MINUTES OF THE
JOINT meeting of the Assembly Committee on Taxation
AND THE
Senate Committee on Taxation
Seventy-Second Session
February 13, 2003
The Joint Meeting of the Assembly Committee on Taxation and the Senate Committee on Taxation was called to order at 1:30 p.m., on Thursday, February 13, 2003. Chairman David Parks presided in Room 1214 of the Legislative Building, Carson City, Nevada, and via simultaneous videoconference in Room 4412 of the Grant Sawyer Office Building, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
Assembly Committee MEMBERS PRESENT:
Mr. David Parks, 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
Senate Committee MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Bob Coffin
Senator Joseph Neal
Senator Ann O'Connell
Senator Sandra Tiffany
Senator Randolph J. Townsend
COMMITTEE MEMBERS ABSENT:
Mr. David Goldwater, Vice Chairman
GUEST LEGISLATORS PRESENT:
None
STAFF MEMBERS PRESENT:
Ted Zuend, Deputy Fiscal Analyst
Rick Combs, Deputy Fiscal Analyst
June Rigsby, Assembly Committee Secretary
Mary Garcia, Assembly Committee Secretary
Gale Maynard, Senate Committee Secretary
OTHERS PRESENT:
Barbara Smith Campbell, Chairman, Nevada Tax Commission
Charles Chinnock, Executive Director, Nevada Department of Taxation
Dino DiCianno, Deputy Director, Nevada Department of Taxation
Berlyn Miller, Vice Chair, Nevada Commission on Economic Development
Robert Shriver, Executive Director, Nevada Commission on Economic Development
Tim Rubald, Director of Business Development, Nevada Commission on Economic Development
Chairman Parks called the meeting to order at 1:42 p.m. and declared a quorum was present. A welcome was extended to the representatives of the Nevada Department of Taxation.
Charles “Chuck” Chinnock, Executive Director of the Nevada Department of Taxation, initiated the presentation with introductions of Barbara Smith Campbell, Chairman of the Nevada Tax Commission, and Dino DiCianno, Deputy Director, Nevada Department of Taxation. Mr. Chinnock called the Committees’ attention to four reports. The first was entitled “State of Nevada Department of Taxation Department Overview” (Exhibit C). The second report was entitled “State of Nevada Department of Taxation Annual Report, Fiscal 2001–2002” (Exhibit D). The third was entitled “Nevada Department of Taxation Property Tax Rates For Nevada Local Governments” (Exhibit E). The fourth exhibit in the package was a seven-page handout entitled “Implementation Plan for the Nevada Revenue Enhancement” (Exhibit F).
Following introductory remarks by Mr. Chinnock, Barbara Smith Campbell, Chairman, Nevada Tax Commission, commenced testimony. Ms. Campbell briefly reviewed the mission and membership of the Commission. The principal function of the Nevada Tax Commission was described as oversight of decisions rendered by the Nevada Department of Taxation. In addition to adjudication of contested cases, Ms. Campbell explained the Commission was charged with the adoption of regulations to administer the Nevada Revised Statutes.
Statutory tax changes, according to Ms. Campbell, would be reflected in Nevada Revised Statutes (NRS) Chapter 233 and the Nevada Administrative Code (NAC). As a point of clarification, the witness explained that not all statutory tax changes would mandate corresponding NAC changes, while others would require entire new chapters to the Nevada Administrative Code (NAC). Ms. Campbell emphasized her comments would be directed at the duties of the Commission in response to any potential statutory tax changes. She assured the Committees that the Commission would respond expeditiously to any legislative actions.
In anticipation of tax changes, Ms. Campbell had issued a directive to schedule regulatory workshops for statutory changes, additions, or deletions. A requirement for adopting a proposed regulation, according to Ms. Campbell, was the conduct of at least one workshop for consideration of public comment. Notification of the proposed regulation had to be posted at least 15 days prior to the workshop. Components of the notification document included the text of the proposal, the estimated economic impact on small businesses, the estimated economic effect on regulated business, estimated costs to the collecting agency, the total projected amount of new fees collected, and the proposed distribution of that money. Ms. Campbell predicted that most workshops would be conducted in northern and southern Nevada. Clearly articulated statutory language was a critical success factor in the conduct of those public meetings. At the conclusion of the workshops, the Taxation Department was expected to file a 30-day notice of intent to adopt the new regulations.
Ms. Campbell added that the Taxpayer Bill of Rights compounded the obligations and duties of the Department of Taxation and the Nevada Tax Commission. By law, no interpretation or construction of any statute was to interfere or conflict with the rights of the taxpayer. Treatment of taxpayers with both uniformity and consistency was a cornerstone of the Taxpayer Bill of Rights.
In summary, Ms. Campbell stated the entire process of adopting each new tax would require a minimum of 90 days. She encouraged the Assembly and Senate Taxation Committees to adequately supply the Taxation Department and the Tax Commission with the tools and resources essential to complete that task. Ms. Campbell reminded the legislators of the ongoing problems of the Automated Collection and Enforcement System (ACES), described as being “1980s information technology.” To underscore her point, she added that the Nevada Department of Taxation had the distinction of being the only state taxation agency in the United States with such antiquated technology.
Seeing no questions, Chairman Parks invited Mr. Chinnock to commence testimony. Charles “Chuck” Chinnock, Executive Director, Nevada Department of Taxation, called the Committees’ attention to the first report, “Department Overview” (Exhibit C). Part I of the document was described as an overview of performance measures for the Taxation Department, whereas Part II contained the specific details of the tax proposals.
Regarding Part I, Mr. Chinnock stated the Taxation Department had statutory responsibility for collection of 17 taxes, generating revenues totaling just under $3 billion per year. The sales and use tax comprised one of the largest components, as illustrated in Section 2A. The monthly distribution of tax funds was displayed in a matrix in Section 2B. The organizational chart for the Taxation Department in Section 3A revealed a structure comprised of four Divisions: Administrative Services, Assessment Standards, Compliance, and Information Services. Referring to Section 3B, Mr. Chinnock described the current staffing as 224 full-time equivalents (FTE’s) plus 10 intermittent employees. Among the 224 authorized positions, he emphasized there were 22 critical staffing vacancies with a priority 1 status.
Continuing his overview of Part I, Mr. Chinnock called the Committees’ attention to Section 4A, the “Governor Recommends Budget Account 2361 Summary for the fiscal year 2004.” The summary table contained a comparison of current budget figures with those of the prior biennium. Mr. Chinnock commented that salaries comprised approximately 80 percent of the Taxation Department budget.
An addition to the budget matrix in Section 5C was the category Special Projects Decision Unit E-850, described as a result of the decision to move lockbox operations in-house. Mr. Chinnock clarified by stating the current lockbox operator had notified the Department that he was ceasing to do business effective July 1, 2003. Because there was no contingency plan to continue tax collections, the alternative process was to pull the lockbox operation into the Department at an estimated cost of $307,000. Working in concert with the Nevada Treasurer’s Office, Mr. Chinnock explained that a request-for-proposal (RFP) was scheduled for issuance within 2 weeks. A contract for lockbox operations would be in place by July 1, 2003. He voiced some concern over the lateness of that date, explaining that acquisition of equipment and hiring of personnel had been originally targeted for April; however, Mr. Chinnock remained confident of meeting the July implementation deadline.
Continuing with the Department report (Exhibit C), Mr. Chinnock called attention to Section 5B, an overview of the number of active accounts by tax type. Sales and use tax accounts totaled 64,090, whereas the business tax category was comprised of 80,783 accounts. He emphasized that the figures represented a net increase of 10,000 new accounts each year.
In Section 5D, a summary of accomplishments for the Information Services Division was presented. Mr. Chinnock explained the Division was created in July 2001, the result of a decentralization initiative issued by the 2001 Legislative Session. Central to their integrated tax process was the Automated Collection and Enforcement System (ACES), described as a legacy-based system built using 1980s technology. It was brought online in 1995 at a total cost of more than $5 million. Mr. Chinnock explained it was based on a design of a billing and collection system and was never intended to be used as an integrated tax system. As such, there were no registration or case-management software modules that normally would be utilized by a tax collection agency.
In contrast to the ACES, the collection and processing of excise taxes were accomplished through the utilization of individual desktop personal computer (PC) technology. According to Mr. Chinnock, there was no integration of that PC-based system with the ACES database, another shortcoming of that outdated technology.
Looking back to 1999, Mr. Chinnock offered a brief review of the legislative action that authorized and appropriated $800,000 to perform a study for the replacement of the ACES. At that time, the Department of Taxation determined a reengineering effort would be the best initial approach prior to launching a formal study. That reengineering effort was accomplished. In 2001, $1.3 million had been appropriated to study the replacement of the ACES. Due to the economic fallout following the events of September 11, 2001, that money had been retracted and reverted.
Continuing his legislative retrospective, Mr. Chinnock explained that an additional $800,000 had been appropriated in 2001 to fund an imaging and scanning system. Despite initial consultant contract difficulties, the project moved forward, and the imaging and scanning system was now within 2 months of being online. Enhanced automation of the processors and a Web-based filing system were being developed concurrently. Those improvements would enable the filing of sales, use, and business taxes online.
Concluding his legislative review, Mr. Chinnock described another appropriation in 2001, specifically $400,000 for computer replacement efforts. The post-September 11 economic downturn had caused the reversion of a portion of that appropriation; however, there remained sufficient funding for the replacement of the most critical items in the Department. The final appropriation was described as a one-shot allocation of $75,000 to develop an online budgeting system for the Department of Taxation’s 290 taxing entities. Mr. Chinnock voiced confidence that the program would be online for the upcoming season of filing and budgeting. In response to Chairman Parks, Mr. Chinnock clarified the filing season would be the spring of 2003, and all local governments would be capable of filing their budgets online.
Returning to the Department Overview (Exhibit C), Mr. Chinnock called the Committees’ attention to Part II, Tax Proposals and Implementation. Section 6A of Exhibit C outlined the intoxicating liquor excise tax, authorized under NRS 639. That tax was based upon the importing, storing, possessing or selling of liquor in Nevada. Mr. Chinnock highlighted a summary paragraph of Section 6A that outlined the projected differences between current tax rates and proposed increased rates (89 percent). All funds collected were deposited in the General Fund, with the exception of the tax on beverages in which the alcohol content exceeded 22 percent. In those cases, the first $1.40 was distributed to the General Fund under the current tax rate, the next 50 cents was deposited to the Consolidated Tax Distribution Fund, and the remaining amount of 15 cents was credited to the Alcohol and Drug Abuse Account. With respect to the projected new amount of $1.82, Mr. Chinnock reminded the Committees that consideration be given to the General Fund. He concluded by stating the projected yield was $17 million in additional revenue the first fiscal year and $18 million during the second fiscal year.
Regarding the Taxation Department workload in the area of excise tax revenue, there were five tax examiners who were responsible for nine excise taxes plus oversight of the abatement and deferral incentive programs approved by the Commission on Economic Development (Exhibit C). Additionally, each examiner provided backup for other tax examiners in the Department. Because the desktop system utilized by each of the five examiners was essentially a manual system, each employee was fully responsible for collections and billings. Mr. Chinnock emphasized that each examiner was at full saturation in their work assignments.
With respect to the liquor tax, there were 66 wholesaler accounts. Mr. Chinnock predicted it would be fairly straightforward to implement the change in tax rates by the first of the month. The costs for enforcement of all excise taxes included the addition of one new tax examiner plus two revenue officers for compliance and enforcement, one in northern Nevada and one in southern Nevada. That would be especially true for the proposed cigarette tax.
Assemblyman Hettrick requested clarification of the procedure outlined in Section 6A that read “The tax is due on the 20th day of the following month after the liquor was shipped to a person in the state of Nevada. If the importer pays the tax on or before the 15th day of the month, a 3 percent discount is given per NAC 269.014.” Mr. Hettrick questioned the logic of a discount and asked why that wording should not be changed to “a 3 percent penalty if not paid by the fifteenth of the month.”
In response, Mr. Chinnock stated that almost all categories of taxes provided for a collection allowance. He added that the Governor’s Task Force Report contained language that addressed issues of passive revenue generators. Assemblyman Hettrick countered by stating that, because the tax was being collected on a product already in the taxpayer’s possession, it would be logical to assess a 3 percent penalty as opposed to a 3 percent discount. Mr. Hettrick judged the 3 percent rate to be too significant to ignore, especially when applied to the additional $17 million projected for the first year.
Mr. Chinnock resumed testimony and called attention to Section 6B, the cigarette tax analysis (Exhibit C). Under the statutory authority of NRS 370, tax collection was based upon the issuance of stamps by the Department of Taxation. Tax dollars were pre-paid by the wholesaler or tribal shops through the purchase of stamps. Those tax dollars were then recovered from the consumer by affixing the stamps to the product and adding the amount of the tax to the selling price. As with the liquor excise tax, Mr. Chinnock explained there was a 3 percent collection allowance for the stamp-affixing fee.
Continuing, Mr. Chinnock stated the current tax rate was set at 17.5 mills per cigarette, the equivalent of 35 cents per pack of 20 cigarettes. The proposed tax increase of 70 cents would raise the revenue to a total of $1.05 per pack. Current distribution of cigarette tax revenue, outlined in Section 6B (Exhibit C), was divided between the state General Fund (12.5 mills per cigarette) and consolidated tax distribution to local governments (5 mills per cigarette). Revenues from the proposed tax increase of 35 mills per cigarette would be diverted to the Nevada General Fund. The yield was projected to be $123 million for the first year and $125 million during the second year. Mr. Chinnock emphasized that one excise tax examiner was responsible for implementation and oversight of the entire program. He assured the Committees that implementation of rate changes would be handled expeditiously; however, as a point of clarification, he added that his request for one additional tax examiner and two revenue officers applied to all excise taxes.
In summary, Mr. Chinnock stated that the two statutes to be affected were NRS 371.65 and NRS 373.50. Implementation of tax rate increases could be accomplished in two ways. On the effective date of the new cigarette tax, cigarette stamps would be available immediately for sale. Alternatively, an inventory or floor tax could be implemented at the wholesale level. The latter would be more costly and require more time for implementation.
Mr. Chinnock next introduced Section 6C of Exhibit C, a summary of the Property Tax Analysis. The statutory authority for property tax assessment was contained in NRS 361.453. Central to the proposal was the establishment of an additional 15-cent tax rate, which would necessitate discussion of the current $3.64 property tax cap. Mr. Chinnock referred back to the testimony of Fred Hillerby who had suggested property tax could be moved above the cap. The Governor’s Task Force offered testimony that suggested bifurcating the cap. In Mr. Chinnock’s words, “It would require pulling the current 15-cent debt rate for the state. There is a 25-cent school rate and a 50-cent school rate, which amounts to 90 cents. Remove that from the $3.64 cap and then probably reduce this existing $3.64 cap to some other amount.” Mr. Chinnock added it would be the decision of the Committees to determine the amount of room under the cap.
Assemblyman Mortenson requested clarification of the concept of removing amounts from under the cap, thereby lowering the cap for purposes of increasing the cap. In response, Mr. Chinnock reiterated his mathematical addition of the 15-cent debt rate, the 25-cent school rate, and the 50-cent school rate, for a total of 90 cents. That rate and the cap were controlled by the Legislature. As such, there existed the option to create a separate government rate.
Chairman Parks offered to clarify and stated that an interim legislative committee for local government taxes and finance, the S.B. 557 Committee, had recommended a bill draft request to split those rates. That action would reduce the local government rate and separate it from the various state-levied rates. Chairman Parks added it would essentially be a return to 22 years ago when the $3.64 cap was established. At that time, it was all local rate. Since then, the Legislature had identified specific areas for property taxes against the $3.64 cap. The net effect had been to push local governments up to that cap.
In response to Assemblyman Marvel, Mr. Chinnock affirmed there was currently a 15-cent debt service. Mr. Marvel further commented on recent discussion in the Assembly Ways and Means Committee regarding an additional 1-cent increase coupled with 15 cents for the state, for a total of 31 cents. Mr. Marvel then asked if those 16 cents would be added to the 90 cents. Mr. Chinnock agreed with both statements. Continuing, Mr. Marvel summarized the total as $1.06 that would have to come from the $3.64, unless the local government cap was changed. Mr. Chinnock clarified by stating it would amount to $3.64 plus the 16 cents if the cap were held in place. Assemblyman Marvel cautioned the Committees that local governments would have a problem with that system.
Chairman Parks interjected and asked Ted Zuend, Deputy Fiscal Analyst, to clarify the issue. Using the language proposed by the S.B. 557 Committee, Mr. Zuend explained it would involve removing 40 cents from the cap, resulting in a cap of $3.24. The logic behind the reduction of 40 cents was that it was the amount imposed by the Legislature since the $3.64 cap was set after 1981. That reduction would result in a local government cap of $3.24. The remainder of the rate, up to the constitutional limit of $5.00, would then be set by the Legislature based on state and school needs. In summary, the Legislature could impose up to a $1.76 rate increase. Combining the 75-cent school rate with the 15-cent current rate and the 16 cents, the total would be $1.06 above a maximum of $3.24. It would enable some rural counties additional ability to raise rates if necessary. Currently, local governments were held to the $3.64 limit because of the 40-cent state involvement after that cap was established. Mr. Zuend summarized by stating there was currently 75 cents for schools and 15 cents of debt; however, 50 cents of that school rate existed prior to the setting of the $3.64 cap. As such, only 40 cents had infringed upon local government ability to raise property taxes.
Assemblyman Marvel commented that after removal of the 50 cents, there was another 25 cents that was allocated to schools. That further affected local governments. Chairman Parks clarified by stating the issue was maximum cap rates and not what local governments would levy. There was no proposal to take additional revenue away from local governments. Rather, it was an attempt to create flexibility and autonomy for local governments.
Assemblyman Grady inquired about the logic of retaining the 50 cents in the formula. He asked if the actual intent was to remove the schools for the 75 cents and the state for the 90 cents, thereby lowering the cap 90 cents. In response, Mr. Zuend corrected an earlier figure and stated it would be a $3.14 cap on local governments and not $3.24. In 1979 the Legislature had provided tax relief in the amount of $1.36. The school rate was lowered from $1.50 to 50 cents. It removed a 25-cent state operating rate and an 11-cent indigent care rate. At that time, property taxes were only bound by the $5.00 rate. Subtracting the $1.36 would reduce the amount to $3.64; however, there was a remaining school rate of 50 cents. As such, the local government effective rate, excluding schools, was $3.14. From that point in time, the Legislature added 40 cents of tax rate, which infringed upon local governments. Mr. Zuend concluded by saying that was central to the logic of removing only 50 cents from the cap of $3.64 and not the full 90 cents.
Senator O’Connell referenced the recently enacted 2-cent property tax that was authorized by ballot Question 1. Being outside the cap, she asked if that revenue would go to the state or directly to the county. Chairman Parks asked Rick Combs, Fiscal Analyst, to respond.
Rick Combs clarified the 2-cent rate was clearly outside the cap of $3.64. If two limits were created, a state and a local, the Legislature would have to address how to handle the 2-cent rate under the state limit if one was created. In response to Senator O’Connell, Mr. Combs clarified the additional taxes would not be received directly by local governments. Rather, the revenue would be deposited into the Bond, Interest, and Redemption Account in the State Treasurer’s Office. From there it would be dispersed to agencies earmarked for bond proceeds.
Assemblyman Mortenson voiced confusion over the removal of amounts from under the cap. He asked if that would necessitate funding be derived from another source. Chairman Parks replied “no” and explained the real issue was the creation of two sets of caps. One would deal strictly with local governments and the second would be at the state level. All would be funded through property taxes. Assemblyman Mortenson asked if that action amounted to a way to circumvent the Nevada Constitution. Chairman Parks disagreed and stated the Constitution set a $5.00 limitation. Mr. Mortenson restated his question and indicated he meant to say “legislative cap” and not “Constitution.” Chairman Parks replied the legislative cap was statutory, and it could be amended during the current session. Mr. Mortenson acknowledged the explanation by stating the cap would first have to be amended before the amounts could be removed from under the cap.
Assemblyman Marvel interjected his view that the proposal was tantamount to raising taxes. Chairman Parks disagreed with the statement.
Mr. Chinnock resumed testimony and summarized the projected yield from the additional 15 cents would be $100 million per year. Because of a respectable lead time, he anticipated no appreciable impact to the workload of Department of Taxation or to county entities. The Department deadline for the last budgets was June 8. The Nevada Tax Commission, by June 25, was required to approve the tax rates based upon the last budgets on file. Following certification of the rates, the clerk would extend the tax roll before July 10. The clerk would then deliver the tax roll to the Controller who would send out the tax bills for payment by the third Monday in August.
Continuing with a review of Exhibit C, Mr. Chinnock addressed the subject of business tax, summarized in Section 6D. The proposal was to increase the business tax to $300 per year, to broaden the base through the inclusion of more business types (e.g., sole proprietorships), and to remove the exemption for one that also applied to partners. Mr. Chinnock explained the computation of the quarterly tax was based upon the number of hours worked in a quarter by an employee. The expected change would be from $25 per full-time employee per quarter to $75 per full-time employee per quarter, with all revenues directed to the General Fund. Exemptions included nonprofit organizations defined in statute, as well as religious organizations. The expected yield was $41 million for the fiscal year 2003, followed by $164 million for FY2004 and $167 million for FY2005.
Regarding the Department workload, Mr. Chinnock projected the number of business accounts would increase from the current 80,000 to 140,000 accounts.
Assemblywoman Gibbons requested examples of exemptions to the business tax. Dino DiCianno, Deputy Director for the Department of Taxation, offered to respond. Although Mr. DiCianno did not have a list from which to read, he did acknowledge there were a substantial number of businesses that qualified under the abatement and deferral incentive programs. In response to Assemblywoman Gibbons’ question regarding the qualifications for exempt status, Mr. DiCianno clarified the correct term was “abatement” and not “exemption.” Chairman Parks interjected that an upcoming witness, Robert Shriver, would shed light on that issue.
Mr. Chinnock resumed testimony on the resources required to handle the increase of 60,000 business accounts. An additional 56 personnel would be needed, of which 42 would be dedicated to the basic package and 14 would be considered support personnel. In terms of the lead time to implement the business tax, Mr. Chinnock emphasized it was essential to notify the businesses prior to the last month of the quarter for which they were reporting. He illustrated his point with an example saying a payment due by July 31 would be processed and posted by mid-August. That revenue then would be credited to the prior fiscal year. Because the infrastructure existed for collecting business taxes, the technological resources required to implement the business tax would be a programming enhancement to the Automated Collection and Enforcement System (ACES). Mr. Chinnock reiterated his appeal for a replacement of the ACES with a new unified tax system.
Moving to Section 6E (Exhibit C), Mr. Chinnock initiated discussion of the business license fee. The proposal was to assess an annual license fee of $100, under the statutory authority of NRS 364A. As interpreted by the Department of Taxation, that statute authorized the tax collection from all business types, including sole proprietorships and partnerships. Mr. Chinnock called attention to a comment in his report regarding the need to consider businesses beyond Chapters 78 and 78A. He commented that, coincidental with the passage of the business tax fee in 1991, there was a statutory change that pulled many organizations out of Chapters 78 and 78A and into other NRS chapters.
In terms of the procedure to collect the $100 fee, Mr. Chinnock explained there were two options under discussion: to add $25 to the quarterly business tax or to collect the entire $100 at once. Based on the existing information technology system, the recommendation was to process a yearly renewal on the anniversary month of each business. The projected revenue was $9 million in 2004 and $10 million in 2005. Impact to the existing workload was expected to be significant, given the addition of 60,000 business accounts.
Regarding additional Department costs to implement, Assemblyman Griffin posed a question about the overhead figure of $5.9 million in Section 6E (Exhibit C). He asked if the proposed revenues were derived from the same group of business accounts as had been previously discussed. Mr. Chinnock clarified by stating that it did include the same businesses; however, sole proprietorships would be added, for a projected total of 140,000 accounts. Each would pay the business tax and the business license fee.
Assemblyman Griffin requested clarification of Section 6D, the Business Tax Analysis. Of the projected yield of $164 million in 2004, he asked what portion was attributed to the addition of new accounts, sole proprietorships in particular. Mr. Chinnock did not have the percentage at hand, but offered to provide that information later.
On the same topic, Senator O’Connell requested the source for the estimate of sole proprietorships that would be added to the tax rolls. Mr. Chinnock replied the source was the Internal Revenue Service (IRS).
Returning to the required resources as outlined in Section 6E, Mr. Chinnock reiterated the need for an additional 56 personnel to implement the business license fee and the business tax, at a total cost of approximately $6 million over the biennium. The expected implementation date for the business license fee was July 1, 2003. Mr. Chinnock emphasized his previous comments regarding the shortcomings of the ACES continued to be relevant.
On the subject of updating the Automated Collection and Enforcement System (ACES), Assemblyman Marvel asked how long it would take to implement a new unified tax collection system. Mr. Chinnock estimated a total replacement would require 2 years. With the existing staff levels, he predicted the ACES could be maintained in the interim.
Moving forward to Section 6F, Mr. Chinnock introduced the state activity tax matrix. Also called the gross receipts tax (GRT), he emphasized it would require new statutory authority for implementation. The basis of the tax was the assessment of businesses with annual gross receipts over $450,000 after deductions. Reporting would be on a quarterly schedule, with computation based on a rate of $0.0025 or one quarter of 1 percent. He noted the business tax itself would be reduced from $300 to $140. Additionally, a credit of $100 per employee would be allowed based on the computed gross receipts tax. Statutory exemptions included nonprofit organizations.
Continuing with the overview of the gross receipts tax (GRT), Mr. Chinnock estimated the revenue from that tax would be $200 million per fiscal year. Total businesses affected would include the current 80,000 accounts plus 60,000 new businesses, for a total of 140,000 accounts in the next biennium. Because of the anticipated impact to the Taxation Department, Mr. Chinnock advised the Committees of the need for a resource buildup in the current biennium in order to be ready to start the collection of the gross receipts tax in the next biennium. That included the addition of 4 personnel in fiscal year 2004, followed by a basic package of 63 personnel and 4 support personnel in 2005. The estimated cost in the current biennium was $3.6 million for personnel and associated costs. Because the ACES was not capable of handling the processing of the gross receipts tax, the lead time was declared as 2 years.
Mr. Chinnock called the Committees’ attention to a handout, a sample tax return (Exhibit G) that illustrated the calculation of a quarterly business activity tax (BAT) and a gross receipts tax (GRT). Step A was the calculation of the number of full-time equivalent employees. That figure was input to Step B where the amount of business activity tax (BAT) was computed. Step C illustrated the calculation of the amount of quarterly GRT. Total deductions were subtracted from the gross receipts for the quarter, resulting in a figure for taxable revenue. The quarter percent ($0.0025) was applied to the taxable revenue amount, resulting in the tax due. Subtracted from that amount was the quarterly $25-credit allowed for each FTE, resulting in the total amount of GRT due. Adding that figure to the BAT calculated in Steps A and B resulted in the total amount of tax due.
Referencing Step A of the exhibit, Assemblywoman Gibbons asked for clarification of the note, “Total hours not to exceed 468 hours per employee.” Mr. Chinnock explained the amount was a standard set by statute. All hours worked by all employees were divided by 468 to determine the full-time equivalent (FTE) figure.
Mr. Chinnock shifted attention to Section 6G (Exhibit C), the admissions and amusement transaction tax analysis. Spectator entertainment and related areas were the focus of the proposal. Also called the transaction tax, it was described as a tax upon the consumer that would be assessed at the rate of 7.3 percent. Revenues were projected at $82 million during the first year and $86 million in the second year. The expected addition of at least 3,200 accounts would greatly affect the Department workload, according to the witness.
To illustrate the complexity of the collection process, Mr. Chinnock offered a comparison. The collection of sales and use tax required the identification of a specific location in order to ensure equitable distribution of revenues to the appropriate county. In contrast, the admissions and amusement tax was filed by entity type, and all funds were deposited into the General Fund. He described two options for implementation, both utilizing the ACES. The first was to treat the transaction tax as a quarterly business tax. The second proposal was to handle it on a monthly basis as a sales and use tax. The latter was chosen based upon the logic that an entity that was obligated to pay the admissions and amusement tax would already be filing a sales and use tax.
In summary, Mr. Chinnock stated the admissions and amusement tax would require new statutory authority and new regulations. Total personnel required for implementation was determined to be 11, at a total cost to the Taxation Department of $1.1 million.
Assemblyman Hettrick questioned the absence of collection allowances in the categories of property tax, business tax, business license fees, activity tax, and admissions tax. Mr. Chinnock affirmed there were no collection allowances in any of those proposals.
Regarding the collection of sales and use tax, Chairman Parks inquired if consideration had been given to collecting and reporting that tax at a lower level in cases where there was an incorporated city or other taxing district. He cited the example of Laughlin, where the city’s contribution to sales and use tax was often questioned. Mr. Chinnock acknowledged that issue had arisen in the past; however, that situation would be taken into consideration by local governments during the budgeting process. Chairman Parks added that the proposed unified tax system should be capable of capturing that information. Mr. Chinnock agreed.
Returning to the staffing requirements under the proposed admissions and amusement transaction tax analysis (Exhibit C), Mr. Chinnock stated there was a need for 11 personnel and a lead time for implementation of one quarter. That time was judged to be necessary in order to identify the retailers who, in turn, would assess the consumer.
Returning to an issue raised by Assemblyman Hettrick, Senator Townsend requested a total number of businesses that had been granted discounts. He also asked if there had been discussion about the ability of a chain of three or four movie theaters to appropriately modify their computer software and to accurately apply the transaction tax to their ticket sales. Senator Townsend voiced concern over the real possibility of a theater rounding the tax up to the nearest dollar and pocketing the difference. In his opinion, that question had to be asked and answered. Mr. Chinnock acknowledged that the question had not been asked and assured the Committees that the issue would be addressed.
Assemblywoman McClain interjected her opinion that the debate over the distinction between participatory sports and amusements was not over. She asked what the revenue impact would be if golf were to be included. Mr. Chinnock admitted he did not know the specific impact of golf; however, he voiced confidence it would be more than the 3,200 accounts listed in the analysis.
Senator Neal asked if any of the taxes discussed were currently being collected in Nevada. Calling attention to the summary of tax types in Section 7A, Mr. Chinnock replied there were two of those being collected. One was a business tax that was being collected at the rate of $100 per FTE. The second was a one-time business license fee of $25. He added that there was a third tax, the cigarette and liquor excise tax.
Making reference to implementation needs, Senator Neal asked why the cost estimates to implement new taxes were so high, given the fact that the Taxation Department was already established for the collection of three taxes. Mr. Chinnock replied that his workforce was account-driven. As such, the number of business accounts directly correlated with the required number of tax examiners, revenue officers, and tax auditors. With an anticipated increase of 60,000 accounts, Mr. Chinnock emphasized the need for additional personnel. With the infrastructure in place, Senator Neal voiced concern over that requirement. Mr. Chinnock replied the increased costs included office space and equipment for the employees. Using the liquor tax analysis as an example, he explained the current five tax examiners were at workload saturation. From a compliance and enforcement standpoint, especially for cigarette sales, one additional revenue officer was required in southern Nevada and one in northern Nevada.
Senator Neal asked if the volume of cigarette and liquor sales was expected to increase substantially. Mr. Chinnock replied it would not. He added that the business activity tax proposal, if passed, carried a substantial impact to the workload for his Department. That increase in workload, directly due to an increase in the number of accounts, was estimated at almost 75 percent.
Senator Tiffany interjected to comment on a Tax Department spreadsheet of uncollected debts that revealed $75 million owed to the state of Nevada. She asked if that had been taken into account as a source of future revenue. Mr. Chinnock acknowledged it had been an issue in the past, with estimates as high as $120 million of outstanding debt. Those numbers included a substantial amount of penalty and interest fees. He explained that when the ACES came online, there was a transfer of data, some of which was more than 30 years old. There was no provision in the ACES to remove any of the write-offs. Consequently, there was carryover of debt figures year after year.
Continuing with his testimony, Mr. Chinnock stated that approximately 1 year ago, the Taxation Department reprogrammed ACES and archived the written-off accounts. Of the $120 million of debt, more than $50 million was in the category of write-offs. In addition to archiving that amount, another $30 million worth of bankruptcies was removed. By law, the Taxation Department was not able to take any action on those accounts until the bankruptcy court rendered a decision. Following that action, the Taxation Department had the option to file a lien and receive a judgment from the bankruptcy proceedings. Payment plans were in place for a portion of accounts receivable. Mr. Chinnock summarized by stating the actual bad debt amount was under $40 million.
In terms of debt collection, Mr. Chinnock explained that the Nevada Tax Commission had contracted with a collections firm, OSI, which had reduced the outstanding debt to approximately $20 million. Of that amount, most was considered aged, and as such, would soon be written off. He reassured the Committees that close attention would continue to be given to that final $20 million in hopes of recovering additional payments.
Senator Tiffany reiterated her question and asked if bad debts had been factored into the analysis of each tax category. Mr. Chinnock stated bad debts had not been considered in the projected revenues; however, those amounts would be factored in once the returns were known.
Given the proposed broadening of the tax base, Senator Tiffany asked if collection activities would require a corresponding increase in enforcement personnel to pursue debt from the small businessman. Mr. Chinnock agreed and added that the revenue officers would be charged with that duty. It would require the hiring of additional personnel. In the case of the “little guy,” it was likely the business in question was already paying sales and use tax.
Assemblyman Anderson voiced confusion over the need to hire additional personnel when liquor tax was already being collected. In his view, the proposal amounted to a mere change in the tax rate. In defense of the proposal, Mr. Chinnock clarified there were currently nine excise taxes generating $300 million in revenue each year. Five personnel utilizing a manual system handled the entire process. As such, the workload was at a saturation point, and an increase in personnel was overdue. Mr. Chinnock added that the cigarette tax proposal carried with it an even greater need for compliance.
Assemblyman Anderson acknowledged the point; however, he questioned the implied logic that the level of compliance would decrease because of an increased tax rate. Mr. Chinnock stated the risk would be greater. More importantly, the compliance efforts handled by the revenue officers had not focused on those excise taxes in the past. He predicted there would be an increased need to do that in the future.
Chairman Parks offered to clarify two points. Referring to Senator Neal’s questions on staffing levels, he suggested the creation of a matrix illustrating the current staffing against the personnel requirements for each of the revenue sources. Regarding Senator Townsend’s request for the number of 3 percent credits offered, Chairman Parks recommended a report of the amount one and one-quarter percent collection fees that were offered in the sales and use tax or other categories that varied from the 3 percent level. Mr. Chinnock agreed to the request.
Calling attention to Section 7A of Exhibit C, Mr. Chinnock explained the personnel needs and associated costs were outlined by individual tax category. He emphasized that only added support figures were reported for the state activity tax, also known as the gross receipts tax. By doing so, all categories would be totally additive in any combination, with respect to the manpower needed by the Department of Taxation. That total was 141 new employees at a cost of $11 million. Regarding the breakdown of personnel requested by Chairman Parks, Mr. Chinnock stated that most of that information was contained in Sections 7B, 7C, and 7D.
In Section 7D, a matrix entitled “Implementation Needs-Added Support Structure” illustrated the difference in costs between two scenarios. The first, a business tax without a state activity tax (GRT), would result in a total cost of $6.9 million for the biennium beginning in 2006. The second scenario, a business tax with full phase-in of a state activity tax (GRT), resulted in a total cost of $14.1 million.
Assemblywoman McClain asked if the cost figure of $14.1 million included the purchase of a new computer system. Mr. Chinnock stated it did not. Continuing, Ms. McClain asserted the Taxation Department would still be obligated to incur the cost of maintaining the old computer system (ACES) while initiating the purchase of a new computer. In response, Mr. Chinnock clarified the current costs expected for the ACES were related to routine maintenance. In the future, running a parallel information system would be prudent. Assemblywoman McClain offered to restate her question and asked if the equipment purchases for new personnel would be compatible with a new computer system. Mr. Chinnock replied in the affirmative.
Referring back to his previous question regarding existing systems, Senator Neal requested clarification on how the number of support personnel was determined. Mr. Chinnock stated it was based primarily on the fact that only one person was currently assigned in that area. After factoring in the amount of overtime with the expected increase in workload, it became evident that an increase of support personnel was essential. If all taxes were adopted, the total support personnel would be 18.
Senator Neal questioned the requested figure of 63 new personnel in fiscal year 2005. Mr. Chinnock explained that was based upon the fact that, although the gross receipts tax would not be collected until the next biennium, it reflected the need to ramp up in the current biennium. That process would be initiated with the hiring of key personnel to oversee the development of regulations and implementation of new taxes. In response to Senator Neal, Mr. Chinnock confirmed that effort would result in the expeditious implementation of the new state activity tax.
Assemblyman Marvel posed a question about the pursuit of sales tax on Internet business activity. Dino DiCianno offered to reply and stated the Governor had been very supportive of Nevada’s participation in the federal Streamlined Sales Tax Project (SSTP). During the last session, Assemblyman Goldwater had sponsored a bill, A.B. 63 of the Seventy-First Legislative Session, now part of NRS 360B. On November 12, 2002, the Streamlined Sales Tax Agreement was ratified. Mr. DiCianno, working in concert with Assemblyman Goldwater, the Nevada Taxpayers Association, and the Retailers Association, voiced optimism that a bill would be introduced making Nevada part of that agreement.
In response to Assemblyman Marvel’s question on implementation time, Mr. DiCianno clarified there were several hurdles before enactment. The United States Congress had to be convinced to allow the states to have the authority to tax Internet sales. Currently, there was a court case that prohibited that tax collection. The U.S. Congress set a threshold that a minimum of 10 states and 20 percent of the U.S. population would have to petition Congress to have that change enacted. Mr. DiCianno stated there were currently 26 states that were introducing legislation. It was anticipated there would be more than 40 percent of the population petitioning the U.S. Congress. Based upon a study conducted by the state of Kentucky, Mr. DiCianno estimated the current revenue loss in Nevada was $100 million annually.
Continuing his testimony, Mr. Chinnock asked to correct an earlier response to Senator Neal. The implementation year for the gross receipts tax would be 2006, not 2005.
Moving to the final pages of Exhibit C, Mr. Chinnock addressed Section 8, an overview of the Department’s Information Technology Project. The focus of the analysis was the replacement of the Automated Collection and Enforcement System (ACES) with a unified tax system. That new technology would be capable of handling current taxes as well as a new gross receipts tax (GRT). By following the time schedule in Section 8C, the admissions and amusement tax conversion and the excise tax conversion would be completed prior to the ACES conversion.
Mr. Chinnock called the Committees’ attention to Sections 8A and 8B, two options for bringing new information technology online for the next biennium. He stated the Department had hoped to conduct a $1.5 million study utilizing money allocated from the last legislative session. The original intent of that study was to demonstrate how the replacement of the ACES would be implemented. In place of that formal study, an in-house analysis was completed, and two options were developed.
Option A, entitled “In-House Development” and Option B, “Outsourced Development,” would each accomplish the replacement of the ACES as well as the development of technology to implement the gross receipts tax (GRT). The foundation for each option was the continuation of the existing Division of Information Technology (IT), a decentralized programming service. Mr. Chinnock explained that an expansion to the current IT infrastructure would be provided under either option, to ensure a redundant and secure system.
Despite the label “In-House Development,” Option A would require the hiring of outside consultants to assist the staff. A core, unified program would be constructed in-house, followed by the purchase of commercial software modules to accomplish functions such as auditing, case management, and registration. The estimated cost was $17 million, and that, according to Mr. Chinnock, did not include communication costs. The required expansion of the telephone system was estimated to cost just under $1 million. Total projected cost for Option A was $16.8 million.
Continuing, Mr. Chinnock addressed Option B, “Outsourced Development,” and offered points of contrast. In the area of project management, outside consultant costs could be reduced from $1.6 million in Option A to $400,000 in Option B. An outside consultant would be hired to build a unified tax system at a projected cost of $20 million. The total projected cost for Option B was $26.6 million. The Taxation Department’s current approach was to work with the Planning Section of the Nevada Department of Information Technology in order to get verification of both cost estimates as well as additional outsourcing ideas.
Referring to Option A, Assemblyman Hettrick asked if the operating costs included office space expenses. Mr. Chinnock replied an overhead cost had been factored in to the personnel category. Mr. Hettrick acknowledged the personnel cost category; however, he requested clarification if that was part of the projected $11 million costs in item 5, labeled “Unified Tax System, registration, discovery, audit, case management, data warehouse, compliance and selection.” He asked if there would be no additional requirement for office space to house the functions beyond what was portrayed in Option A. Mr. Chinnock agreed and added that the $1.2 million cost for item 3, labeled “Relevant IT Infrastructure,” contained specific office space needs.
Assemblyman Hettrick asked if that figure covered the total number of employees. Mr. Chinnock replied it did not and explained the employee cost for office space was already built into the $11 million item. In response to Mr. Hettrick’s question about rented office space, Mr. Chinnock referred back to Section 7A, “Recap – Tax Proposal Implementation Needs.” He called the Committees’ attention to the category labeled “operating support costs” and stated that included office space. Once again, Assemblyman Hettrick asked if the office space was rental. The witness replied in the affirmative. He added that some consideration had been given to partnering with other state agencies or county business licensing offices.
Regarding a new unified tax accounting system, Chairman Parks asked if the Taxation Department had investigated systems that had already been developed for other states that might be available for purchase. Under Option B planning, Mr. Chinnock acknowledged there was an ongoing effort to look at existing systems. Assemblyman Hettrick asked if the witness was aware of a company called AMS. Mr. Chinnock stated he had a meeting with them planned for February 28 and had been dealing with that company for the last two years. He clarified that AMS offered cost-benefit funding, which was desirable.
At the suggestion of Assemblyman Hettrick, Mr. Chinnock offered to clarify. Companies that offered cost-benefit funding agreed to absorb a certain amount of up-front development costs, with the promise of recovering those costs based upon the benefits demonstrated in existing and new taxes.
Chairman Parks thanked the presenters from the Department of Taxation and the Nevada Tax Commission.
Senator Coffin interjected with a question regarding recent newspaper coverage. He voiced concern over an implication that tax measures might be integrated with the appropriation process. Chairman Parks responded that he was not aware of that proposal; however, he stated it might have been a hypothetical response to what could take place. Because the tax bill draft had not taken shape, nor was it known if the Assembly or Senate would introduce the bill, Chairman Parks speculated one vehicle could be an appropriations bill. He clarified that it was only one possibility. Senator Coffin encouraged the Committees to avoid what could be construed as an “end-run on the Taxation Committees.” Chairman Parks reiterated he was not aware of any such action. Senator McGinness echoed that reassurance.
Robert Shriver, Executive Director, Nevada Commission on Economic Development, commenced testimony. Accompanying Mr. Shriver were Berlyn Miller, Vice Chairman of the Nevada Commission on Economic Development; Tim Rubald, Director of Business Development for the Nevada Commission on Economic Development; and Jerry Sandstrom, Deputy Director for the Las Vegas office. Following introductions, Mr. Shriver provided a report entitled “Incentives for Economic Development” (Exhibit H).
Mr. Shriver acknowledged the wisdom of past legislative appropriations that encouraged new investment in Nevada and the resultant generation of new tax revenues. The heart of economic development efforts in Nevada was a network of 14 economic development authorities that worked cooperatively to keep Nevada competitive with neighboring states. Mr. Shriver introduced Chuck Alvey, President and CEO of the Economic Development Authority of Western Nevada (EDAWN), and described that group as the “hands-on team serving clients.”
Returning to his report (Exhibit H), Mr. Shriver highlighted accomplishments and lessons learned from other states. On page 2 was a bar chart depicting the frequency of incentive types by state. Tax credits were the most prominent category, followed by exemptions. Other incentives included abatements, described by Mr. Shriver as the category that dovetailed with the current tax system in Nevada and with the Commission that administered the program.
An overview of economic development criteria and terminology was contained on pages 3 and 4 of Exhibit H. Mr. Shriver emphasized the mission of the Commission was to attract primary employment, high-wage jobs. A primary job was defined as one where compensation earned by the employees was generated from outside the economic region. He elaborated by stating the Commission was not interested in “incentivizing companies that re-circulate existing dollars in the community.” A desirable firm was one that infused new capital into the state of Nevada. Other criteria included wage requirements, based on the “average annual hourly non-government private wage” as determined by the Employment Security Department (DETR).
Mr. Shriver reintroduced Berlyn Miller and requested his review of page 6, “Nevada’s Incentives.” Mr. Miller, Vice Chairman of the Commission, commenced testimony and listed Nevada’s six incentive programs: Sales and Use Tax Abatement, Sales & Use Tax Deferral, Business Tax Abatement, Personal Property Tax Abatement, Recycling Property Tax Abatement, and Renewable Energy Abatements. The seventh incentive was a training program called Train Employees Now (TEN).
For a company to qualify for an incentive, Mr. Miller noted that specific criteria must be met. One of the most prominent requirements was the provision of a medical insurance plan for all employees, including an option for dependent health insurance coverage. He assured the Committees that most companies receiving economic incentives in Nevada far exceeded the threshold for a benefits package. Some employers offered stock options and educational programs.
The second corporate responsibility was compliance with all registration and licensing regulations for the city and county in which the business was expected to operate. In terms of wages, companies were required to meet or exceed the current minimum hourly wage of $15.48. Continuing with applicant criteria, Mr. Miller added there was scrutiny of the proposed number of full-time jobs, as well as a comparison of capital investment within the county or city population where the company would be based. The final condition for receiving economic incentives was a commitment to maintain a business in Nevada for at least 5 years.
Returning to page 7 of Exhibit H, Mr. Miller stated the most common incentive program was the Sales and Use Tax Abatement. It applied only to the purchase of capital equipment, and the Internal Revenue Service (IRS) guidelines were utilized for determining qualified equipment. It was not a straight sales tax exemption on every piece of equipment purchased. Nationwide, capital equipment purchases were automatically exempt from sales and use taxes in 38 states. An additional 5 states did not charge sales tax, for a total of 43 states that had no set qualifications. As such, Nevada stood apart in the nation with the distinction that very little was given away.
Assemblyman Anderson interjected a comment and speculated that perhaps Nevada had relatively few incentives to offer because the state had so few taxes. He asked if there was a correlation. Mr. Miller agreed with the observation; however, even considering that factor, Nevada still offered smaller incentives when compared with other states. He cited the examples of Arizona and Utah, which had significantly more money available to award incentives.
Moving to the second incentive program, the Sales and Use Tax Deferral, Mr. Miller stated it was generally applied to the 2-percent constitutional sales tax that could not be abated. Qualifying companies were awarded a 48-to-60 month period to amortize the tax on the capital equipment purchased. Ultimately, that money was fully recovered by the state of Nevada.
Mr. Miller next addressed the Business Tax Abatement, the second most utilized abatement program in Nevada. A quarterly business tax in the amount of $25 per full-time equivalent employee was imposed for the privilege of conducting business in Nevada. A new or expanding business might qualify for tax abatement in that area. On a sliding scale, businesses were allowed a credit of up to 50 percent over a period of 4 years. Described as complicated in its application, Mr. Miller predicted it would be a category in which his agency would request changes during the legislative session. A straight 50 percent amount over 4 years would simplify the process for both the client and the Tax Department.
In the area of the Personal Property Tax Abatement Program, Mr. Miller explained the Commission was authorized to abate up to 50 percent of personal property taxes for up to 10 years. As with most of the abatements, the state gave up the smallest percentage, whereas the city and county gave up the largest percentage. He cited an example where 95 percent of the abated amount was earmarked for local, school district, county, and city use. Because of the potential impacts, the Commission required applicants to obtain a letter from those local entities stating they were aware of that business’s application for property tax relief. The Commission worked closely with local governments to help them understand that, although they would be sacrificing revenues in the short-term, revenue would be gained over the years.
Chairman Parks cited an example of a new Furniture Mart in Las Vegas that recently had been awarded property tax abatement by the City of Las Vegas. He asked if that exceeded the amount awarded by the Economic Development Commission. Mr. Miller stated that no application had been received from that company. He was unsure of the specific program, but speculated it was an incentive offered at the city level.
Assemblywoman Pierce asked about a hypothetical situation in which a company was awarded a tax abatement, but failed to expand or build in Nevada. In response, Mr. Miller stated, in the case of a company failing to operate in Nevada, there would be no tax assessment against which to apply the abatement. In other cases, when a contract was signed with the Commission, the Tax Department would eventually perform an audit. If that company failed to meet the terms of the contract, such as salary level, the Tax Department would obligate the company to repay the full tax amount to the state of Nevada.
Robert Shriver interjected with a point of clarification on the Furniture Mart in the city of Las Vegas. It was his understanding that the property being considered was part of the city’s redevelopment district. Chairman Parks added it would be that city’s portion of the property tax that was approved. Mr. Shriver clarified by saying the Furniture Mart would not have qualified for the state’s incentive program.
Continuing, Mr. Miller addressed the Renewable Energy Abatement Program on page 11. Designed for companies producing energy from renewable sources, an entire package of abatements and referrals, as previously described, was available. Additionally, an energy company could receive a 50 percent abatement of real and personal property tax for 10 years. Mr. Miller commented, in the last 2 years, there had been no applicants in the category of energy producers. Mr. Shriver attributed the lack of applicants to the fact that the energy market had dried up. That was compounded by a severe shrinkage in the investment market.
The last incentive program, Train Employees Now (TEN), was summarized on page 12. In Mr. Miller’s view, the single largest obstacle to the recruitment of desirable companies to Nevada was the small pool of qualified workers, especially when compared to surrounding states. As such, the TEN Program was a critical factor in Nevada’s economic development success. The total budget allotted to that effort was $775,000, with a portion already committed to new companies in the process of getting started. Mr. Miller contrasted Nevada’s figure of $775,000 with Arizona’s $20 million to $30 million budget for training. He gratefully acknowledged the legislative help in previous sessions.
Robert Shriver resumed testimony and called the Committees’ attention to a matrix at the end of Exhibit H. Entitled “Nevada’s Selected Business Assistance Programs – Statewide,” it was designed for distribution to development authorities and potential corporate applicants. At a glance, it would be apparent to a new company whether or not it qualified for the incentive programs offered by the Nevada Commission.
At the end of Exhibit H, there was a matrix that summarized incentive activity for the year 2001. During that span of time, there were three adjustments to the wage rate, now set at a minimum of $15.48. Continuing, Mr. Shriver stated 23 of the incentives were granted to companies in Clark County, 6 in Washoe County, 4 in Douglass County, and 3 in Lyon County. The final pages of Exhibit H displayed an analysis of the estimated impacts for all abatements provided to new industries during the past 2 calendar years.
Tim Rubald, Director of Business Development, Nevada Commission on Economic Development, offered to review the report on impacts of economic development efforts. During the years 2001 and 2002, there were 2,243 new primary jobs generated, with a minimum average wage of between $14.61 and $15.48. Mr. Rubald emphasized the average wage was actually $20.19. In terms of the types of abatements, sales and use tax abatements totaled $11.5 million, followed by business tax abatements of $387,000, and personal property tax abatements estimated at $6 million. The last category, personal property tax abatements, was characterized by Mr. Rubald as complex. That was primarily due to the span of time, amounting to as much as 10 years. Additionally, there was no set of solid numbers for modeling due to the changes in depreciation rates, the taxable rate, and the property tax rate itself.
Continuing with the Impact Analysis, Mr. Rubald called attention to the breakdown of direct and total impacts at the local and state government levels. For each level, the impacts in dollars were displayed for payroll, real property tax, personal property tax, and sales tax. The category of “direct impact” contained those dollars that new companies added to the economy. Total impacts included direct impact dollars as well as the dollars resulting from the economic activity of the companies themselves. The latter referred to indirect and induced jobs created as fallout of the primary business activity.
Mr. Rubald emphasized that all of the figures presented in the matrix were calculated after the abatements were granted. As such, the revenue amounts represented “new money” generated for the counties, school districts, and the state. Significant returns on the investment were evident, according to the witness. Abatements totaling approximately $18 million over the last two calendar years had generated a return of approximately $45 million over one year. Because businesses continued to operate year after year, Mr. Rubald emphasized it was important to understand the initial $45 million was only a snapshot in time. The tremendous return on investment in the economic development area was perpetuated year after year.
Moving to the Time Line Analysis, Mr. Rubald clarified it was based upon a simple return ratio for sales and use tax abatement. One of the most revealing statistics was the break-even point, defined by the witness as the point when a company had paid back into the local government system the amount that it had received in the form of abatements. That was estimated in the time line analysis for each of the tax abatement types. Under local governments, abatements were measured in years and included sales and use tax as well a personal property tax. In the state category, business tax abatement was reported in weeks, creating an earlier break-even situation.
In closing, Mr. Rubald remarked that many states and the industry of economic development often used “job creation” as the benchmark for success. In Nevada, the amount of payroll dollars input to communities and the state was judged to be the critical measurement and not necessarily the number of new jobs. As stated in previous testimony, he reiterated the importance of the high quality of the new jobs, quantified by payroll dollar amounts.
Returning to the matrix of incentive activity for new companies in Nevada, Assemblywoman Gibbons inquired about average wages for the Ford Motor Credit Company. Mr. Rubald commented that the Ford Motor Credit Company had applied for training money. Average wages were not calculated because the training dollars, although listed in the matrix, were not considered. He recalled the average wages, when the company initially applied for incentives, were over $17 per hour. Mr. Shriver interjected that it was probably over $19 per hour. The jobs were considered to be good quality with a great benefits package.
Mr. Shriver called the Committees’ attention to the final pages of the report, illustrations of the economic impacts of three new companies: Starbucks, the Potlach Corporation, and the General Motors Service Parts Organization.
Assemblyman Griffin asked if there existed any competitive exemptions in situations where a competitor of an existing company attempted to come into Nevada. Mr. Shriver responded that, in the case of a primary employer, competitiveness would not apply. An effort was always made to define the marketplace for prospective companies. That information was used to designate a company as a primary employer, defined as having 50.1 percent of its operations outside the state of Nevada.
Mr. Miller added that there were instances of applications being denied based upon expected competition with existing companies in Nevada. As such, the new company did not meet the criteria for the economic development incentives.
Chairman Parks posed a question regarding the multiplier effect for new dollars into the economy. For every dollar in credit exemption or abatement granted through the Economic Development Commission, he asked if that figure was known and how it compared to other states.
Mr. Rubald replied that direct multipliers were not used. Figures were derived using an input-output model based upon a nationally recognized system designed by the United States Department of Agriculture (USDA). The data input to the model were updated on an annual basis. It took into account not only the five economic regions of the state, but also the type of business. The latter had a significant impact on the number of times a dollar rolled over. “The closer to the earth you get, the more exponentially increasing you have. The farther away, the more of a service industry you get, the less you have.” The numbers were generated by a national organization that supplied numbers for every county in the United States. A comparison with other states would be a challenging study and was not available.
Seeing no additional questions, Chairman Parks adjourned the meeting at 3:55 p.m.
RESPECTFULLY SUBMITTED:
June Rigsby
Committee Secretary
APPROVED BY:
Assemblyman David Parks, Chairman
DATE:
Senator Mike McGinness, Chairman
DATE: