MINUTES OF THE meeting
of the
ASSEMBLY Committee on Taxation
Seventy-Second Session
May 22, 2003
The Committee on Taxationwas called to order at 2:26 p.m., on Thursday, May 22, 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:
Speaker Richard Perkins, District No. 23
Assemblyman John Oceguera, District No. 16
Assemblyman Ron Knecht, District No. 40
Assemblyman Garn Mabey, District No. 2
Assemblyman Rod Sherer, District No. 36
Assemblywoman Sheila Leslie, District No. 27
STAFF MEMBERS PRESENT:
Ted Zuend, Fiscal Analyst
June Rigsby, Committee Secretary
OTHERS PRESENT:
Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy
Jeremy Aguero, Technical Advisory Committee, Governor’s Task Force on Tax Policy
Chuck Chinnock, Executive Director, Nevada Department of Taxation
Chairman Parks:
I’d like to call the Assembly Committee on Taxation to order. [Roll taken.] As other members arrive, please mark them present. We’d also like to welcome Guy Hobbs and Jeremy Aguero joining us from the Sawyer Building. On Tuesday they gave us a presentation on the universal business tax. Initially today we will follow up with that presentation. They have worked hard to provide us some examples of how the tax would work. I’ll ask them to join us at the witness table at the Sawyer Building in Las Vegas. I have just been informed that I borrowed Senator Townsend’s name “universal business tax.” Ours is the “unified business tax.”
We want to thank you for all the hard work you did. We have an exhibit in front of us that includes at least 51 pages of data you generated for us (Exhibit C). I would like to go through that and have some explanation of a few of the charts. I will start off with Ms. McClain, who had asked for some explanation relative to Wal-Mart, so the first chart we have in our materials is the chart you submitted, produced, and provided to her (Exhibit C).
Assemblywoman McClain:
I don’t have any specific questions on it, but could you walk the Committee through and explain the alternatives between a GRT (gross receipts tax) and the UBT (unified business tax) and how you got these figures?
Jeremy Aguero, Technical Advisory Committee, Governor’s Task Force on Tax Policy:
The question presented was with regard to Wal-Mart’s income, expense, and impact estimates. The data that is provided to you is a very summary-level income statement that includes gross revenue, the cost of goods sold, and its gross profit as reported in the company’s 10K statement. We also got some information from the Investor Relations Department at Wal-Mart; they were kind enough to assist us in some areas.
You have two columns in this. The first is “Company-wide,” which illustrates the total amount of gross revenue, gross profits, expenses, and so forth for Wal-Mart nationwide. It generated just under $220 billion worth of gross revenue and brought about 3 percent of that to the after-tax bottom line. The second column is Wal-Mart’s Nevada locations. About 7/10 of 1 percent of Wal-Mart’s total operations are located in the state of Nevada, so it is reasonable to assume that an allocation of its gross revenue and its cost of goods sold and operating and selling expenses were relatively similar within the state of Nevada as for the company as a whole. That provides the baseline from which we can compare different tax alternatives.
In this case, under the status quo today, the business license tax exists. They would pay $100 per employee per year, assuming that every one of their 8,000 employees who were reported to us is a full-time employee and is subject to the business license tax. That would then generate $800,000-worth of tax payments. Under the alternative, the unified business tax, the worksheet I sent to you incorrectly refers to it as the “uniform” business tax, the amount of business activity tax would increase to $140 per employee, per year. That increases their total tax liability on that line item to $1,120,000 each year. The revenue-based tax, which is the gross receipts tax at 0.25 percent less the $450,000 deduction and capped at 1 percent of gross profit, would generate approximately $3,540,000.
The combined total would generate about $4.7 million annually. If there’s a way you’d like me to compare and contrast I would be more than happy to do it. I think probably the most important thing to point out here is that, because Wal-Mart’s cost of goods sold in this example are in excess of 75 percent, their tax liability is reduced by the 1 percent profit cap.
Assemblywoman McClain:
Because the UBT is giving some companies a big break, what happens if you change that standard deduction? You take the cost of goods sold deduction first and then you see if they qualify for that standard deduction. If you lowered that standard deduction, how many more companies would qualify to pay the tax under the UBT?
Jeremy Aguero:
The amount of the deduction moves a number of businesses out of the UBT; it exempts them, theoretically, altogether. One thing that’s important to note is that the UBT has two components to it. One component is the business activity tax; the other component is the revenue-based levy and they do work together under the UBT regimen we’re talking about here today. To the extent that someone is moved out to where they don’t have revenue-based liability, based on 0.25 percent or the capped rate, they would continue to have business activity tax liability. That having been said, if you’ll bear with me for just one moment I think I have some figures on what those thresholds are.
At $250,000 just under 50 percent of all the businesses are exempt. At $350,000 that number goes to 56 percent, and at $450,000 it’s roughly 62 percent of the businesses. At the various thresholds these businesses would not be subject to the revenue-based portion of the liability but they would continue to be subject to the business activity tax.
Assemblyman Mortenson:
There are a lot of awfully small businesses like mom-and-pop stores, one-person businesses, and so on, but how would this compare with the amount of tax that a Wal-Mart would pay in California and a few surrounding states, for example? Are we going to be high or low compared to surrounding states in this tax on this one entity, which of course will apply to a lot of other entities?
Jeremy Aguero:
I want to be a bit cautious about making these statements. I think it’s important to note that we’re talking about financial reporting data that can be different from how tax returns are filed. Depreciation is handled somewhat differently, as is amortization, but if we were just to look at Wal-Mart’s operations as a whole and we were to assume that Wal-Mart’s operations nationwide were to be located in any one of the Western states, Wal-Mart, under the status quo, the $100 business license/business activity tax that we have today, their tax liability would be roughly $96 million. In Arizona, California, Colorado, Montana, New Mexico, Oregon, and Utah they would have tax liability in excess of about $700 million a year based on their existing profit.
Assemblyman Mortenson:
I wanted to know, presuming the UBT was implemented, how would we compare with surrounding states? Would we be high in taxes on Wal-Mart, or would we still be low?
Jeremy Aguero:
We would be higher than Colorado and Utah and we would be lower than Arizona, California, Idaho, Montana, and Oregon. I guess Wyoming doesn’t have a similar tax, so we would be higher than them as well.
Assemblyman Mortenson:
It’s a great answer.
Chairman Parks:
Could you repeat that again?
Jeremy Aguero:
Under the assumption that 100 percent of Wal-Mart’s operations were to be located in one single state, and using the data provided by their 10K and the profits that are provided therein, under the UBT, Nevada would have a tax rate higher than only Colorado and Utah on Wal-Mart but lower than Arizona, California, Idaho, Montana, New Mexico, and Oregon.
Chairman Parks:
Are there any other questions relative to this particular exhibit before we move on to other exhibits? [There were none.]
In the exhibit we have (Exhibit C), pages numbered 2-12 go through a number of those businesses. What I wanted to do is get any explanation you might like to provide us relative to those individual businesses before we proceed.
Jeremy Aguero:
I believe that there are two files that are similar to that. One of them is based on the assumption that all the companies have revenues of $30 million; the second file assumes an average-size business. Would you like me to go over them together? They’re sort of connected.
Chairman Parks:
Yes, that would be fine.
Jeremy Aguero:
Let’s start with the table that looks at a company having $30 million worth of gross revenue.
Chairman Parks:
In the document we have, that is covered on pages 13-26.
Jeremy Aguero:
What you see here are 25 companies. These data are based on corporation income and expense data as reported by the Internal Revenue Service. They are based on the 1999-tax year, which means the tax year for companies ending in 2000.
The first page of this worksheet [page 13] compares and contrasts the existing business license tax [the first column] with a straight gross receipts tax that also includes the business license tax increase to $140 per FTE (full-time equivalent employee) in the second column. The third column is the unified business tax increasing the business license tax to $140 per FTE and a gross receipts/gross profit tax at 0.25 percent capped at 1 percent of gross profit.
If you look at the pages that follow [pages 14-26], they outline for you the income and expense data, assuming that a company generates total revenue of $30 million per year. There are mining companies, utility companies, grocery stores, hardware stores and the like, each one having different sets of information.
Guy Hobbs, Chairman, Governor’s Task Force on Tax Policy:
Mr. Chairman, are there any particular examples of industry types that you would like reviewed just for illustrative purposes?
Chairman Parks:
Yes, I had noted a few of them. The first is a building contractor, followed by a motor vehicle dealer, a grocery store, a health care provider, and a Nevada hotel/casino.
Jeremy Aguero:
The first one you mentioned was a building contractor. Building contractors on average have a cost of goods sold in excess of 80 percent and therefore realize a benefit from the 1 percent gross profit cap.
Auto dealers have a tendency to have a cost of goods sold due to the value of the purchases in excess of 80 percent as well. They also recognize a reduction in liability.
Grocery stores have a cost of goods sold, I believe, at about 71 percent so they do not benefit from the cap. They would pay the 0.25 of 1 percent on their gross. Of course, grocery stores make a significant amount of their purchases from wholesalers who will benefit.
[Mr. Aguero, continued.] The fourth type of industry you noted is a Nevada hotel/casino. I want to be cautious here as well because the IRS does not report information for Nevada hotel/casinos. Because that information wasn’t there and knowing that it was going to be a question that came up, we extracted similar data from the gaming abstract that’s produced by the Nevada State Gaming Control Board. Looking at these data, they suggest that the cost of goods sold for a hotel/gaming/casino operation in the state of Nevada has a cost of goods sold, irrespective of how it’s calculated, well below 75 percent and therefore would not benefit from the cap, either.
One other one that’s in here as well and is a question that comes up is gas stations. That tends to be an area where we’re getting a number of questions. Gas stations have a cost of goods sold, due primarily to the purchase of petroleum, which also has a high cost of goods sold and benefits significantly from the 1 percent profit cap.
The other accompanying chart does something very similar, but there’s an aberration that’s created by looking at everybody based on $30 million in gross revenue. A mining company with $30 million worth of gross revenue is very different than a gas station or an electronics store or a professional services firm with $30 million worth of gross revenue.
The second set of tables that was provided to the Committee (Exhibit C) looks at an average firm and takes the aggregate amount of gross receipts and divides it by the total number of companies that file corporate tax returns. It gives more of an example of what the real world might illustrate.
Chairman Parks:
Are there any questions at this time? [There were none.] Do you have any further comments relative to this set of exhibits? [Mr. Aguero did not.] If we could proceed to the next set of charts that you provided, the title on it was, “Exhibit 2: Analysis of Income, Expenses & Tax Liability All United States Corporations, by Minor Industry 1999-2000” (Exhibit C). If you could walk us through, I would appreciate it.
Jeremy Aguero:
This file is also derived from information that is made publicly available by the Internal Revenue Service. It includes a number of columns and compares a number of industries by what’s called “minor industry classification” or “minor industry code.”
[Mr. Aguero, continued.] The total revenues are in the first column, the cost of goods sold that are reported are in the second column, and the third column shows the percentage of cost of goods sold as a percentage of total revenue. Net income is also listed as well as income subject to tax and income before tax credits.
We believe this was useful information not only for gleaning what type of businesses would benefit from a capping mechanism, but it also gives a good indication of how information may differ based on income tax returns as well as comparing different industries, some viewed as highly profitable and some that are viewed as not so profitable or having high or low margins. This provides some meaningful insight, we believe, into how different industries compare with one another.
On the whole, the average company has an average cost of goods sold of about 54.4 percent and a net income of about 6.5 percent. Total income subject to federal income tax is roughly 3.7 percent of total revenue.
Chairman Parks:
On that first page of Exhibit 2 (Exhibit C), there is a category for mining. I know we haven’t talked an awful lot about mining to this point. I was wondering if there was anything unique in that industry that we should be aware of relative to further exploration of the UBT.
Guy Hobbs:
Just a general comment. There are some things unique in the mining industry relative to taxation as it pertains to the use of the extraction values of minerals or the severance tax we use in this state and any constitutional limits imposed by virtue of the way the Nevada Constitution was constructed around those. The net proceeds of minerals are what I’m referring to. Other than that its characteristics are laid out for you on the table provided, but that would be one limiting factor.
Chairman Parks:
Do any of the Committee members have any particular questions relative to this exhibit? It’s really quite extensive.
Assemblyman Mortenson:
The Constitution of our state specifically says that we can tax business any way we want to except mining, which they were very specific on. Were you saying we would have to amend the Constitution if this were to apply to mining?
Guy Hobbs:
Yes, that’s the point I was trying to make.
Chairman Parks:
If there are no further questions with regard to Exhibit 2 in front of us let’s look at Exhibit 3 (Exhibit C). Maybe we could ask you to give us a brief explanation of these two pages.
Jeremy Aguero:
Exhibit 3 is an analysis of cost of goods sold deductions by corporations at the federal level, so it’s an analysis of corporations nationwide. It looks at how cost of goods sold is broken up into the different components that tend to go into it such as other costs, costs of labor, additional inventory, and purchases with purchases making up the vast majority of cost of goods sold for all industries as well as, of course, beginning inventory being included in there. There was some question about what components went into what portions of cost of goods sold by different industry. This was just merely provided to add some additional clarity for that particular question.
Chairman Parks:
Thank you. Are there any questions from anybody with regard to that? It doesn’t appear that there are any questions, so we can proceed to a chart that I think would be very helpful for us in making any decisions that we make. It’s a two-page analysis of fiscal climates in the Western states for business taxes (Exhibit C).
Jeremy Aguero:
Mr. Chairman, you said it was the one labeled “Fiscal Climates in the Western States”? [Chairman Parks concurred.]
Essentially, these data are somewhat similar to what we were speaking of before, but using Wal-Mart as the sole example. Take the 10K income and expense filings for publicly held companies with significant operations in the state of Nevada and imagine in a hypothetical world that 100 percent of these businesses were located in a single state, either the state of Nevada or Arizona, Colorado, and several other western states. It then looks at what those companies, assuming 100 percent of them were located within the state of Nevada, would pay in business license tax today, what they would pay according to their pretax net operating income in all the states that have an income tax based on the average rate provided at the end of the second page. It then compares each one of those with the alternative, the unified business tax, the business license tax, and gross receipts tax liability for each of those corporations. In some cases Nevada fares better, in some cases Nevada fares worse, but I think in general Nevada tends to be well below where they would be otherwise. Again, I would caution you, Mr. Chairman and the Committee, that these data are taken from 10K or financial filings. Tax accounting will differ somewhat from state to state.
Chairman Parks:
As I look at where we are today, Nevada has a lower tax burden than any of the other states whether it’s a Target, a Wal-Mart, or any of the gaming properties you’ve demonstrated for us.
Jeremy Aguero:
One thing I probably should have pointed out in the beginning is that this includes only general business taxes. It doesn’t include industry-specific taxes like insurance, mining, or gaming taxes.
Chairman Parks:
I think this is quite enlightening and it’s certainly an awful lot for us to absorb on first viewing. I appreciate all the notes you’ve given us relative to the different rates that are paid in other states, such as Arizona Corporate Income Tax at roughly 7 percent and California Corporate Income Tax at 8.84 percent.
Assemblywoman McClain:
On this last page [52] you have the GRT (gross receipts tax) with a little “13” footnoted there and in the Notes section it says, “Assumes that a gross receipts tax…” but it’s not the UBT (unified business tax), right?
Guy Hobbs:
We were working on these charts over the last several days and I apologize for not having caught that in the note. That should have been caught in editing.
Assemblywoman McClain:
So it is under the new plan?
Jeremy Aguero:
The proper title preceding footnote 13 would say “UBT.” The footnote is describing the UBT.
Assemblywoman McClain:
With the cost of goods sold out?
Jeremy Aguero:
That is correct.
Chairman Parks:
As we look at this, going back to the Wal-Mart example, we’re looking at a tax rate that would still be, if there were a business license tax as well as a unified business tax, as previously mentioned, more than Utah and Colorado, but less than all the other states.
Are there further questions? I’m not seeing any. I have a general question I’d like to address. I think everyone who fills out their personal income tax forms deals with deductions and credits, and I don’t see that business tax forms would be treated a whole lot differently. In many cases credits are a dollar-for-dollar offset whereas a deduction is a deduction usually against the adjusted gross income that someone would have to report. Looking at Nevada, since Nevada does not have a state income tax or corporate income tax, wouldn’t a typical corporation in Nevada end up paying higher taxes to the federal government?
Jeremy Aguero:
Absolutely yes, Mr. Chairman. Nevada businesses would effectively export some of their tax liability, or Nevada as a whole would export some of its tax liability, to the federal government. Line 17 on the corporation income tax form allows for a deduction of taxes and licenses, and to the extent that you have a profit you’re able to reduce your tax liability and shift some of that burden onto the federal government.
Chairman Parks:
If we were to do some calculations, is that a number that would easily be calculated at a specific percentage, say 25 percent or 30 percent?
Jeremy Aguero:
We can do some research on that. I don’t have that number at my fingertips so I can’t tell you what the share of liability that would be exported to the federal government would be, but I will do some research and get back to you on that.
Chairman Parks:
I’d certainly appreciate it. I know we’ve read newspaper articles that have often said Nevada sends more tax dollars to Washington, D.C. than it gets back in programs. If there is any analysis you think would be beneficial for us to review I certainly would appreciate having something in that area.
Assemblywoman Gibbons:
I apologize because I was not here the other day when you first brought out this tax package, but the greatest concern I have in hearing from my constituents is the “mini-IRS.” Would you explain the process? Because we don’t want that in a bill for Nevadans, or in any tax bill. Would you explain what would be in this bill?
Jeremy Aguero:
I would defer questions about how the tax would be administered and complied with and enforced to Chuck Chinnock and the folks at the Department of Taxation. What I can tell you is that a modified tax on gross revenue, one that looks at gross profit, would deal with the first three lines of the federal income tax form. The level of complexity of that as compared to the complexity that comes with the income taxes that are imposed in California, Utah, Arizona, Oregon, Idaho, and any number of other western states are remarkably more complex, in their nature, their application, and the difficulty of complying with them.
Guy Hobbs:
The issue of administration came up from the very beginning and is one of the things we tried to be mindful of at the Task Force level. In subsequent work we have done on behalf of this process, we have been aware of the cost of collection, and not just the cost of collection, but how that translates into what kind of an imposition it would be to businesses, other individual taxpayers, and collectors within any of the recommendations we’re making.
There’s no question that with no unified business tax there certainly would be less reporting than with a unified business tax. However, we believe the data is readily accessible and have had such discussions with the Department of Taxation. References to that as a mini-IRS are perhaps a bit of an overstatement as to what kind of imposition compliance may be. That isn’t to say that there won’t be additional compliance required, but we believe the data is already there and, in most cases, is already being prepared for federal purposes. We don’t see it as being an insurmountable issue.
Assemblywoman Gibbons:
When did you think this would be implemented? Would it be July of next year? I also want to clarify that this unified business tax would only be paid by people who gross $450,000 and above, is that correct?
Guy Hobbs:
Those are still the assumptions we’re working under, the $450,000 level. We understand that’s still a policy decision that has to be arrived at by you all, but the assumptions we’ve used to run any of the values include that assumption.
Assemblywoman Gibbons:
The numbers you have come up with that would be raised from this tax, how many businesses did you base those numbers on? What figure was it? Was it 85,000?
Jeremy Aguero:
The number of businesses that the model is currently based on in the first year is 105,000 businesses. I could go back and check that for you.
To answer the first question you posed in regard to when the tax would come on line, as currently modeled, it’s assumed to come online January 1, 2004, in a modified form in which it would only apply to the largest industries as the Department of Taxation got its system geared up and was able to administer the tax broadly.
Assemblywoman Gibbons:
I would think 105,000 businesses would be modest compared to what I’ve heard.
Jeremy Aguero:
You are absolutely right.
Assemblyman Mortenson:
I’m looking at the very last page of the analysis of fiscal climates (Exhibit C) and I notice that for Albertson’s and Nordstrom’s we would be taking more money from them than any of the other eight states, and Safeway fares pretty badly, too. Do we need to manicure this a little bit to help situations like that? Perhaps you should tell me if I’m reading this right.
Guy Hobbs:
Actually, Mr. Mortenson, I think this goes back to an earlier chart. Something that was interesting in looking at the different clusters of industries we analyzed is that I think many of us might have felt that grocery stores for example, and those are two of the three that you mentioned, might have come in with higher cost of goods sold and thus achieved a better benefit under the unified business tax proposal. One thing that may make them somewhat unique in the state of Nevada is, in addition to offering perishable goods and other goods for sale, that they have other activities within those stores that may have distorted the value somewhat in the state but nonetheless those exist. Should there be a desire to view grocery stores on a different basis we can certainly discuss or accommodate any different treatment that you would prefer.
Assemblyman Mortenson:
I think what you have provided us with is absolutely magnificent. You have anticipated, I think, the important things and just given us a great tool to look at.
Guy Hobbs:
Mr. Mortenson, we thank you very much for that. Jeremy has been the keeper of the files both for the Task Force and then supported this effort and done quite a remarkable job and I’d certainly like to commend him.
Assemblywoman Gibbons:
It’s my understanding $20 million will have to be spent on technology whether we do anything or not. Is that correct?
Chuck Chinnock, Executive Director, Nevada Department of Taxation:
That is correct. We have done a study on it and we will come out with a definite number, but it’s probably in that neighborhood or a little more.
Assemblywoman Gibbons:
Would you share with us what additional costs would be incurred to put this in place and then also share with us what costs are involved with the business activity tax and much it currently brings in? I think it’s $80 million a year, but I may be wrong. Also, could you compare the BAT to other taxes that have been offered so I can get a picture of which one’s the most costly in comparison?
Chuck Chinnock:
We indicated that to fully implement the gross receipts or uniform business tax we would need new information technology and, as Assemblywoman Gibbons indicated, whether we adopt that tax or not we still need the new technology. So you have that cost, which is $20 million or in excess of $20 million, to implement new technology. That new technology would be implemented, as we see it, over a three-year time frame so it would go past this next biennium.
In addition, depending upon what type of tax is implemented, there is a cost with respect to manpower and resources to implement and it’s pretty much account driven. Based upon some of the activity that’s happened in the last week or two I would add one other caveat to that: Although I’ve stated time and again that it’s account driven, when you start to implement several taxes that are changes to existing taxes or new taxes, it complicates the process a little more beyond just being purely account driven.
[Mr. Chinnock, continued] With respect to the unified business tax, under that concept we had originally talked about a gross receipts tax that would be implemented on July 1, 2005. Because of the study that we did and are about to release, as far as the cost estimate on new technology, we believe vendors are out there that could implement that sooner. What we had originally anticipated was as early as January 1, 2005. Under the unified business tax, depending upon how you implement that—I’ve heard implementation dates as early January 1, 2004—and depending upon how many other tax proposals are brought along with that, we have determined we could implement something sooner.
We would not be using the new technology but using some kind of desktop application. If the unified business tax was restricted in some way to fewer accounts then we could go ahead and do something. I testified in the last meeting that if there was some restriction so we didn’t have the full number of accounts, as of January 1 we could narrow the focus to it, develop some desktop systems, and get the word out to fewer numbers of people to implement such a tax.
Assemblywoman Gibbons:
If there are 105,000 businesses and we’re exempting any business up to $450,000, what would we have? If there were 120,000 businesses, my figures would be about 101,000 of those are businesses grossing probably less than $450,000. If there were 105,000 businesses, what would that figure be? It may not be that expensive.
Chuck Chinnock:
We did our estimates based upon 25,000-30,000 accounts. That would be with full implementation and we were looking at needing 67 people in the Department to do that without any support package. Again, the support package has strictly to do with the number of accounts that you add for any tax proposal. When I talk about a “support package” you need more people in the mailroom, more people to process, and those kinds of things. There is an additional support package that comes along with any new tax if it’s of any size.
Assemblywoman Gibbons:
Is there any way you can do it in conjunction with the business activity tax?
Chuck Chinnock:
The way I would answer that is, under the Task Force proposal there was the concept that because of the offset from the business tax against their gross receipts tax, it was envisioned that it would be filed quarterly along with the business tax. I would say a unified business tax could be filed on a quarterly basis. There is no offset here. Again, perhaps there’s a way we could target only those businesses that exceeded the $450,000 threshold, or some other threshold level, with respect to the discovery process.
Chairman Parks:
Are there any more questions for Mr. Chinnock? [There was no response.] Any other comments you would care to share with us? [Mr. Chinnock declined.]
At this time we are going to recess this meeting. We have not posted a meeting for either tomorrow or Saturday at this point so what we will do is go ahead and recess this meeting for a later time and make sure everybody has an hour’s time before we reconvene our meeting.
We are recessed [at 3:19 p.m.].
Good afternoon. I’d like to call the Assembly Committee on Taxation back to order [at 4:45 p.m.]. We have a document we would like to distribute but before we do that I have a couple of remarks I’d like to make.
For the last few weeks the Committee has carefully studied a number of tax proposals, including recommendations from the Governor’s Task Force, the Las Vegas Chamber of Commerce, and various other business groups as well as a lot of suggestions from individuals, many in the form of e-mails.
We have had hours of testimony. I think we were told his morning that we were in our 16th week. We’ve received and studied hundreds of documents and reams of paper. It’s now time to take what we’ve heard and develop a tax package that we can take home to our constituents. I therefore asked staff to put together a draft plan for discussion today and we have that draft in front of us. These are the criteria staff was given for the development of this plan:
[Chairman Parks, continued.] The plan before us will raise $447 million in the first year of the biennium and $524 million in the second year of the biennium. The plan before us has a broad-based tax that taxes big business but, unlike the gross receipts tax, has protections for those businesses with a high volume and low profit margin, businesses like grocery stores, gas stations, and wholesalers. This business tax includes a higher tax burden for gaming as well.
The plan before you does not have a sales tax on services that we use every day—no tax on the dry cleaner, the car repairs, or the haircut. The plan before you does not have an increase in property taxes. The plan before you protects average taxpayers and small businesses by placing a majority of the new taxes on larger businesses as well as gaming. The plan before you includes a tax break for Nevadans on the cost of their annual car registration, a tax break that helps offset a few tax increases in the package that do affect average taxpayers. Assemblyman David Goldwater and Speaker Perkins will talk more about those proposals in a minute.
We have also discussed the possibility of providing an incentive for those businesses that provide health care for their employees. Staff is still working on that component, how it would actually work and what the cost would be and we may want to consider that idea in future decisions as we assemble this entire package.
I would now like to ask Speaker Perkins and Assemblyman Goldwater to come to the witness table, as well as Mr. Hobbs and Mr. Aguero in Las Vegas.
Speaker Richard Perkins, Clark County District No. 23:
Before I start I’d like to offer my heartfelt thanks to Mr. Aguero and Mr. Hobbs for all the hours they’ve put in to so many things this legislative session that are going to be, I believe, instrumental in how we actually are able to move forward as a state.
[Identified himself.] I’m here today to express my support for the revenue package before you. I think it’s fair, equitable, and raises the new revenue we need primarily from big businesses that are not currently paying their share of taxes. I also want to specifically address a component of this package that Chairman Parks mentioned briefly, a reduction in government services tax of 25 percent beginning January 1, 2004. That’s something that will be offset by a real property transfer tax, and I’m going to ask Mr. Goldwater in a moment to walk you through how that would occur. I know that it’s a concept that this Committee has already had in front of it.
[Speaker Perkins, continued] This package, as we have said before, increases our state revenue by primarily taxing big business and gaming but, while we tried to keep new taxes on average citizens as low as possible, it was impossible to avoid them completely. What we have done to help offset this new tax burden on average citizens is give everyone in the state a break from the tax they pay to register their car every year. Taxes in this plan that do affect average citizens and small businesses are targeted as much as possible to discretionary spending such as tobacco products and liquor, but owning a car is usually not an option and registering it annually is certainly never an option. Depending on public transportation in this state is almost impossible for working men and women and very difficult for our retirees.
In my ten years in the Legislature I have probably heard more complaints about the government services tax, formerly the motor vehicle privilege tax, than about any other tax or fee. It is high and everybody hates paying it. That’s why, as we try to keep the burden as low as possible on our families and senior citizens, we believe this relief on a tax that just about all Nevadans have to pay every year is so important.
If you have the information in front of you, I would now like to walk you briefly through the individual components that are included in this package (Exhibit D). Some of the proposals, such as the increase in the business license fee and tax and the increase in the Secretary of State fees, are very similar to those proposed in the Governor’s plan and in the Task Force plan. Other proposals differ only slightly, but we also have some proposals that were not in either of the initial plans that we believe help shift the burden to big business and gaming and help protect average citizens and small businesses. This package includes the following:
· An increase in the business license fee to $100 annually, which raises about $8 million the first year and almost $10 million the second year.
· An increase in the business license tax from $100 to $140 per full‑time employee, which raises just over $37 million in the first year and just over $43 million in the second year.
[Speaker Perkins, continued.]
· An increase in the real property transfer tax on a graduated rate from 0.50 percent to 1.50 percent, with the first $100,000 exempt, putting the greatest burden on commercial sales or the sale of high-end property. This also has some effect on our growth, particularly in southern Nevada, in that many of those new, first-time home buyers will contribute to this amount. This raises $105 million annually.
· An increase in Secretary of State’s fees of 50 percent, which raises $27.7 million in the first year and $28.4 million in the second year.
· An increase in the liquor tax of 50 percent, which raises $10 million in the first year, and $10.5 million in the second year.
· An increase in the cigarette tax of 50 cents a pack raising about $74 million in the first year and $77 million in the second year.
· An increase in the slot machine license fee of $80 for the first five slots and $140 for six or more slots, raising $8.8 million in the first year and $9 million in the second year.
· A gaming license fee increase of 0.25 percent across the board raising $22.5 million the first year and $25.6 million the second year.
· Rather than adding a fourth gaming tier to be taxed, as has been discussed in the past, we chose instead to increase the burden on gaming through the unified business tax and removing the exemption on some casino entertainment. This brings gaming’s additional tax burden to in excess of $150 million over the biennium, which is actually higher than would have been raised by simply adding a fourth tier.
· The unified business tax, at the rate of 0.25 percent of total revenue above $450,000 annually, with a cap at the 1 percent margin, as has been discussed in this Committee. That cap helps protect those businesses with high volume but low profit margin. We have a one‑time exemption for the year 2004 for businesses with a total revenue for the quarter of under $2.5 million. This one-time exemption simply allows us to start taxing the biggest businesses first in 2004 instead of having to wait until 2005 to begin collecting this tax. The unified business tax raises a total of $76.4 million the first year and almost $167 million the second year.
As you can see from your chart we have broken this revenue into three categories: gaming, non-gaming, and banking. For the sake of simplification, the non-gaming revenues are those non-gaming types of businesses. Gaming, under the UBT, are those gaming businesses, and their non-gaming revenue, and the banking revenue is fairly self-explanatory. The unified business tax on banking is calculated a little differently because of the unique characteristics of that industry.
· A commercial lease tax with the first $1,000 of monthly rent exempt is proposed here. At the 2 percent amount we are proposing, this tax would raise $21.5 million the first year and $22.4 million the second year while at the same time, with the $1,000 exemption, relieving the burden on those small businesses.
· The live entertainment tax would expand. The casino and entertainment tax would also be extended to adult venues and brothels in our state and that would raise about $80 million the first year and just over $82 million the second year. Under half of that revenue would come from primarily the gaming industry.
· We would reduce the government services tax, the tax we all pay every year to register our cars by 25 percent beginning January 1, 2004. This will save Nevadans $25.5 million the first year and almost $55 million the second year.
[Speaker Perkins, continued.] This is a fair plan, an equitable plan, a plan that finally requires big business to pay its fair share, an increase in gaming’s burden in our state, and at the same time protecting average taxpayers and small business.
Assemblyman David Goldwater, Clark County Assembly District No. 10:
[Introduced himself.] I appreciate you re-hearing this. This is a similar concept to what we presented in A.B. 387 on which we had lengthy discussion, and I appreciate the members’ indulgence.
A few things have occurred to me through this tax debate. One of the wonderful things about being in the Legislature is the ability to learn and accept and change. We’ve moved through the fork in the road where we’ve decided whether or not we need a tax for the people of this state. I think a majority of the members, through some vehicle or another, have addressed the need for additional revenue. Then we’re talking about amount and method, and when we’re talking about amount and method, we are very, very close. In terms of who we represent, when we’re talking about amount and method the things that people are debating and are getting upset over and are fighting over, the narrowness of that group of people is so small.
[Assemblyman Goldwater, continued.] What I propose to do is, in fact, broad-based. What we are proposing to do does, in fact, help the little guy. What we’re talking about is reducing the most onerous, the most complained-about tax that a large group of people, the people we actually represent, what they pay every year to register their car. Not just senior citizens who take that big chunk out of a fixed income, not just a working person who has to use their car to get up every day and go to their job, but the businesses to whom we expect to levy an additional tax on, the small, the large, regardless, it is truly broad-based, which is a very subjective term these days. It does help the little guy who, through my informal surveys, has quite a few representatives up here in the Legislature.
The mechanics of returning 25 percent, one quarter of what you pay every year for the government services tax, is laid out in a mock-up of an amendment to Senate Bill 370. That is Senator Dean Rhoads’ bill that dealt with Mormon crickets and raising the real estate transfer tax to deal with Mormon crickets. The amendment would reduce the basic government services tax by 25 percent. It would authorize each county to impose a real property transfer tax of $1.50 on each $500 of value on the property transfer and provide for the use of 10 percent of the remaining proceeds of the basic government services tax to reimburse the rural counties for any loss of revenue resulting from a loss of the basic government services tax. It keeps them whole.
I can go through it section by section. Section 1 reduces the tax; Section 1.5 authorizes a county to do it by giving them the ability to raise it by $1.50. In Section 14.5 it provides for the distribution of money to the rural counties by the State Treasurer as a reimbursement for any losses, a hold-harmless provision. Section 17.5 would amend the proper statute of the Nevada Revised Statutes to provide for the allocation of 10 percent of the proceeds for the basic government services tax to the State Treasurer for distribution pursuant to what we did in Section 14.5. Section 8 would cause S.B. 370 to become effective January 1, 2004, so we could leave this Legislature knowing we did everything we could for our kids, for our seniors, for our working families, for our small businesses, as well as reducing a tax as onerous and that is complained about.
I never thought we were going to look at the tax structure of this state in order to respond to critics who might say that we are simply raising revenue for the sake of raising revenue. We have been addressing the tax structure of this state and we need to be honest that this structure unfairly penalizes working families and senior citizens. A way to change that is to move the burden of providing for all the government services away from where you register your car and to big business.
Assemblyman Griffin:
The reduction of the government services tax will be $25 million in the first year and $55 million in the second year. Is the rate of reduction going to increase in that second year?
Assemblyman Marvel:
The reduction in 2004 is for a half year.
Assemblyman Griffin:
On the business license fee, we’ve all received e-mails and calls from direct marketers and their concerns about home-based businesses. My wife has a home-based business. Is that something you’ve considered in S.B. 370? Are you addressing that at all?
Speaker Perkins:
You weren’t referring to S.B. 370 in that question, I don’t believe, but the number that was come up here is one that’s come through this Committee. I probably ought to ask your Committee staff as to whether or not that includes those particular folks or if they’ve been exempted in this figure. At this point in time I’m sure, like many of you, you’ve heard so many numbers and seen so many concepts through the session that I think we’d have to refer to staff for the specifics.
Chairman Parks:
Mr. Zuend, would you like to comment?
Ted Zuend, Committee Fiscal Analyst:
The figures do include an expansion of the tax base as proposed by the Governor’s plan. I’ll let the Task Force speak for themselves, but the business license tax itself and the business license fee generally only apply if you submit a Schedule C for purposes of a federal tax reporting. If you just report your income as income rather than filing a business tax return, the Schedule C, then you would be exempt from this. Whether that covers everybody or not I don’t know.
Assemblywoman Pierce:
Mr. Speaker, there was a number there and I just wanted to make sure I had it right. You said that the increase in taxes that gaming would pay over the biennium would be $105 million? Was that the figure you gave?
Speaker Perkins:
Ms. Pierce, it’s a little over $150 million. If you break out each piece that they would pay in terms of the increase in the business license tax and the other business taxes, the gross gaming tax, the unified business tax, the portion of the live entertainment tax they’d be responsible for, so collectively breaking those out over the biennium it would be our estimate at over $150 million.
Assemblyman Marvel:
On the real property transfer tax, how’s that 0.50 percent to 1.50 percent tiered?
Speaker Perkins:
The schedule I have that explains that is that it’s exempt up to $100,000; it’s 0.50 percent between $100,000 and $200,000; it’s 0.75 percent between $200,000 and $400,000. Between $400,000 and $1 million it’s 0.875 percent; between $1 million and $3 million it’s 1 percent. Between $3 million and $5 million it’s 1.125 percent; between $5 million and $10 million it’s 1.25 percent and greater than $10 million it’s 1.5 percent.
Assemblyman Marvel:
Is that included in here someplace? We don’t have the schedule in front of us.
Speaker Perkins:
No, I got the schedule from staff when we put the numbers together that are reflected on the revenue sheet, but I don’t believe it’s spelled out that way in the mock amendment. I’m happy to get a copy of this and distribute it to the Committee.
Chairman Parks:
Are there any further questions?
Speaker Perkins:
Just as a summary, we find ourselves in the waning days of the legislative session, these decisions often get made at this point in time after we’ve had literally weeks upon weeks of investigation, testimony, and gathering of data, hearing from all of our constituency groups. I think this is a fair plan, an equitable plan, one that does protect the average taxpayer and small business, shifts the burden to gaming and big business, and is relatively sufficient to get to where I think we will need to in our budget closings to provide the proper educational system and support to seniors and public safety and the other items that you listed in your opening remarks.
[Speaker Perkins, continued.] We haven’t reconciled our budget yet. We know that, but I think this is at least in a ballpark that it could be shifted. It’s dynamic. It can move in order to accomplish what it is that we do when we reconcile budgets between the houses. Hopefully that will occur in the next couple of days. I’ll leave the plan in your able hands and hopefully we’ll have a specific target in a couple of days.
Chairman Parks:
I’d like to go to Las Vegas and ask either Mr. Hobbs or Mr. Aguero if there are any comments or anything else they’d like to provide.
Guy Hobbs:
As usual, we’re here to answer any questions that you may have. This is the first we’ve seen of this particular composition but generally we’re familiar with each and every component of what’s being discussed here. If there are any questions particularly as it relates to any commonality between this and Task Force recommendations, I’d be very happy to address those.
Chairman Parks:
Are there any questions or any comments that members of the Committee would like to make? [There was no response.]
This is a starting point and we will be further refining it. As I’ve indicated, most of these already have been drafted in some form and are in a module. We will be putting together a draft bill for consideration of each and every one of these items further.
We have definitely adjourned for tonight [at 5:14 p.m.].
[A proposed amendment to Senate Bill 370 (Exhibit E) and written testimony (Exhibit F) were provided to the Committee but not presented verbally during the meeting.]
RESPECTFULLY SUBMITTED:
Terry Horgan
Transcribing Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE: