commend you and Chairman Hobbs and Jeremy Aguero for just doing an incredible amount of work for that subcommittee. They should be applauded because they donated that time. They didn’t get paid, either, so all of you and them should be applauded.
Chairman Parks:
Are there any questions for Ms. Gilbert? [There was no response.] I know that we’ve made reference to the Department of Taxation and I’d like to ask if either representative of Taxation would like to come forward and make a comment?
Chuck Chinnock, Director, Department of Taxation:
[Introduced himself.] The unified business tax is a relatively new concept for us. Maybe I could make some general comments regarding the Department’s perceptions of the tax. As you know, it was the position of the Department of Taxation that to implement the gross receipts tax we originally had a date of July 1, 2005. I believe the unified tax could be implemented sooner. We are about to release a cost estimate and a report on implementing new information technology at the Department that should come out tomorrow, so I think a date earlier than July 1, 2005.
What I heard here today, though, was talk of revenue being generated in the first year of the biennium, which would mean an implementation timeframe of approximately January 1, 2004, or shortly thereafter. That would be challenging. If there were to be an earlier implementation then maybe there should be some restriction as to how this tax would apply. What I’m really saying is, in the long run, with respect to application, we need new information technology. If there’s a desire to do it in a shorter time period than the first year of the biennium, and that’s what the state’s needs are, then I think we have to look at something like a desktop system and perhaps be a little more focused or more narrow in order to put it on a desktop system and get to those specific taxpayers.
The issue of who has to file would be determined when we saw the specifics. Once we’ve identified who the taxpayers are that would be required to file, we would narrow it down to who needs to actually file. As far as some other challenges that we’re ready to address, you heard Jeremy Aguero talk about out-of-state companies that have nexus in the state. We also have companies for purposes of income tax who are located in this state so we have to deal with the issue of apportionment or allocation. When we talk about apportionment or allocation we are talking about regulations for the Tax Commission and so the Tax Commission would have to get involved with that. How many other taxes are we talking about implementing? We could be talking about various taxes with several regulations that need to be implemented within a six-month period or so. I would stress that if we concentrate on a few tax programs to implement it’s going to be much easier for us than if we have several that we have to implement, for the reasons I just stated.
Assemblyman Marvel:
Have you had an opportunity to look at the commercial leasing program?
Chuck Chinnock:
I heard about it and I did start to look at it. I know there were some questions regarding administration and I do echo what Mr. Hobbs said that probably at the lessor level is where you’d want to administer that. From the standpoint of the Department of Taxation the assessors have a pretty good database of those properties that are commercial and industrial. I’m working on that right now so that we can identify which ones are owner-occupied versus ones that are leased. Once we do that we could have the numbers and, hopefully, we’ll have those numbers in a short period of time.
Assemblyman Marvel:
There are thousands of mini-storage units throughout the state. Would that cover them?
Chuck Chinnock:
I don’t know for sure if those would be included, but it’s a commercial lease so I would assume so.
Jeremy Aguero:
The numbers we gave to you were only for office, industrial, and retail space. Mini-storage units were not included or figured into that calculation.
Assemblywoman Pierce:
Are the big-box stores generally leased or owned?
Jeremy Aguero:
It depends on the stores. Some are owned; some are leased. I don’t think there’s an easy answer to that question.
Assemblyman Anderson:
There are a lot of vacant stores, particularly in shopping centers. How would they play into this since they’re vacant? If we’re doing it on a square footage basis it would appear to me that they would probably be excluded, but I want the reassurance that that’s the case and that we’re not charging someone for empty, vacant space.
Jeremy Aguero:
If it’s not occupied there is no lease, there is no payment, and there is no tax.
Chairman Parks:
I know we have some representatives in the room from both mining and tourism. Is there anybody who’d like to make a comment at this time?
Bill Bible, President, Nevada Resort Association:
[Introduced himself.] I really had not intended to provide testimony today but I wanted to respond to Mr. Mortenson’s question as to how gaming would be treated under this particular tax. I also want to talk more generally about how gaming gets treated under all the various proposals that have been considered by the Legislature. As you know, the gaming industry is the state’s major employer as an industry. It probably has the most significant impact on the Nevada economy so anytime you change the tax structure, regardless of where, there’s an impact on gaming. If you look at the existing general fund revenue you’ll find that gaming pays directly about 37 percent of all the revenues, either in the form of gross levies on the industry or through the collection of the casino entertainment tax.
Additionally, the industry acts as a collector of various other taxes such as sales tax and so it’s been estimated that the total impact is about 50 percent of the state General Fund. I took a list that was compiled by the Nevada Taxpayers Association and compared it with the Governor’s and Task Force proposals. [Referring to] the cigarette tax, the industry is both a collector and a payer because the industry still does provide complimentary cigarettes to some of its customers. The same is true of the alcoholic beverage tax. It’s been estimated that the industry pays about 50 percent of that tax. Of that 50 percent, the industry in turn gives about 50 percent of that away in terms of promotional activities. For Secretary of State’s fees, the industry pays all of those fees because it’s registered as various corporations, partnerships, and other forms of business activities.
The Business License Tax is currently the only really broad-based business tax that’s a source of General Fund revenue. The gaming industry pays about 20‑25 percent of that particular tax because of the numbers of its employees who are engaged in gaming activities. Property taxes haven’t been talked about extensively, but if you take a look at the top ten taxpayers in both Clark County and Washoe County you’re going to find that usually seven of those ten are going to be gaming companies, the exception typically being the power companies and in southern Nevada there are a couple of land development companies. To Mr. Hettrick’s question about ability to pay, the eleventh company on that is the Aladdin. As you know, the Aladdin was the most recent property that opened. It was a billion-plus-dollar property that’s now in bankruptcy. It still pays that tax, it still pays the gaming tax, and it still pays the business license fee.
[Mr. Bible, continued.] The gross receipts tax was advanced by the Governor’s Task Force. The gaming industry would pay a proportional share of that based upon its gross receipts and I will talk about gross receipts in a little bit more detail because as you know the taxation of the industry is based upon gross receipts. Additionally, the proposed amusement admission tax would affect the industry not only as a collector but also as a payer, because the industry does extend complimentaries to its guests as they go about their activities. For instance, during the National Final Rodeo if there happens to be a big player in the house, the house typically will treat them to a ticket, so the industry would be paying the tax on that.
Whenever you look at the tax proposals there’s a definite effect on the industry. Jeremy Aguero mentioned this particular proposal, which has a cap at 1 percent that becomes applicable at the level above 75 percent of your cost of goods sold. The industry’s cost of goods sold is about 8–10 percent. If you look at the reports that are prepared by the Gaming Control Board, the cost of goods sold is typically going to be mostly food and alcoholic beverages purchased by the industry.
Interestingly enough, one of the larger tangible goods purchases is in the form of meals provided to employees on which sales tax is collected. In the last bill you’ve talked a little bit about the proposal as it’s being advanced today. I will add the caveat that we do not know the details of this particular proposal. We have not had an opportunity to evaluate it as a resort association, but our goal in supporting the gross receipts tax was an attempt to broaden that base so all segments of Nevada’s economic community have an opportunity to participate in contributing some revenues to the state’s General Fund.
The first cut that came off was the Task Force’s recommendation of a $350,000 exemption. The Governor’s proposal increased that to $450,000 so right off the bat you take some 55–60 percent of the businesses out of the applicability of the tax. You’re now talking about the remaining applicability and this would further narrow that down by allowing certain industries, which are probably more traditional manufacturing, retailing-type activities, to avail themselves of a credit. We have not discussed that proposal, as I indicated, and we have to take the opportunity to evaluate the proposal. The definition of cost of goods sold is going to be very important to our evaluation.
Billy Vassiliadis, representing the Nevada Resort Association:
We went back and looked at all of the studies over the last 14 years that were commissioned by this Legislature and at all the interim committees that looked at the revenue needs and who should pay. In almost every case it came back that Nevada was too dependent on one industry, gaming; and on two sources of revenue, gaming tax and sales tax. Here we sit again after this body and the Senate commissioned a task force. The Nevada Resort Association took a position to support most of the Task Force, especially the 0.25-cent. Why? Because we felt that it was at such a low level that any business should be able to assume that 0.25-cent and be able to afford to pay.
[Mr. Vassiliadis, continued.] Then a concern developed over affordability in high-volume, low-margin businesses. As payers of a gross tax, we didn’t get that kind of consideration when the Aladdin went bankrupt, the Riviera went bankrupt, the El Rancho went bankrupt, Bally’s in the early 1990s went bankrupt, and casinos in northern Nevada went bankrupt. There was no hue and cry for some sort of relief. It’s assumed that you should be able to handle that small of a part of your revenue to pay this tax. We thought it was very fair, the exemption level was very fair, and you took out 60 percent of Nevada’s businesses.
Under this margin cap, some very, very successful businesses will get off. Another thing that is a fact is that service industries will end up paying more because they don’t have goods sold. This is how I feel as a businessman who employs about 200 people in this state: I need to pay for the services that those people use. That’s part of my cost of doing business. I pay for their health care, I pay to put them at a desk, I pay for their phone service, et cetera. One of the things I need to do is pay for the schools their kids go to, the roads that we drive on, and the roads that we use to go to church. That’s part of my obligation as a Nevada businessman.
We also understand our colleagues from the business industry and the concerns they have because this is all new to them. This is the first time there’s been a serious discussion of a broad-based business tax. We understand the concern for diversification, et cetera, but the fact is, by watching this house and the other house close budgets, there’s some consensus that our education needs help, and I agree. There’s some consensus that we have to do something about health care in this state. The gaming industry agrees. We all need to participate in taking care of that and we’re concerned. We hope that this cap is not the tip of a run on the business tax to decrease its impact and decrease the revenue the state may get by an ongoing discussion of who else doesn’t have to pay.
As Bill Bible said, we pay all of these taxes in addition to which we’re going to pay the 0.25-cent on gross receipts. We didn’t complain even though we pay industry-specific taxes and we’re still going to, hopefully, join our colleagues in the business industry and pay the tax they all pay, too. I think it’s fair that you consider that. Also consider this, I’ve heard recently from my friends in the Chamber [of Commerce] and in the Taxpayers Association and others that the $450,000 or $350,000 exemption for small business makes it not a broad‑based tax. Now we have an exemption for small business and a margin cap so we further make it not a broad-based tax. Obviously we want to participate in the solution. We’ve said from day one that we want to be part of solving the problem, helping our schools, helping our seniors, and helping the state of Nevada because the state’s been very good to this industry. However, we hope that everybody joins us in that help.
Assemblyman Anderson:
Mr. Bible, I was under the impression that the complimentary rooms, the complimentary dinners, the drinks, and the other giveaways that keep customers within the casinos were an offset against gross receipts of the casino so that they wouldn’t have to pay. It seems to me that we’ve had a couple of bills on that in past sessions that reduce the amount of exposure the casinos have.
Bill Bible:
I wish that were the case, but if you look at the provisions of NRS (Nevada Revised Statutes) 463you’ll see that the basic equation is wins less losses. There are some disallowances, for instance you’re not required to pay on credit play until you actually collect the debt. There are disallowances for counterfeit money and things of that nature. You cannot deduct your rooms. You’re not required to pay room tax on a comp, which is somewhat different than I referred to on alcohol where you have to pay the alcohol tax even though you give the alcohol away. But there is no deduction from the gross gaming tax for those kinds of promotional or incentive programs.
Assemblyman Anderson:
I’ll go back and check it again, but I remember a very controversial piece a couple of years ago relative to that very question about coupons and other giveaways.
Bill Bible:
That was the free play coupon issue. That was a very limited set of circumstances with the “Lucky Buck” promotion, or something of that nature, but it had nothing to do with the rooms or the major promotional activities of the industry.
I do want to compliment Assemblyman Hettrick. I’m looking forward to his legislation. I know we won’t have time to prepare it this year, but if you could get that gross gaming tax based on the ability to pay and you could also get that deduction for health care, that idea has merit. The gaming industry probably has the highest incidence of coverage of its employees of any other industry in the state in terms of providing health care benefits to its employees.
Mark Nichols, Executive Director, National Association of Social Workers, Nevada Chapter:
[Introduced himself.] I’m here to speak in support of the UBT. There are a number of issues with regards to taxes and points that have been made throughout this session. First off, NASW supports and urges the Legislature to adequately fund the human services and the education needs of this state, whether that figure is over or below $1 billion or $500 million a year. We strongly encourage you to pass tax reform legislation that addresses the needs of this state.
We need to have a fair system. We have been, in a number of our communications, talking about having business pay its fair share. One of the things I see that the UBT does as opposed to simply the gross receipts tax is that it does create an additional level of fairness for those businesses that do operate on a different margin. From that aspect this seems to be a fairer tax.
Third is the stability issue. We need to have the reliability of having revenue for the state that we strongly encourage you to address, so NASW, Nevada Chapter, strongly supports the uniform business tax and encourages you to vote “yes” on this.
Vicki LoSasso, State Cochair, Nevada Women’s Lobby:
[Introduced herself.] I’m not here this afternoon to testify as a tax expert. We have been following this issue closely enough with the realizations that we have always been concerned with the need side and that if we’re going to be concerned with that side we have to be also concerned about the revenue stream. We watched this debate evolve, and we agree that we need to broaden our tax base and make it more stable so that our state is not as vulnerable to the changes in the economy as it has been in the past. You’ve heard a lot of testimony about why the unified business tax will help address that in a way that such things as a service tax would not.
One of the other reasons we’re here today to talk about that is because we understand that the service tax is going to trickle down to all of us pretty quickly. We’re here as representatives of families in the state and we look at things in terms of how it’s going to affect them. We’re a coalition of groups and today we invited a lot of our folks to come down and even on short notice we got 50 individuals to come. They’re here representing a lot of organizations and they’re here to voice their support for raising taxes responsibly and to help all of the legislators understand that we are going to support you after you raise taxes. We suspect there will be a lot more problems for the legislators who vote not to raise taxes when people start seeing services fall off if that would be the unfortunate outcome.
I want to go along with the comments that both Assemblymen Goldwater and Arberry made in terms of the need to address this issue now. We see that and thank you all for the hard work you’re doing on this issue.
Chairman Parks:
I’ve gone through the whole list of people who have signed in to speak, so I’ve satisfied that requirement and the floor is open for anybody.
Carole Vilardo, representing the Nevada Taxpayers Association:
[Introduced herself.] I did sign in with a question mark not knowing if you’d take testimony. I can’t specifically address the changes that were just proposed. I will put them to my Board, as I’ve told this Committee before.
I totally disagree with Assemblyman Arberry and agree with Assemblyman Hettrick. I have covered legislative sessions since 1973 and I’ve been very involved in the tax issues. We will be back for more taxes unless there is some corresponding budget and expenditure reform. We have spent ourselves, as have most of the other states, into this situation. We have had budgets that have increased 32 percent. We had a budget last biennium that was an 18 percent increase and budgets that have totally exceeded population costs and even a fudge factor for expanding programs. I’m afraid that unless we seriously take a look at some of these budget and expenditure reforms we will be back here within two sessions.
We believe in supporting the taxes. We were at every meeting of the Task Force. We made a presentation and identified a series of passive revenue generators and other issues that could be implemented and that would be implemented in such a way that, if we did not see an immediate and dramatic turnaround given the current economy, would still ensure that we would receive the revenue. That is a current concern we still have, and I’ve spoken to many of you about it and I know it’s a concern of yours. If you take a look at what we did in 1981 with the tax shift, and if you take a look at what we did in 1991 with the Business License Tax, we had to make additional cuts because there was sticker shock when those were imposed. As a result, with those economies going bad and not improving the way we had expected, budgets had to be cut even further than they were. That is why we ask you please, do not spend up to projections, particularly with the new revenues. They are strictly projections. Instead of raising taxes additionally to fund $100 million for the Rainy Day Fund—which, by the way, was an Association bill and a request in 1991 as a quid pro quo for our support of the business taxes at that time—we would suggest, if your projections come in higher, that you use that to fund the Rainy Day Fund.
[Ms. Vilardo, continued.] It seems totally incongruous to me to turn around and fund the rainy day fund at $100 million, possibly $150 million if you take a look at what was proposed to be put back for this year, and have to raise taxes to cover it. That was not the intent.
We’re happy to work with the Committee. We still support a number of these items but, as occurred in 1991, if we do not see some of the revenue reforms and budget reforms working their way into this tax package we will withdraw our total support for everything we have supported in the way of the increased taxes.
Assemblyman Hettrick:
I’d like to use Ms. Vilardo’s testimony as an opportunity to comment about stability and these issues we always hear about, such as the studies, Nevada’s structural deficit, and all the rest. The reality is, we’ve gone back and looked at the states all around us, and our tax base is at least as stable, if not more stable, than any of the states around us. You can take sales tax as a separate item; it’s more stable. You can take gaming tax as a separate item; it’s more stable. I got a report, I haven’t had a chance to verify it but I have no reason to believe it’s not true, that the GRT in Washington State actually trailed their economy by 25 percent.
This talk about stability is not true. We are sitting here today with a $340 million increase in revenue from our structurally deficit tax base. California with its sound tax base has got a $38 billion deficit. It’s simply not true. This is being used as a way to push for increasing taxes and spending to the hilt. It’s unfortunate that that’s what’s going on here, but that’s the reality.
I have made a proposal to raise taxes because of the clamor that we have to fund some things more than we are. I made the comment before and I’ll make it again; how much is enough? We are looking at $340 million in new money plus $730 million from the Senate that’s already passed. That’s a billion dollars in new spending. When is enough, enough? That’s my problem and I don’t see an end to this ever. We’re going to spend every penny and be back here in two years looking for more money because we have a $200 million hole in the estate tax that will have to be funded in two years and nobody’s looking at paying that bill now. They just want to spend every penny. I just think this is a giant train wreck.
Assemblywoman Pierce:
From the e-mails I get, one of the things that would be enough would be funding our schools at the national average, but one of the things you brought up was sticker shock. The Task Force worked for two years. What kind of lead-time would the members of your organization need to not experience sticker shock? Is two years not enough?
Carole Vilardo:
We believed that there were some taxes you could put in immediately. The two different versions, the one that the Task Force was discussing on gross receipts we polled on; it was not acceptable. When we got the detail, we re-polled. Irrespective of whether we liked the tax or not, that one was two years away; maybe now it’s 18 months away, but what we looked at was both the Governor’s bill and the Task Force bill. Going from $100 to $300 in the proposal to increase the Business License Tax, the head tax, in one year is sticker shock. We recommended that it be phased in.
We recommended phasing the cigarette tax in, because of the history of the tax, what’s going on in other states, and what’s happened with the Jenkins Act, incrementally over two years. The reason is that now, even worse than when we started tracking it, we have Internet sales to content with. Until Congress does something with it you don’t want to lose that revenue.
Ms. Pierce, I have sat on two interim committees on taxation as a public member. Some of the recommendations we made to the Task Force we have making since 1990 because we’re losing revenue. I neglected one thing on the taxes: Gaming and sales tax, the two main taxes, whether you like them or you don’t like them, whether you consider them stable or you consider them volatile, neither one reflects the economy or the way we do business today. We’ve recommended, and I believe you have received the papers I have written, that we start looking at modifying the gaming tax to give them some sort of a deduction on direct employees and on leases or purchases of gaming equipment. When that tax was put in, Nevada was the only state with gaming. They’re in a completely different business environment now. Some people want to raise the rate. My Board and I believe that you can’t raise that rate until you look at stabilizing the industry. You can’t do the substantive increases that have been discussed of 2 and 4 percent until you start looking at how to keep them healthy in the business environment that they’re dealing with.
It is the same reason that we supported the expansion of the sales tax base. Nobody may like the way it’s currently being proposed, but at some point the reality is it’s going to have to be expanded if it’s going to continue to be a major tax that we use. That’s the reason this Committee passed the streamlined sales tax bill. We’re not being anti-tax but we’re trying to use the history the Association has in dealing with these issues to make sure that we get the revenue you put forth that you need for the budget. We don’t disagree with some of the spending, but we think there are other reforms. You don’t spend money the same way today that you did 20 and 30 years ago. All we’re saying is there’s got to be a better balance and you can’t keep going to the revenue side of the equation without looking at the expenditure side. Both of them deserve to be adjusted, that’s all I’m saying.
Chairman Parks:
I believe you made a comment earlier about $100 million in the Rainy Day Fund, and I think that the Governor as well as the Legislature had looked at possibly returning $50 million to the rainy day fund and not the full $100 million.
Would anyone else like to speak to the Committee?
Janice Flanagan, Citizen, Reno, Nevada:
[Introduced herself.] We’ve been taxpayers in Nevada for quite a while now, over ten years, and it is embarrassing that every time Nevada is in the national news we are there for a negative reason. We are there because we are at the lowest level where we should be high; we’re at the highest level where we should be low. I think we should spend whatever it takes to raise our standards a little bit.
My husband and I have two grown children who are entrepreneurs in other parts of the country because the school districts here are not good enough for their children. I’m sure they’ll move back here once their children are educated, but we’re losing the jobs that they are creating other places in the United States.
I would like to see us, if we have to raise taxes, just bite the bullet and raise them. We keep talking about our children accepting responsibility for what they should do; this is something we should do. This is what is right for our state, I believe.
Chairman Parks:
Are there any questions? [There were none.] Anybody else? [There was no response.] If not, the Committee is adjourned [at 4:08 p.m.].
RESPECTFULLY SUBMITTED:
Terry Horgan
Transcribing Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE: