MINUTES OF THE
SENATE Committee on Taxation
Seventy-second Session
March 6, 2003
The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 2:05 p.m., on Thursday, March 6, 2003, in Room 2135 of the Legislative Building, Carson City, Nevada. The meeting was videoconferenced to the Grant Sawyer State Office Building, Room 4406, 555 East Washington Avenue, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Randolph J. Townsend
Senator Ann O'Connell
Senator Sandra J. Tiffany
Senator Joseph Neal
Senator Bob Coffin
STAFF MEMBERS PRESENT:
Rick Combs, Fiscal Analyst
Mavis Scarff, Committee Manager
Gale Maynard, Committee Secretary
OTHERS PRESENT:
Dan Meyer, President, Comstock Games Incorporated
Samuel P. McMullen, Lobbyist, President, The McMullen Strategic Group
Ray Bacon, Lobbyist, Executive Director, Nevada Manufacturers Association
Christina Dugan, Lobbyist, Director of Government Affairs, Las Vegas Chamber of Commerce
Mary Lau, Lobbyist, Executive Director, Retail Association of Nevada
Robert M. Thorniley, Lobbyist, Associated General Contractors, and President, Image Construction Incorporated
Summer Dew
Taylor Dew
Buffy Gail Martin, Lobbyist, Government Relations Director, American Cancer Society-Reno
Michael Pack, President, Frehner Construction Company
Jerry Threet, Controller, Dielco Crane Service
Richard Dieleman, Dielco Crane Service
Gaylyn J. Spriggs, Lobbyist, Nevada Taxpayers Association
Michael D. Pennington, Lobbyist, Public Policy Director, Reno-Sparks Chamber of Commerce
Harry L. York, Lobbyist, Chief Executive Officer, Reno-Sparks Chamber of Commerce
Steve G. Holloway, Lobbyist, Executive Vice President, Associated General Contractors
Richard R. Ziser, Lobbyist, Nevada Concerned Citizens
Bob Hibbard, Chief Executive Officer, Martin Harris Companies
Doug D. Busselman, Lobbyist, Executive Vice President, Nevada Farm Bureau
Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association
Mike Zunini, Operations Manager for Winner’s Corner Convenience Stores, Berry-Hinckley Industries
Alfredo Alonzo, Lobbyist, Nevada Beer Wholesalers Association c/o Bonanza Beverage
John L. Wagner, Lobbyist, The Burke Consortium of Carson City
Jan Gilbert, Lobbyist, Progressive Leadership Alliance of Nevada
Elisa P. C. Maser, Lobbyist, Nevada Tobacco Prevention Coalition/Las Vegas
Jim J. Avance, Lobbyist, Nevada Retail Gaming Association
I have called this meeting to order for the Senate Committee on Taxation. Our bill today is Senate Bill (S.B.) 219.
SENATE BILL 219: Provides revenue in support of state budget. (BDR 32-1209)
Dan Meyer, President, Comstock Games Incorporated:
I am here to speak about the slot route tax and add some
additional options and items to take into consideration when proposing a tax
increase on the slot route. The Governor has proposed a 33 percent increase on
all restricted accounts no matter the size or ability to pay. I strongly
believe any flat,
across-the-board tax proposal without consideration on the marketplace and size
of operation is regressive, to say the least.
The ability to compete in the slot route business is as different as night and day. The number of slot route operators in Nevada has been stagnating for 20 years, yet the few largest companies have grown into operations of 8000 to 10,000 machines. This has been achieved mainly due to their control over the marketplace, over supply and demand, and control over competition. Product manipulation and price control reduced any competitive nature in this business.
The advantage of these companies displays their ability to remove competition in bidding for new accounts by offering stores such as Safeway Food and Drug, or Scolari’s Food and Drug Company, and others a 90/10 percent split on the wins generated by these machines. The remainder of the industry has a much different cost structure and a higher cost of operation. These smaller operators cannot compete in this environment. The value of the smaller route operations cannot be underestimated. These operators supply smaller businesses with added revenue and give them the ability to compete in a Nevada marketplace. The slot route operator or actual smaller businesses survive on low profit; they work harder for less, and require consideration.
The few large slot operations control manufacturing and distribution, thus having monopolistic control over the route operations in Nevada. Recently, these companies have notified the rest of the slot route operators that products only a few years old will no longer be supported and will only be supported for their casino clients, leaving the rest of us to fend for themselves.
These larger distribution, manufacturing, and route operations have helped pushed the Indian gaming movement and have helped weaken Nevada’s competitiveness in the marketplace. I agree these companies need to feel their operations should be ruled and taxed as a casino. But to do the same to the remainder of the operations would further inhibit small route operators’ ability to operate and provide needed revenue to small businesses within the State. I propose a three-tiered tax system based on the number of equipment operated during any quarter in a fiscal year. The top level would be at 1250 games in operation and above, the middle level would be operating from 1249 to 750, with a bottom level being at 749 and below.
I have outlined a system I feel will balance a company’s ability to pay while reducing the cost of regulatory compliance in oversight of operations (Exhibit C. Original is on file in the Research Library). This would elevate the top route operations to an existing class, which is casino. It will bring higher monthly revenues to the State while leveling the competitive nature of the industry. This will also allow gaming control officials to increase regulatory supervision on the basis of ability to pay and comply and would help hold down cost to the State, while increasing State revenues.
The reason there are small incremental tax proposals on the remaining two lower levels, is these slot operators are at a disadvantage, namely in cost of operations and the inability to bid on the higher-quality accounts.
Another important consideration is the benefit this revenue gives the State as well as the profitability of many small Nevada businesses. These businesses need the product support and access to this revenue. Times have changed in regulation and many regulations are outdated and ineffective. The time to reevaluate policy and regulations that have been developed over time has come. Yet, common practice has given way to increased regulations and a corresponding lack of competitiveness. Currently, we still have a 5-day waiting period to purchase antique slot machines while the consumer can buy these same machines just across the border in California with no paperwork. Mr. Guinn has not touched on the accumulative effect these taxes will bring.
The current slowdown on the economy and the added cost brought on by previous State and local increases in taxation and fees have already taken a toll. Many of these future tax proposals have an accumulative effect that has greater impact on the average Nevadan and will affect the smaller to mid-sized capital businesses more adversely than the larger businesses. Small capital businesses have weaker volumes of business activity, inventory, buying power, and the lack of a destination quality to them. Any increase in cost will either be passed on to the customer, or if competition increases, will have to be eaten by the small businesses.
I resent the talk of businesses not paying their fair shares. In fact, these businesses are the ones not placing the demand on the system. Large corporations have billing and accounts receivable departments outside Nevada, and will avoid paying a gross receipts tax (GRT). With the use of technology, electronic funds transfers and other modes of accounting methods, large capital businesses will continue to place the demand on the system, while avoiding the true cost.
In conclusion, I would like for you to remember the casino industry itself does not operate under a GRT. The casinos benefit both yearly and monthly by decreasing their taxes on a per-machine basis while in low volume months decreasing the tax percentage rather than paying the 6.25 percent currently reported in the press. The gross win is based on a monthly tax rate and allows the casinos to write off 80 to 85 percent of the gross revenue. Hopper fills, jackpots, and advertising through shilling of its customers are taken off the gross figures.
I suspect with increased competition, and the high-debt loads the casino industry has placed on itself, fewer and fewer casinos will find profitability. They have been packing their own bags to leave the State and going into contractual agreements to operate many of these new Indian casinos.
What Governor Guinn has proposed will further stress our economy by weakening the only part of the economy which is growing. I agree with Assemblyman Beers that Nevada’s current tax growth situation has sustained this State. It is the $1 billion in new spending which has brought us here. As a father, and a businessman, I know the value of saying no. I believe the State would benefit from a self-evaluation and restructuring.
Nevada is in a position to benefit from having weak Californian political leadership, which refuses to make the necessary cuts. We will continue to grow and diversify by avoiding the traps the increased taxes will bring. Remember, this is Nevada and still a small state. We have made historic breaks with the political and economical norm.
Senator Rhoads:
Approximately how many slot operators are there in this State?
Mr. Meyer:
Over the last 20 years, there have been 55, maybe 57. There has been no real growth. Primarily the growth has been in manufacturing.
Senator Rhoads:
In this three-tier level, how much more money would it bring in?
Mr. Meyer:
In order to figure the revenues, I looked at the two top companies. Using United Coin Machine Company’s numbers from 2000, I believe it would increase their taxes threefold to the State and I believe they can compensate by the fact they manufacture the products and their cost of equipment is much different.
Senator Rhoads:
I believe Governor Guinn’s proposal will bring in $600,000.
Mr. Meyer:
Mine would be considerably more. We are talking millions with my proposal.
Senator Neal:
Are you here representing the slot operators?
Mr. Meyer:
I have talked to about five in the Reno area and they have given me some of their concerns and I speak for them as well.
Senator Neal:
Do you have any idea as to the number of slot machines we are talking about in each one of the categories mentioned in the Governor’s bill? Is it either five or less, or six or more in those two categories?
Mr. Meyer:
To be honest, I have not had time to pull all the information, but I can get it for you.
Senator Neal:
How many slot machines do you have which fall into this category?
Mr. Meyer:
I would be the bottom level. I only operate about 65 machines. The largest company I have talked to which is Winner’s Gaming Incorporated operates 450 to 500 machines. The majority would be in the two classes; the large manufacturing class would have the lion’s share of the tax liability, and there would be maybe one or two in the middle class with the majority in the bottom class.
Senator Neal:
Which one would be in the majority, the five or less?
Mr. Meyer:
Yes. Those are the ones I feel have a disadvantage in the system.
Senator Neal:
So under the Governor’s proposal it talks about adding $20 per machine.
Mr. Meyer:
He is talking about a flat, across-the-board increase. After 22 years of being in the business, I am tired of being known as an International Game Technology (IGT) rebel.
Senator Neal:
Is it your understanding the Governor’s proposal for the majority of the machines you operate would be $20 per machine?
Mr. Meyer:
Yes.
Senator Neal:
Could you tell us how this would affect you?
Mr. Meyer:
I would have to renegotiate my contracts with my accounts and reduce the amount of leased space payments I currently pay or change the percentages I pay. Typically I run about 50/50 to 60/40 percent.
Senator Neal:
Could you give us an idea as to what the average payout is per your machines under five or less?
Mr. Meyer:
When you say payout, do you mean the taxes I pay?
Senator Neal:
No, no. The money you pay for the machines they make for you. I assume you put machines in a place where you can collect money.
Mr. Meyer:
Yes. The numbers I talked to Mr. Neilander about were based on a percentage basis. I showed him the numbers from my accounts, which are the small bars that have six machines. I showed him at a flat 6.25 percent, he would be achieving less revenue than what I currently pay now. These accounts I refer to typically make only $38,000 in a quarter gross win, and out of this, my retention is usually $4000 to $6000, sometimes $2000. Others from quarter to quarter may be in the hole.
Senator Neal:
Let me understand this operation. Do you contract with individuals to put these machines in various places you oversee?
Mr. Meyer:
Yes.
Senator Neal:
Who do you contract with?
Mr. Meyer:
With the business owner.
Senator Neal:
You contract with the business owner. Who do you get your machines from? Are they your machines?
Mr. Meyer:
Yes. I buy from Bally Gaming Incorporated, IGT, and lately I am buying used machines from United Coin.
Senator Neal:
So you actually own the machines you place.
Mr. Meyer:
Yes, and they are all used, probably about 5 to 6 years old.
Senator Neal:
When you contract with the individual owners to place these machines, what is this contract like in terms of cost to you? What do you pay for the space?
Mr. Meyer:
I tend to pay anywhere from $150 per machine to $275, but after this last recession, I have dropped that down to $250, on the top and for my best accounts.
Senator Neal:
How often do you check on these machines?
Mr. Meyer:
Every day; sometimes more than once. I have to pay jackpots or gaming control asks me to open the machines to check the programs at their discretion, and this is 24 hours a day 7 days a week.
Senator Neal:
If the machines are not making money, what happens?
Mr. Meyer:
I do not pay myself.
Senator Neal:
You do not pay yourself. Do you remove the machines?
Mr. Meyer:
Sometimes I do. During this last recession with my marginal accounts, I actually had to pull some. I try not to pull out. Twenty years ago it took two months to get a new account, now it takes six months with all the added regulations involved.
Senator Neal:
Can you give the committee some indication as to the locations of these machines, or the establishments you place these machines in.
Mr. Meyer:
Bars, taverns, convenience stores, and small restaurants.
Senator Neal:
Where are these establishments located?
Mr. Meyer:
I work out of the Reno area. I only have one other employee and try to keep my costs down. My accounts are in Reno.
Senator Neal:
Are they placed in Albertson’s Food and Drug, grocery stores, and if in bars, are they sports bars?
Mr. Meyer:
The large sports bars are going to want about $400 to $500 per machine, and this is out of my ballpark. With my cost of equipment, I cannot compete there. The people who have their own licenses and want a percentage are going to want an 80/20 to 90/10 split. I cannot operate in this realm. There is a marked difference between the operations, and I think any kind of flat rate is unfair and unethical. This is why I am here.
Senator Neal:
Could you tell the committee and me how long you have been in business?
Mr. Meyer:
I have been in business for 22 years.
Senator Neal:
It has probably been a profitable business in order for you to be in it this long?
Mr. Meyer:
Sometimes. Last year I paid myself about $65,000, and this last year, I paid myself about $25,000.
Senator Neal:
You are saying this proposal would cut into your $65,000 salary. Is this what you are saying to the committee?
Mr. Meyer:
My concern is it is going to affect not only the slot route operators but also the stores as well. Many of these small stores, sir, operate on the sly, and the only money some of these people put into the bank are the monies we pay them. The 7-Eleven stores get a 55 percent or so management franchise fee. Considering you only make 28 percent on a convenience store, if it were not for the slot revenue, there would be nothing left. I have owned two convenience stores, and I understand the profit margin. I have owned a restaurant and understand the profit margin there also. These people do not make a lot of money.
Senator Neal:
The slot machine is not like a store. A slot machine is money-intensive, are they not? It is a dollar for a dollar or a quarter for a quarter to win money.
Mr. Meyer:
No. We only hold, just like everyone else, about 4 percent. So out of each $1 placed into the machine, I make 4 cents, on average, which is not always the case. I would be more than happy to show you my numbers.
Senator Neal:
I find it hard to believe because the reports I have seen from the gaming abstract say the payout averages about 65 percent, back to the customer.
Mr. Meyer:
In what way? I have about 48 percent of my income from the machine going back as hopper fills. Twenty-eight percent goes out in terms of jackpots, so we are already cutting deeply into one hundred percent. Then I have to pay the accounts, usually 20 to 30 percent depending on the month, what revenue and what percentage I give them. I cannot base it on a percentage. Lease space accounts are flat fees, and in certain quarters I do not make any money.
Chairman McGinness:
You do not pay the licensing with the gaming commission, do you?
Mr. Meyer:
Yes, I pay the license fees for the most part. In the lease space accounts, it all comes through me.
Chairman McGinness:
If I have Mike’s Sports Bar, and I want you to put in five slots, I do not have to go to the gaming commission? Am I the licensee, or are you the licensee?
Mr. Meyer:
I could be if it was a lease space account, or if you wanted to participate in the agreement, based on a percentage, you would have to get the license.
Chairman McGinness:
So in most of your accounts, are you the licensee?
Mr. Meyer:
Primarily, yes. There is a benefit to this. If you were to sell an account and were the license holder, the machine operations would have to close. If I am the lease space holder and the license is under my name, the continuation of the operation will go on and I file the new information.
Senator Rhoads:
Under level one, a flat 6.25 percent would be paid under your proposal?
Mr. Meyer:
What I would like to show you is why we should go to a flat 6.25 percent, because currently the casinos do not pay this. The two middle spreadsheets I have worked out (Exhibit C) you can see casinos pay 3 percent on the first $50,000 per month. They pay 4 percent on the next $84,000. I would agree with Senator Neal, they do not see the 6.25 percent, especially in low-volume months. Also on the year tax, if you want to look at this, all slot route operators pay a flat $250 for tax per year. The casinos, actually after its 275 machines, which most of the megaresorts have well over this amount, they pay a lower year tax than I do.
Senator Rhoads:
You are suggesting tier one would pay a flat $350.
Mr. Meyer:
Yes. I think the casinos should pay a flat fee.
Senator Rhoads:
Tier two would be how much for the year?
Mr. Meyer:
With level two, I think we should continue with the situation we have currently but increase the quarterly taxes. Right now it is based on from one game to five games based on $61 per machine, and I think we should increase this to $71. Then from 5 games to 15 games should increase as well at this level.
Senator Rhoads:
In tier three, what do you suggest?
Mr. Meyer:
The bottom level is that we should hold fast on the quarterly tax with an increase in the yearly tax. The reason why this was done is the difference in operations, the difference in cost. I do not think we should hurt the small guy, whether it is me or the other five guys in Reno, or the small bar and restaurant owners. If you come at us too quickly, we are going to have to shut down. We do not make much per machine; we only hold 4 cents to the dollar. We are volume based and the volume is much less than a casino, and much less than a Scolari’s Food and Drug Company Store.
Senator Neal:
Mr. Meyers you had mentioned in your testimony lease space accounts. Are there any other types of accounts existing in your business?
Mr. Meyer:
There are just two: a participation account which the location actually holds the gaming license, and the lease space account.
Senator Neal:
And the person who you place these machines with holds the license? Is this correct?
Mr. Meyer:
On the participation accounts, yes.
Senator Coffin:
I want to make sure I understand you correctly. You have mingled the term manufacturing with slot operations.
Mr. Meyer:
Currently it is allowable as a privilege in the State to hold all three licenses and is another issue. I think we should have only two of the three. The manufacturers, like Bally and International Game Technology also own the two largest slot routes in the State. It costs $1000 to build the machine, and they charge me $10,000. There is a drastic difference in price and cost.
Senator Coffin:
I understand there are probably some large ones who do not manufacture.
Mr. Meyer:
Well, Gaming Incorporated Enterprises (E-T-T) bought Jackpot, which went into the electronic funds transfer business, from what I understand.
Senator Coffin:
Is it not likely these bigger businesses have smaller clients and they get big by having an accumulation of small clients like you?
Mr. Meyer:
For the most part during this last recession, they have been getting rid of their small accounts. In fact, I have doubled the size of my business, just by them walking out of the small bars. These small businesses have to go somewhere.
Senator Coffin:
How big are you? You said you had 65 slots?
Mr. Meyer:
Yes. I use to have 28. I have been kind of a “Mr. Mom” living at home and had about 8 accounts, now I have about 15 accounts.
Senator Coffin:
So the average is about 4.5 slots.
Mr. Meyer:
Yes. I do not have any big accounts; they are reserved for the big boys.
Senator Coffin:
If you offer a larger drop to those people, can you get the business if you negotiated a different contract?
Mr. Meyer:
If I wanted to. The problem is I cannot afford the new equipment or the technology. They tend to hold this to themselves. Bally Gaming has a multi‑denominational game they put in all the 7-Eleven stores. I cannot get it, so they have advantages and they use them. I am not saying I am a poor businessperson, I have done all right, and I have been in business for over 22 years. Some have been good and some have been bad.
Senator Coffin:
There was one other issue mentioned in your testimony about taxing the gaming industry a little different rate depending on their out-of-state gaming. Was this in your testimony?
Mr. Meyer:
No. What I said was the manufacturers have been the ones pushing the Indian gaming. They have brought this on themselves to a certain degree and they have been doing it at the expense of Nevada.
Senator Coffin:
I just received a copy of a letter from Clark Russell, who is a long-time gamer and suggested a graduated tax level on those who invest out of State. He did not single out slot route operators; he just indicated perhaps those who invest out of State should pay a higher tax on their revenue.
Senator Neal:
You indicated Bally Gaming has slots in the 7-Eleven stores?
Mr. Meyer:
Yes, they own United Coin Machine. Alliance Gaming is Bally Gaming, is United Coin Machine. International Game Technology, who bought Anchor Coin, now operates Anchor Coin. International Game Technology has tried to get out of the slot operators business.
Senator Neal:
International Game Technology bought Anchor Coin? Do you know when this purchase occurred?
Mr. Meyer:
I believe it got approved in March, 2003.
Samuel P. McMullen, Lobbyist, President, The McMullen Strategic Group:
I am here today as part of a much larger group. We have informally called ourselves the Business Representative Group, and we have made a commitment to study, analyze, propose, and most importantly, through our thought process, come up with how the State ought to be funded.
With me is Mary Lau, Executive Director, Retail Association of Nevada; Christina Dugan, Vegas Chamber of Commerce; Ray Bacon, Nevada Manufacturing Association, and Wayne Frediani, Nevada Franchised Auto Dealers Association. Our group started after last session and we have continued to meet and made a written statement saying we will continue to participate in these processes and let you know the specifics of the quote, “plan” we have come up with.
There are multiple decisions which have to be made. One of them is the issue of need, cash flow, and what is absolutely required and necessary as we get through this budget year, through June 30. We do not know how much we can help on these questions. You are going to have to answer this. We know and expect you will figure out through some reason, analysis, and debate what the needs are or will be. You will look at all the options and the responsible solutions to this.
We, basically as a group, are speaking specifically to section 1 of S.B. 219 and will have testimony on other sections. I will turn this over to Ray Bacon, to speak on what we said not only in July, but also most importantly in December, 2002, as it relates to this.
Ray Bacon, Lobbyist, Executive Director, Nevada Manufacturers Association:
We made a commitment during the last session to come up with some tax ideas. As the tax interim study progressed, one of the things which became obvious, was the need for revenue. While there has been a lot of discussion over the business license tax, and there are a lot of people who do not like it across the board, businesses recognize it is the broadest-based tax we have in the State. It is the most stable tax we have in the State, and it is very easy with which to comply. Although it may have some levels of fairness and equity issues, it still is a broad-based, and very stable tax. Initially, we were talking about at least indexing this for inflation, which is roughly an increase of 40 percent, from roughly $100 to $140 per year. This is what came out of the coalition’s proposal.
As the situation worsened with the budget, we went back to our members and discussed this across the board with our various associations and we supported the position of up to doubling this tax and I believe we were the first ones in the July time frame to at least start thinking about it. We also openly mentioned in the October time frame, if the cash-flow situation required, because the business license tax mandated no overhead, and this was one tax relatively easy to change the rate and make the change effective the first of April, this would roughly bring in $20 million. Understand this, cash shows up in July due to the way taxes are collected. It is still about $20 million, which could effectively be on the books and generated in a relatively early time frame. You have to put this in perspective; this is in the October, November time frame. We are walking through this operation. We see the situation has changed in the decision of what the need is as Mr. McMullen mentioned, this is an offer we have brought forth and still think it makes sense.
As I have said in my conversations with the Governor, the short-term thing you are fundamentally limited to is changing the rate on the existing tax structures and this was clearly a business-paid tax. For clarification purposes, this group focused on the broad-based business taxes. While we looked at the revenue coming in from other things, we did not have a large constituent from the gaming industry, and we did not discuss the gaming taxes. We took a look at the “sin” taxes and people pay “sin” taxes. As far as the overall picture, we discussed those things, but did not put them in our proposals because they were not things we pay. We focused on what business pays.
Senator O’Connell:
Did you look at a sole proprietor when looking at the $20 million or were you looking at the existing base for the tax?
Mr. Bacon:
This was strictly looking at the existing or current tax base. We did discuss the issue of bringing in sole proprietors, but at that stage of the game, we were looking at the current registration becoming an annual fee of $25 and in time, but not immediately, you would bring in sole proprietors.
Mr. McMullen:
This is in the context of what Mr. Bacon has said of the interim revenues through June 30. The issue of a sole proprietor is something which has impact in a situation where you have longer to implement it. We invited, for every meeting, 150 to 200 business representatives and organizations. In our meetings, there were always 30 to 50 people, and we have had at least a dozen meetings. This has been a considered study, and we will continue to participate as you discuss longer-term issues other than the bill in front of you today. Our concern, particularly not knowing where the economy is today and its impact, is the question of need and whether you are going to fund the cash flow and how you are going to do it. We think it is up to 100 percent in this context. We want to make sure you understand business is not saying “no”, and we are willing to be responsible and do our fair share, even if it is on an accelerated basis in order to help solve problems. We thought this would be an important part to the solution, and will continue to participate as you consider the other tax issues in front of you this session.
There is some concern about the business taxes, but it is the broadest-based business tax we have. Subject to the issue of sole proprietors and whether they are added in, this tax hits every business. Consequently, as a group, we have looked at those types of taxes and did not sort out one industry versus the other and figure out who was going to be in the barrel this time. We knew the issues facing the State are the kind which needed a larger broad-based structure, and we looked at those paid by business.
Senator Neal:
Mr. McMullen, are you telling the committee the business community you represent is willing to step up and do its part?
Mr. McMullen:
Clearly this is the message we have tried to send the last session in terms of our effort during the interim. We have tried to comply by written plans and additional testimony and you will hear today from our group which has spent dozens of hours trying to figure this out.
Senator Neal:
You seem to have placed great emphasis on a broad-based business tax, and I am wondering what the difference is between this and broadening the tax structure. I seem to hear from this Legislature and other groups coming in they want to broaden the tax structure rather than the base.
Mr. McMullen:
That is a good question. We looked at taxes we all would share as a business community. We also looked at accountability results, revenue needs, and particular aspects of society which may need additional funding, either through caseloads, or just because we are interested in them as business, such as education. We did look at a lot of policy issues and paid great attention to the fundament of the resolution passed which started the task force and their challenges and charter. When we talked, in this group about either changing the tax structure or making it much more capable of solving the problems we have in this current structure that does not drive the dollars we need to fund the State as we see it, part of the issue for us was trying to increase stability of those resources, which was part of the charter of A.C.R. No. 1 of the 17th Special Session. So we looked at taxes not only just in terms of what dollars they would raise but also the policy objectives they might fulfill. We particularly looked at the ones we are dependent on now and seeing if we could stabilize those in different ways.
The business license tax is extremely broad and may have some aspects of unfairness, but we did not think we could do much more with this other than potentially look at the revenue-raising side of it. We looked at the sales tax and saw some ways we thought could stabilize it and most importantly match the taxation of the State with our economy and try to make sure the engines were in place to drive taxes and link it to the types of issues driving the needs of the State, and most of those are growth or caseload driven. A transaction or consumption-based tax seems to have a great linkage with respect to what we are doing in terms of funding the future of the State.
We looked at 34 to 35 issues, the pros and cons, and looked at them from this point of view. The tax structure of the State ought to be driven by sources, which move with our economy and State and make sure we fund things. We do not want to be here every 2 to 4 years looking for a solution, and we also know we are at a stage where there is going to be significant revenue generated out of this session by additional taxes. We wanted to generate taxes in a way we thought was smart, where we could step up to and also solve some of the long‑term problems and diversify the economy and some of the other goals you have heard.
Chairman McGinness:
Mr. Bacon, when you spoke about the business tax going to $140 because this was about where it would have been if it had been allocated or figured for inflation, were you talking about indexing this or leaving it there?
Mr. Bacon:
We actually had discussions both ways, and part of the discussion was to go to roughly $140 and then index it so it would not get behind. Other parts of the discussion were to just go to the $140 and address the issue later. When it became obvious this number was not going to be large enough, we started discussing doubling and pretty much dropped off the indexing.
Christina Dugan, Lobbyist, Director of Government Affairs, Las Vegas Chamber of Commerce:
As a representative of the Las Vegas chamber and the small business community, we would ask you to consider the impact of increasing the business license tax on small businesses, already used by Dan Meyer previously. We agree with most of the testimony the Business Representative Group has given today, but we do believe providing some relief to smaller businesses in the State is going to be necessary. We have developed some ideas on this and want to work with the committee to bring them forward in the future. No matter what you choose today, it is important you understand small businesses will be significantly affected by this increase.
Chairman McGinness:
Are you talking about relief for smaller businesses in S.B. 219.
Ms. Dugan:
In relation to the business license tax increase in general, but specifically today in relation to this bill, S.B. 219.
Chairman McGinness:
Do you have some information on which businesses you think should have relief?
Ms. Dugan:
We basically believe businesses with 25 and fewer employees are the core of small businesses. The chamber has a membership of over 85 percent small businesses and we feel it is our obligation to speak out for them.
Mary Lau, Lobbyist, Executive Director, Retail Association of Nevada:
Our members and our board do not support the idea of bridge revenues. I needed to make this clear on S.B. 219 and we feel it is inappropriate to ask legislators and the business community to come forward and look at this small piece of a pie and at the same time consider a much larger bill having the total State impact. The rainy day fund is another issue and we believe whatever is done, it would be appropriate to consider it as a whole tax package. We do not support a bridge-revenue concept and then have a separate conversation on tax revenues.
Senator Neal:
I have a general question for the panel. Looking at Nevada Revised Statutes (NRS) 364A.140, which is the business activity tax (BAT), it is calling for an increase of $25 to $75 or about 200 percent. Do I understand from the testimony today, you support this?
Mr. McMullen:
We basically have indicated our support for a level of 100 percent increase. Specifically on line 14, if you process this we would be saying the amount should be no higher than $50 for each full-time equivalent employee (FTE).
Senator Townsend:
Let me reference the business license tax. You are aware of those individuals who do not have health insurance either from their employer or from their spouse’s employer. You know they have health needs which are spread throughout the community and picked up either by policyholders or through various mechanisms of government, such as Medicaid, and in some cases as bad debt.
Looking at the license fee and since the State has a responsibility along with some of the counties in these areas, have you ever looked at splitting this? Also, when you made mention of the FTE, research has provided us with information saying if you were to count heads and not a 40-hour week, you would pick up an additional $11 million for this budget. Based on what your conversations have been and on your philosophy, following A.C.R. No. 1 of the 17th Special Session, have you looked at this as being fair, equitable, broad‑based and stable?
Mr. McMullen:
We did not look at FTE in terms of the difference between a head count and hours worked, basically took the tax as it was, and have not had a board group meeting. We were planning to have a meeting next week, and this will be one of our subjects of discussion. The next issue of whether it would be fruitful to put an incentive in the business license tax to employers in providing health insurance where none exists, we thought that was an excellent idea. We did not know how to implement this, but there was a consensus in the group this would be a good policy objective.
It seemed especially so when we looked at the caseload dynamics of Medicaid, and in a lot of ways people who qualify for Medicaid may be working. These are the types of caseloads we are finding.
Mr. Bacon:
The problem we have with basing the business license tax solely on the number of heads versus equivalent hours is for the part-time employees who are working a few hours a week, you substantially increase the part-time employment. What does this do to total employment? We did not have a good answer.
Senator Neal:
In this regard, talking about the business activity tax, the present law compensates for this because you can add in those people who do not work full-time. I have another problem with this; the contract employees. This bill does not do anything for this. If you have a contract employee, you usually could get by this if a large establishment has an associated day care facility. They can deduct or exempt a certain amount of taxes based on contribution they make to the day care facility or allow their problem employees to be a part of the facility on- or off-site. Are we looking at a situation where the larger establishments would be able to get by in paying whatever fee directed by the Legislature and the burden would fall upon those individuals who have a lower number of employees, less than 100? Do you have a response to this?
Mr. McMullen:
To the extent a person is an independent contractor and falls in the category for this tax as a sole proprietor you have a policy decision you will have to answer on this. The earlier policy decision was these people would not be subject to a business license tax to the extent these other employees are hired by another business, leased, or provided by an employment service, or obtained through some other source, where they are quote, “employees” of a particular business. When we did this in 1991, we tried to look at a lot of those quote, “loopholes,” and gather them in. I do not think there is much opportunity for this to happen legally. They would be employees of another business and there would be an FTE head tax paid on this as a business tax.
Senator Coffin:
I was chairman of this committee in 1991 when we passed the business activity tax. It was the Assembly bill which passed and not the Senate bill, and was based on a percentage. If we had stayed with then- Governor Miller’s original proposal, we would have had the revenue we needed, simply because it was based on a percentage of payroll. The business community opposed it heavily and we ended up with the BAT, which does not grow based on inflation and this is why someone here has suggested indexing. It is regressive and hurtful to the small employers. I was really surprised when I saw such a huge increase was going to come to the business activity tax, because it cannot keep up with growth; it is stable. I understand you are trying to do the best you can to help bridge the problem. But is this the first, second, or third option you had in terms of finding revenue? Why this one? Gaming is out there, and they are going to pay more. You all know it is a lousy tax.
Mr. McMullen:
We have spent a lot of time discussing this tax and we bearded a lot of the issues which have been raised through the last decade. They have been either ghosts of real or unreal issues, but needed to be discussed. This is not the only solution to the State’s tax and revenue needs, but it is one currently capable of being raised very easily and is easy for compliance. It has demonstrated revenue, meaning it is realizable and certain, and most importantly, when we went around the table, it may not have been perfect, but it had a value, was something we could do and it was a business-only tax and something we could speak to in front of everyone and was an ongoing tax.
Senator Coffin:
I understand you were responding to rhetoric of businesses not paying their fair share and must pay more. I hope we do not magnify the mistake we made in 1991 with our actions here, if it comes to pass. There are so many people in business who are small employers, to which the Las Vegas Chamber of Commerce has attested.
Mr. McMullen:
We consider this only to be part of the solution but it is a part we can speak to that is paid basically by businesses. When we first raised the issue publicly and said we were supporting it in July, we were looking at revenue needs for the State at least over the next biennium, somewhere in the $120 million range. Now, those numbers have basically tripled or quadrupled depending on which numbers you are talking about at the time. We also talked about a full plan. We talked about the kinds of things, which had more relationship to growth than the business license tax like those we call tax engines, which will grow with the State and hopefully solve what our issues are for the future without having to come here every 2 or 4 years and readdress the issue. We have other ideas in the context of this bill.
Robert M. Thorniley, Lobbyist, Associated General Contractors, and President, Image Construction:
We are a small general contracting firm and we are sympathetic to the needs of the community. However, in today’s market our business is down over 72 percent and our insurance is up 50 percent. Each year our insurance is cancelled and we renegotiate, and have no idea where it is going. In addition to this, our margins are also down, and the number of projects out there has definitely been affected by not only the stock market, but also September 11, 2001.
Most of us are not operating at the capacity we are able to operate. I am concerned that a 200 percent increase in the taxes of the business license tax is going to encourage people to lay off those people who they have been trying to retain, hoping the market would turn around. Will this tax force others or me to close their doors? No, I do not think so. Again, with the numerous fronts we are all facing in the construction industry today, it is going to have a major effect. Is it going to be passed along to our customers? In certain instances, yes, it is going to be passed along to our customers. What is this going to do? I think it is going to have an about 20 to 30 cents-an-hour effect. It is going to raise the cost of a construction project.
We are already in need of additional growth in our industry, and I am very concerned this is going to be detrimental to the growth. I think there are instances where this tax could be extremely unfair. I have personally experienced millions of dollars in losses in the last couple of years from various hotels which have gone bankrupt and have not paid their bills. This seems to be highly unfair; there should be some sort of outlet here. Again, a 200 percent increase in just about anything is extremely dramatic, and I would certainly ask everyone consider this and the impact it is going to have on our industry. Thank you.
Summer Dew:
I have my sister Taylor Dew with me and we both are in a group called the Magical Hula Girls. It is a small business owned by our mother. During the boom of the 1990s, state governments enlarged upon their budgets. Now in a recession, the state governments are in trouble and controlling spending is a necessity. Money is very fluid today and can move very quickly. Our job should be to drive jobs here. As other states raise taxes, it is a golden opportunity to attract businesses by keeping our taxes low and advertising this fact.
We might want to have sunset laws where agencies demonstrate they are accomplishing something, or cease to be funded. Perhaps money spent by government should be a benchmark; any money collected above population growth and inflation should be either be rebated to taxpayers or at least put into the rainy day fund. In short, the $300 per employee, in S.B. 219, is a job killer.
Taylor Dew:
I am here to express my opinion on the effects of S.B. 219 on small businesses and business owners. Many small businesses are against this bill. They will either pass the cost to consumers or, in many cases, go out of business. Our goal should be to create jobs not destroy them. I oppose the $300-per-employee cost.
This is a matter of whether we have a government of individual rights, or a collectivist State, taking our money to make decisions for us. You do not tax your way out of recession. Businesses across the country will be looking for a place to flee. Use every means to advertise we are not raising taxes and jobs will come to us. We should strive to be known as a tax haven and we are not trying to kill jobs.
Senator Coffin:
Are you recent high school graduates, or in college?
Taylor Dew:
We are in high school, but at the moment we home school and in less than a month I will be taking my General Education Diploma.
Senator Coffin:
The difficult thing we face is people like to tighten their belts and cut their spending and sometimes have to do this if the revenues drop. Unfortunately, we cannot turn off the revenues which go to help school you, if you were a student in a public setting, or your friends. We could not cut out 5 or 10 percent of you and say we are sorry you cannot come to school. It is difficult to turn it off and on. This is one of the objectives of these business taxes. I understand where the proponents of the business taxes are going. Am I making myself understood?
Summer Dew:
Over the years, schools have continually asked for more money and support from the system, and they have been getting it continually and I do not see why they should continue to get it. The grades in Clark County are definitely not going up, and this system is not working. In many respects it is not working in our county. This is why we home school.
Buffy Gail Martin, Lobbyist, Government Relations Director, American Cancer Society-Reno:
On behalf of the American Cancer Society and our 6000 statewide volunteers, we urge you to vote to support an increase in the tobacco excise tax (Exhibit D). Governor Guinn has proposed a 70-cent increase for each pack of cigarettes sold in our State. A few of the benefits from a 70-cent tobacco tax increase would be $90.2 million in new tobacco tax revenues each year and $1 million in new sales tax revenues each year. There would be 26,000 fewer youth smokers in Nevada, and save 8000 children from a premature death from tobacco-related diseases. There would also be 17,000 fewer adult smokers, saving 3700 from smoking-related deaths.
The annual health care costs in the State of Nevada directly related to tobacco are estimated at $440 million per year. Tobacco use costs us $96 million in State Medicaid programs alone. In 2001, Nevada generated $61.2 million in tobacco excise taxes. This is $34.8 million less than what the State spent just on tobacco-related Medicaid programs.
Increasing the State tobacco excise tax is common sense and voters overwhelmingly support this tax issue. We urge you to take a stand for the health of Nevadans and especially our youth. Please vote to support a tobacco excise tax increase.
Senator O’Connell:
When you were putting this together, did you by chance look at the last time the cigarette or tobacco tax was raised?
Ms. Martin:
It has not been raised in over a decade. The $90.2 million projections are based on what we have had in the past with the Governor’s 70-cent increase.
Senator O’Connell:
The last time we raised the tobacco tax, it took us 2½ years to bring it back up to the point it was at the time we raised it. I wondered if you had taken this into consideration and if so, how you have arrived at your $90 million figure.
Ms. Martin:
I did not take this into consideration.
Senator Rhoads:
It might even be worse this time because we did not have the Internet then. I was talking to a gentleman the other day who is a certified public accountant, and he gets all of his cigarettes on the Internet. He saves $10 to $15 per carton.
Ms. Martin:
We would recommend taxing the Internet tobacco sales. To answer the question, as the Governor’s office testified in committee, when they looked at California which had a greater tobacco tax increase than what Governor Guinn is advocating they found less than one half of one percent of people who would normally buy their cigarettes at a grocery store moved to the Internet. So we are not looking at a substantial decrease of people purchasing cigarettes in the normal places. We also have statistics which state an incredible amount of people do not take advantage of the sales they could be saving buying per carton opposed to buying per pack. It is about convenience. All of a sudden, moving to the Internet probably is not a possibility.
When we look at the other states that have also increased their tobacco excise taxes, and most of the other states have, we know they do not lose a lot of their smokers to the Internet. We would recommend taxing tobacco Internet sales.
Senator Townsend:
There are many members here in both houses who have lost family members due to smoking. We all remember when we passed the tax and watched sales dramatically decrease and inch their way back up over a 2- to 3-year period. If you add all of this together, the ability of people to buy on the Internet with, overnight delivery at 40 to 60 percent less per carton, do you have a different number than what the Governor has given us?
Ms. Martin:
To answer some of your questions the answer is no. The statistic we came up with was based on projection of future sales based on past sales.
Senator O’Connell:
With the information and figures you have provided, is it the hope of your organization to try and prevent people from smoking or is it to help us with the tax situation?
Ms. Martin:
It would be both. We see this as a win-win situation. If you increase tobacco sales or at least the excise tax, as other states have shown, we could see a decrease immediately in smokers, particularly among our youth. It is the goal of the American Cancer Society to completely eliminate smoking in the United States, which essentially puts me out of a job and is something to which I will look forward. We are hoping if we increase the taxes based on what we see from other states, we will decrease smoking among our youth and adult smokers, and generate revenue for our State.
When we look at $440 million per year in the Medicaid program alone, and can decrease the burden tobacco places on our State, then there is going to be extra savings for our State.
Senator O’Connell:
The committee has discussed this for many years and if we want to prevent people from smoking, why would you not suggest we go to $5 per pack or $10 per pack? We cannot take a segment of our taxes and base it on any ongoing expense because we know it is either going down or up at any rate. It is not going to be a stable tax. This is the problem we are faced with; it is not going to be a tax we can depend on, therefore, we have to decide what our actual goal is with the tobacco tax. If it is to try and keep people from smoking, because we know the impact it has on our Medicaid, then our thought is to simply go for broke. We cannot depend on it as a stable-base revenue source.
Ms. Martin:
I understand this, Senator, and the 70 cents the Governor is proposing was actually a nickel more than what the Nevada Tobacco Prevention Coalition, of which the American Cancer Society is an active member of, proposed initially. So might I propose you amend this to make it $5 a pack?
Senator O’Connell:
This is a decision we have been wrestling with for a number of years as to what our real goal is with this particular tax.
Senator Coffin:
In this building we have a lot of smokers and they are intelligent people.
Ms. Martin:
I try to talk to smokers to tell them we can help them quit or to give them my business card, and they just turn me away.
Senator Coffin:
Why do you think they turn you away?
Ms. Martin:
It is a very addictive substance.
Senator Coffin:
Then you have hit on a subject I want to ask you about. I favor in a way consumption taxes as opposed to some other means of taxes, if only because they are voluntary. You know the addict, as you define them, has no choice; they are addicted. The one reason we have the Millennium Scholarship is because it was adjudged by so many courts that in fact people had become addicted by the actions of the tobacco companies and they could not stop. Despite the high intelligence of some of these people, they cannot stop. It is just a craving that cannot be defeated by very many people. I am not sure I can question your statistics, but the fact is if you are going to tax addicted people, I feel very guilty about this. For many of those people, it is not as voluntary as you would like to make us believe. The addiction is there, and I feel bad about this. There is the competitive aspect, the economic aspect, diminished sales based on price, and there is a gray market and we have not talked about this. When the taxation department was in front of us we talked about the gray market, the black market, the tribal sales, and the Internet sales. These are four means around which people are going to avoid the retailers who sell these items legally to the public.
Therefore, no statistic can be believed at this point as to what future consumption can be based on price, or the number of lives which can be saved based on price. I will support some level of increase in this tax, but not the highest level being proposed at this time.
Senator Neal:
How many cigarettes are there in a pack?
Ms. Martin:
I honestly do not know.
Senator Neal:
In the bill, we are talking about charging about 52.5 mills per cigarette. I am trying to get an idea as to what this would mean in terms of the cost of a pack.
Ms. Martin:
It breaks out to 70 cents a pack.
Senator Neal:
The tax is 70 cents additional revenue per pack?
Ms. Martin:
Each pack of cigarettes, based on what the Governor has proposed, would be $1.05 in taxes.
Senator Neal:
We know 47.5 mills for cigarettes will go to the State treasurer to be deposited and credited in an account for cigarette taxes and the State General Fund. We have about 0.5 of a mill going for some other purpose.
Ms. Martin:
I do not know where the missing tobacco is going.
Senator Neal:
Maybe some of the Governor’s people can answer this question.
Michael Pack, President, Frehner Construction Company:
We are a locally owned business of Las Vegas, and have been in business for over 30 years. Our primary business is highway construction, which I would like to discuss.
In our business we operate basically on high revenues and low margins, unfortunately. In our good years, the margins are between 2 and 3 percent of revenue, therefore, margins are thin. Overall, our business is both capital and labor intensive and our company has up to 1000 employees on any given day.
I am all for paying our share of taxes, but if we increase the employee tax from $100 to $300 per year, I feel this is too great of an increase given the margins on which we operate. Our industry, as Mr. Thorniley indicated earlier, has seen significant increases in the past few years in both insurance costs as well as permitting costs in Clark County and Washoe County. As any good businessperson would do, you have to look at the rewards versus the risk. While the cost increases and the risks stay the same, you have to ask yourself whether the business is worth it or not? As the taxes increase, our costs increase. You may see the competition decrease, you may see thousands of employees looking for jobs in other industries, and overall. The cost to the consumer, which in our case is mostly the Government, will increase as well.
I recommend the committee not approve a head tax increase of 200 percent but consider a reasonable tax increase. We will pay our share, but a 200 percent increase should not be our share.
Jerry Threet, Controller, Dielco Crane Service:
The federal government is promoting tax decreases, trying to keep employees working and off welfare. One of the things we do during slim times is keep our employees working by trying to find things for them to do at the expense of our bottom line. Another thing is to try to promote a summer-jobs program for about three or four people to get them involved in our industry.
I feel this tax increase is contradictory to all of this. In fact, we only employ about 100 employees because we are mostly capital intensive. However, what it will do is increase our cost by about $20,000 which is the cost of our summer-jobs program. As all of the other contractors have stated, in addition to our 100 percent increase in insurance costs, increased medical costs, and increase in deductibles, it is counterproductive to what we are already doing.
The State generates a lot of money through our business already from the sales tax. We buy a machine for $400,000 to $500,000 and the State gets $20,000 to $30,000. Our margins are already squeezed tight like everyone else’s. If we have to begin reducing capital expenditures, I do not believe the State will come out a winner with this tax bill. I agree with Mr. Pack. We are not opposed to a fair increase, but 200 percent? We certainly cannot do this.
Richard Dieleman, Dielco Crane Service:
After September 11, 2001, Las Vegas started to slow down and we were a part of it and we could see a big change. The only hope was Mr. Wynn’s project and this is what we are counting on heavily. There were a few power plants built where we were able to latch on, but now we are doing business more and more out of State. We are trying to base our people out of Nevada, but if it gets much worse, we may have to put an office out of State and start working from there, since the taxes may be somewhat less. I know we are all hurting, and like Mr. Threet stated, we are all for a small tax increase, but the 300 percent is out of line.
One of the things that happened after September 11, 2001, is we negotiated our insurance in October, and it doubled to cost us $500,000. Where did this money come from? We cannot raise the rates. We work harder and longer hours. The other thing is we get sued a lot more and people love to hit cranes. Our insurance company will give you $40,000 for just looking as if you got hit by one. Everywhere we look, our bills and costs are increasing. Medical premiums are over $800 per employee, per month. Where are we going here? We want to stay in business and would like to see these fees stopped. Our permits for driving the cranes on the street went from $2000 a year to $6000 a year. It is not only being hit in taxes, it is also being hit in fees. We cannot raise the rates; where do we go? I cannot rob a bank, because then I would be in jail. We are trying to reason with you and see a little increase, but to triple something is out of line.
Chairman McGinness:
Who raised the fees for driving the crane, was it the State, or the county?
Mr. Dieleman:
It was the Nevada Department of Transportation.
Gaylyn J. Spriggs, Lobbyist, Nevada Taxpayers Association:
We are testifying in opposition to the bill and we would like to see you use the rainy day fund first, since this is why it was created, and see if the revenues come in. We are definitely opposed to tripling any taxes.
Michael D. Pennington, Lobbyist, Public policy Director, Reno-Sparks Chamber of Commerce:
Our 21-member Reno-Sparks Chamber of Commerce organization is opposed to S.B. 219 in its current form. Given the testimony of the Governor’s office and his administration on Tuesday, as well as the conditions of the State and national economies, our members believe it is imprudent to place undue burdens on the business community at this time by tripling the business activity tax. We believe this is not a good solution and the rainy day fund was created to assist taxpayers and working families during these critical times. Therefore, we hope this committee and Legislature will look at restructuring the tax system into one package rather than choosing the interim package and then a long-term approach.
We understand the hardships Nevada is facing and we stand ready to lend our support for the cause to develop a credible long-term solution by tackling the structural deficit the Governor has outlined for us. However, in order to accomplish this mission, it is critical the business community understands and knows the amount of the deficit so we can become part of the solution by offering some credible alternatives.
We understand your challenges and we are ready to make Nevada’s future brighter tomorrow. On behalf of the Carson City chamber and Larry Osborne, I have been asked to relay they do support the task force recommendations for both the interim and the long term.
Senator Townsend:
If this committee chose not to process these interim taxes, and instead looked at a full package, whether it is the Governor’s or something the committee makes in the future, are you saying you are going to sit down with the Governor and us to work through this? I believe it was 24 months ago that a letter was read into the record by your organization stating you were going to work in the interim and come back with a solution. Now you are telling me you are going to work again for another 2 months?
By constitution, we are a little prohibited from dragging this issue out. What solution are you going to bring us 2 months from now we do not already know?
Harry L. York, Lobbyist, Chief Executive Officer, Reno-Sparks Chamber of Commerce:
We will bend with our options for the solution for the long term. I think we are here today to address the short-term piece of it specifically, the tripling of the business activity tax. This would have a negative impact on our member businesses and all business.
Senator O’Connell:
Mr. Pennington, when you were making comment on behalf of the Carson City Chamber of Commerce, did we hear you say you went along, or they went along with the task force recommendations? And by the task force, did you mean the chamber task force or the Governor’s task force?
Mr. Pennington:
To clarify, the Carson City chamber stands ready to support the Governor’s task force policy recommendation on the business activity tax they had proposed.
Senator O’Connell:
The chamber supports the $140 BAT?
Mr. Pennington:
Correct.
Senator Neal:
We hear what you are opposed to, but what are you for?
Mr. Pennington:
For the long-term proposal, we are here to bring alternatives to this body and this committee to work out those solutions. At this time, my board of directors and its members do not feel there is a short-term need to raise taxes and we believe we can get through the end of the fiscal year without those adjustments. Until the administration can prove to us a number shaving the need for short-term increases, this is the position we are taking a stand on today.
Senator Neal:
Is this your position also?
Mr. York:
Absolutely, and we will be back when you have the entire bill before you.
Steve G. Holloway, Lobbyist, Executive Vice President, Associated General Contractors:
We have Associated General Contractors, north and south, and well over 1000 members who are businessmen, business owners, and long-time residents of this State. The construction industry is probably the second largest taxpayer in this State, behind gaming, for example, we pay over a third of the sales and use taxes, and a large percentage of the business activity tax in this State. The construction industry is also the third largest employer in the State behind gaming and government.
I noticed after September 11, 2001, gaming was forced to lay off some 20,000 people. Since then, as the third largest industry, we have laid off approximately 40 percent of the workforce and our industry is facing a recession. We have had to make cuts like the kinds Mr. Thorniley, Mr. Dieleman, and Mr. Pack mentioned. These are business decisions, and we are in a recession.
I noticed the second largest employer in the State, government, has made absolutely no cuts; it has have laid off no one. We do oppose S.B. 219 and the tripling of the business tax, particularly when we are not convinced there is a hole to fill. We have been, as an industry, involved with the business group which spoke earlier and we see there is a need for additional taxes, or at least a broad-based tax, long term. We also happen to agree with Senator Coffin that a business activity tax is not a good tax. We would like to be part of the solution, but we do not think tripling the business activity tax for an interim period of time is going to solve any of the problems of this State, and it comes at a very bad time for our industry.
Senator O’Connell:
When you talked about being the second largest contributor to the revenue in this State, did you add the support industries as well, or was this pure construction?
Mr. Holloway:
This is the construction industry, but this does go to the equipment part of it such as Cashman Equipment Company and White Equipment Company as well.
Senator O’Connell:
I have looked into this before, and the construction industry support tax is about 20 percent of our General Fund revenue. This is quite a large amount contributed to the tax base.
Mr. Holloway:
We are definitely willing to pay our fair share, and definitely willing to look at any broad-based taxes, but we do feel there should be cuts in government and we need to look at the need a lot stronger than we have before we look at filling this need.
Senator Neal:
I keep hearing about September 11, 2001, and how things have gone down and how thing have gone up. Did this event have a material effect on your industry? I ask this question because I hear the gamers saying the same thing, but when I look at their stocks they have continued to rise since that tragic day. I am wondering what is happening?
Mr. Holloway:
September 11, 2001, did have an impact on the stock market and the ability of developers such as the gaming industry and other owners to obtain money for future developments.
Senator Neal:
It did not seem to have an impact on their stock; it continued to rise.
Mr. Holloway:
In some cases, yes, the stock did continue to rise and I cannot explain it.
Chairman McGinness:
We have your testimony in front of us and if you could confine it to S.B. 219, we would appreciate it.
Richard R. Ziser, Lobbyist, Nevada Concerned Citizens:
We have been talking with committee members and other Legislators for some time about the need for these taxes. I think the speculation is to the actual need for increased taxes, prior to the end of this Session. It seems to be taken away with the Governor’s presentation this past Tuesday. There appears not to be a deficit through the fiscal year ending June 30, 2003, and like the Nevada Taxpayers Association, we believe we should be able to draw on the rainy day fund to accomplish this if necessary. Based on the numbers, the State will still end up with $106 million in reserve and this is $6 million more than is required by law.
It is important to note the Governor’s request for these additional revenues was based on the fear of the war with Iraq and September 11, 2001, reducing various projected revenues. If there is a need for a larger reserve in order to get through these tough periods of time, then what our Governor and government needs to be looking for is a larger reserve with tighter controls, and we can then make use of these funds in the event of a disaster.
We also need to remember that day in September was a totally unexpected and unprovoked attack. The $100 million decline being talked about due to the disaster in September took place over a 10-month period of time. We certainly have ample time to discuss the tax issues we need to be talking about and have a good tax debate on the larger issues that will come before the Legislature.
There are several different items we would like you to take a good hard look at in terms of cost-cutting efforts prior to raising any taxes (Exhibit E). If you decide there is a need for increased taxes we want to make sure in times of economic downturns, like we have now, you do not tax the essentials of life, that will most affect our families.
The actual major component of S.B. 219 is the tripling of the employee head tax. We firmly believe it is an indirect tax on our families. We ultimately pay the cost of any of these tax increases. We pay them either through higher prices handed down or through fewer jobs or lower salaries.
The casino industry obviously is favoring the gross receipts tax along with the unions. What they are doing is attempting to make their case by emphasizing national and regional pricing structures of large corporate entities. We want to make sure you understand small businesses and midsized businesses are the backbone of this country and the State of Nevada, and businesses will pass down the cost increases they have in Nevada. They do not have the ability to spread them out over other states and other regions. If these small businesses can raise their prices, then we and our families will pay higher prices. If they cannot, then these small businesses and midsized businesses will be forced out and will become the victims of the national pricing structures, and not of our tax structures here in the State.
We are concerned about our State and the cost to our families and ask that you hold the line on unnecessary tax increases.
Bob Hibbard, Chief Executive Officer, Martin Harris Companies:
We have been in business in Nevada for over 27 years and have become very successful in this State. We also wish to contribute our fair share to help the State restore itself to financial health and future health, but we do feel any tax or any resource that increases 300 percent is difficult to explain and support. Although it is a broad-based tax, as explained earlier, it is not necessarily equitable to all of the people it is affecting. The construction industry, being a heavy employer, gets hit harder with these taxes than do other businesses and industries across our economic plane.
It would be our hope the committee would consider who is actually paying these increases short-term, and the amount of the increase. Whatever tax increase is necessary, we will support once we get to the point it is fair and equitable for everyone, not just singling out high-density employers.
Chairman McGinness:
May I ask what type of business Martin Harris Companies is?
Mr. Hibbard:
We are a general contractor.
Doug D. Busselman, Lobbyist, Executive Vice President, Nevada Farm Bureau:
I am here today to express our organization’s opposition to passage of S.B. 219. In addition to the positions our voting delegates took in opposition to taxes this past year at our State convention, the Nevada Farm Bureau’s executive board of directors has adopted an expanded policy of opposition to tax increases. Further, based on testimony presented this first Tuesday, it appears the purpose of this proposed set of tax increase could be accomplished with further reductions in spending. Based on the policy direction of our voting delegates and the executive board of directors, we would urge your support for needed fiscal constraint in the form of reduced spending as opposed to adding additional tax burdens on Nevada’s taxpayers.
Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association:
With me today is Mike Zunini who is our convenience store operations manager of Winners Corner, which is one of our largest independent convenience store chains in Nevada. I would like Mr. Zunini to explain what is and is not a convenience store, and how it operates. Of the four proposals contained in this bill and its companion bill, all four have a negative impact on our business.
Mike Zunini, Operations Manager for Winners Corner Convenience Stores, Berry-Hinckley Industries:
We have 33 convenience stores in northern Nevada with anywhere from 8 to 12 employees per store, approximately 350 people I am responsible for on a daily basis. We have stores across northern Nevada from Reno to Battle Mountain eastward, and down towards Hawthorne and Tonopah. In the southeast, we have Yerington, Carson City, and Gardnerville. Our concern is that the proposed taxes will directly affect our convenience store businesses and will in some cases tax some of our stores out of existence, especially the marginally operating ones in the rural areas.
Two of the issues that have not been addressed are safety for employees and theft, which is also called “shrink.” I have the feeling with some of these taxes, regarding tobacco that we are starting to tax some of the things to a point where we are making a commodity such as gold which increases the likelihood of more store robberies. We just had two instances where trailer loads of cigarettes have been hijacked in northern Nevada. My concern is that we are going to tax some of these businesses out of existence. We have creative ways in which we try to watch the theft in the stores, whether by employees inside the store, vendors, or our customers. The increases in taxes are going to raise a lot of safety issues within our industry.
Mr. Krueger:
There are a few points I would like to highlight so as not to portray us as opposing taxes of any kind. Our industry has looked at the bill as a short-gap measure, and we do think the need for enhanced revenue between now and the end of the fiscal year is somewhat suspect. We are prepared in an ongoing discussion to look at increases in the tobacco tax, however, our understanding, based on information coming from the Governor’s task force, is that alcohol, for example, was raised to an equivalent of an ad valorem based on the consumer price index (CPI). This is fine, however, on tobacco there is no way an additional 70 cents per pack is based on any CPI. The CPI, as I understand it, has been about 45 to 47 percent, and this would justify the initial task force recommendation of doubling the tax. We think this is a fairness issue that needs to be addressed by the committee.
There is no question in our minds, based on the handout you have in front of you (Exhibit F), that there has been more than a doubling of tax evasion in California due to cigarette tax increases.
In the State of Nevada, during 2002, cigarette sales increased 9.1 percent and we feel this was due in large part to increasing taxes in surrounding states. During this same period sales volumes in the states of Washington, Utah, and Oregon decreased by as much as 18.6 percent in the case of Washington. There is price sensitivity to this and concerns of theft and tax evasion. We see this will become a major problem.
The average convenience store has more than $3000 of tobacco inventory at any one time. This is not the visible cigarettes as you enter the store, this is the inventory in the back.
Senator Townsend:
There are two policy issues brought up by the committee. One is the issue Ms. Martin brought up which is perhaps people will not use tobacco as much and our health system will be improved. But regarding the one you brought up in regard to the other states, are you telling us that if we were to drop the tax a significant amount our sales would increase, based on the rise in taxes in other states and the decrease in their sales?
Mr. Krueger:
I think the jury is still out on this question. If we took a precipitous drop in our revenue, I would ask we deal more with the reality. The demand for cigarettes is extremely high. A lower price will draw tobacco users. The health question is a separate issue from this bill. We feel strongly, as an industry, we are willing to pay more in tobacco taxes, but not going to $1.05 per pack.
Senator Townsend:
If this bill passed, I believe four out of the five in here will directly affect the consumers, mainly the rural establishments of your business. Can you give us information on what would keep these establishments from surviving? This is a severe statement.
Mr. Zunini:
I can give you an example. A lot of rural areas where we have stores have been economically hit due to the mining industry and a lot of these towns survive on mining and our stores, such as in Hawthorne. We are a 24-hour store and to try to offset losses at this particular location, we recently eliminated the graveyard shift. We try to be loyal to long-term employees, but it did not warrant this shift to continue. This particular store has been supported by other stores in our area that are more profitable, just to keep the store going.
Alfredo Alonzo, Lobbyist, Nevada Beer Wholesalers Association c/o Bonanza Beverages:
It is clear to say our members clearly understand the issues and are willing to pay their fair share. The concern is the raising of the excise tax to the extent that it is, and also considering the business tax, it is a heavy burden on one small group of people. We would like for you to consider this as you continue in this debate.
With respect to tobacco, and on behalf of R. J. Reynolds, be careful with the number chosen. Obviously, other states which have raised their cigarette taxes to a very high amount have come to a point where it is diminishing returns with the Internet, counterfeit, contraband, and gray markets. Essentially, the higher the tax, the more these thing infiltrate the marketplace. This is something to remember because, ultimately, it hurts the revenue of the State.
Senator Coffin:
I have been looking at the beer portion of the alcohol tax increase and I need your help, Mr. Alonzo. It is hard for me to do conversions regarding the content of alcohol in a beverage. Is this gallon of alcohol content in the booze versus the beer? Or is it gallon of beer? Current rate is going up 8 cents to 17 cents per gallon. What is this?
Mr. Alonzo:
I believe it is per gallon of beer. It is also my understanding this would be 4 cents to 5 cents per six-pack of beer.
Senator Coffin:
This breaks down to less than a penny per can.
Mr. Alonzo:
Essentially, yes.
Senator Coffin:
What is the elasticity of demand on beer, such as price? Is this the wholesale price? Is this levied at the wholesale level?
Mr. Alonzo:
Yes. It is levied at the wholesale level.
Senator Coffin:
In this choice of liquor as one of the sources of new revenue, why was beer only raised less than a penny a can?
Mr. Alonzo:
It is my understanding the task force came up with this number and it was based on a formula they were using with respect to inflation. I bring this up only because our members are not necessarily opposed to this or any other number. They are simply saying, if you are going to raise taxes in every area of our business, such as, our business tax, our excise taxes, and hit us across the board, it makes it difficult for them to compete. You are talking about a business which is very competitive, and now you have the Internet which affects liquor to some degree because it is hard to control. You are adding a lot of outside influences and making it difficult for these people to compete.
Senator Coffin:
I am trying to figure out what kind of competition beer would have versus cigarettes. Beer would be extremely expensive to ship and a lot more expensive than shipping cigarettes. What about the tribes? Do they sell beer and pay tax?
Mr. Alonzo:
I believe we have the same situation and we are going to have many of the same issues come up. It is clearly different because of the product, and the clear difference is there. As you look at the products, you ultimately tax the businesses and the people they employ. We have, on the wholesale level, employee-intensive companies throughout the State. Again, it is an added burden and they want you to put it into consideration.
Senator Coffin:
Is this same kind of percentage of increase levied on beer the same percentage increase in terms of a drink, as it is commonly called, a mixed drink, a cocktail? Would the increase be about the same? It does not make it easy to understand.
Mr. Alonzo:
It is my understanding the same formula was used on all forms of liquor.
Senator Coffin:
It seems it is a lot less than the formula used on cigarettes.
Mr. Alonzo:
I agree.
Senator Neal:
Looking at section 2 and section 3, talking about the transfer of the tax on liquor program accounting to the State General Fund it is $3.72 per wine gallon, and the levy is $3.88. Is there any reason why the transfer is less than the levy?
Rick Combs, Fiscal Analyst:
Some of the current rate does not go to the General Fund, but the entire increase is proposed to go to the General Fund.
Senator Neal:
You are going from $1.90 in terms of what is being transferred to $3.72 and you are going from $2.05 to $3.85 in terms of the levy. Carry me through the math again so I can understand it.
Mr. Combs:
Basically, the rate is being increased by 89 percent, the whole rate. But not the entire current rate goes to the General Fund. Therefore the increase you are seeing, 100 percent of the increase is going to the General Fund.
Senator Neal:
Where is the other 11 percent going?
Mr. Combs:
The State General Fund receives 65 cents per gallon of tax on liquor containing over 22 percent of alcohol. The State tax on liquor program account and State General Fund receives 15 cents per gallon on the over 22 percent, and the remaining 50 cents per gallon from the tax on liquor containing over 22 percent is deposited to the local government Tax Distribution Fund. Then it is redistributed to each county by statutory formula. So it is the over 22 percent. Not all of this goes to the General Fund. But all of the increase would.
Senator Neal:
You are saying 89 percent of the increase is being transferred.
Mr. combs:
No, the entire 100 percent of the increase is being sent to the General Fund.
Senator Neal:
But all of the increase is not going to the General Fund, you understand. I am missing something.
Mr. combs:
All of the increase is going to the General Fund.
Senator Neal:
The difference in terms of the levy, which is 15 cents or something; where does this go?
Mr. combs:
There is a liquor program account and I think it is one of the BADA funds that helps with alcohol abuse programs, and then local governments get a portion of the levy.
Senator Neal:
Is this where the 15 cents is going?
Mr. combs:
The 15 cents per gallon on over 22 percent does go to the State tax on liquor program account.
John L. Wagner, Lobbyist, The Burke Consortium of Carson City:
We do not feel the taxes should be raised and we feel there are still cuts that can be made in the budget. I do not believe the budget is complete and done and we are trying to get the taxes before the needs. We have needs and we have wants. Unfortunately, the wants outweigh the needs. There are programs that can be and should be cut. The program which bothers me the most is the employee head tax. We want businesses to hire more people and we know they are going through a financial crunch like everyone else. We would like to see more industry come in and not be driven away, and the ones that are here to stay and not leave because they feel they can no longer do business in Nevada anymore. I am also interested in knowing where all these ships are for these task forces. We are a landlocked State. I do not know of a lot of water.
Senator Neal:
Are you telling the committee the Governor is trying to mislead the public by deliberately lying to us about the tax situation of the State?
Mr. Wagner:
I think these things are blown out of proportion.
Senator Coffin:
I am going to play devil’s advocate about a statement made by Mr. Wagner about the budget being cut more. I serve on the finance committee as well as Senator Rhoads, and Senator Tiffany. We hear a lot about the budget everyday, so where would you like to cut it?
Mr. Wagner:
Here is one I got out of the paper yesterday. On Tuesday they were having a breast-feeding support group, Wednesday was the sing and play music group, today is baby calming group, car seat safety check, and brain games for babies. This is the so-called Family-to-Family Connection. I understand this program is $1.5 million a year and about 150 families in it. I do not know, maybe all or some of you are parents. I do not know how you learned how to raise a child, but when I had my first, I was looking for the handle and there was not one. This is only one example and it is my pet peeve.
Senator Coffin:
Thank you for your offer.
Jan Gilbert, Lobbyist, Progressive Leadership Alliance of Nevada:
During the interim period, my organization did their own 3-year study of the tax structure, and attended every meeting of the Governor’s Task Force on Tax Policy in Nevada and I am not going to go over our recommendations now but rather wait until you do your full tax proposal.
I have been amazed that no one has said today, this is a 3-month bill. This is an emergency bill. It concerns a reserve which I think every one of us makes sure in our own lives we have a reserve. If something happens in your life and you do not have reserves, it is a very scary proposition.
Currently, at the federal level, there are changes coming about in the Medicaid program and the Temporary Assistance to Needy Families program (TANF). These changes can come about at any time and they are going to affect Nevada severely. It is not going to come with money, it is coming with mandates and we have to be prepared.
I work for a nonprofit group and we make sure we have a 3-month supply to pay our bills and we try to because we raise all of our money from donations, grants, and this type of thing. I believe the State is in dire straits and if an economic change occurs because of a war, we are going to see some severe problems.
Two of these proposals were in our study, and as concerns raising the alcohol and cigarette taxes, our rates were lower. I feel with the way taxes are going in surrounding states, we are still the lowest and people will come here to buy cigarettes. We have not raised the alcohol or tobacco tax in 14 and 18 years respectively.
As far as cuts to our State government, one department, the Department of Human Resources has made $32 million cut in the last biennium. They did not make just a 3 percent cut, but had to go much further and these cuts have been going on for the last 3 years. As a matter of fact, there were cuts made in the last budget. To say our government has not made any cuts is upsetting.
With the Family-to-Family Connection program, they have served thousands of babies and families. This program is a child abuse prevention program and is incredibly successful, particularly in the rural areas. The program in Elko serves many families and assists families in hard times. Mr. Wagner was saying we did not need a manual to raise our children. I got to stay home with my daughter. How many families can say this today? How many families can say their parents could stay home with a child? They are all working. As far as the convenience store employer, I would not be surprised if some of his employees use some of the services the State provides, because they are making minimum wage. They probably get food stamps and apply for the Nevada Check Up program, which is 70 percent paid by the federal government. If we do not match these federal dollars, we lose a lot of money.
I would urge you to pass this bill and it is sound management to have a reserve and I do not think it is all exaggerated for business and alcohol and tobacco users to pay a little more in the way of providing for our State.
Senator O’Connell:
This is more of a comment rather than a question especially talking about the Family-to-Family Connection Program. You brought up the issue of two working parents and the reason we have this situation is because they cannot afford not to work. The higher the taxes are, the less they are going to be with their families. This is a problem I have had every time we put an extra burden on the families. It does not help solve the problem of having a parent home, but every time we increase the taxes or the burden on the family, it means it will take a longer time for the things to come back to where they were when we were younger.
Ms. Gilbert:
In Nevada, low-income people pay a much higher percentage of their income on taxes than those at a higher income level. In our recommendations, we deliberated the alcohol and cigarette tax for some time, because many of us felt it was a regressive tax. But our group felt the health benefits and the prevention aspect of stopping teenagers from smoking was worth the price to pay. We are still the most regressive State in the country, which means poor people are paying. We are trying to create taxes to tax those at the upper level of income, such as large corporations, and we certainly do not want to hurt the small businessperson. This is why we are supporting a broad-based business tax for the real solution. I do not support raising the business activity tax 300 percent, for the long term. I think this is a good solution for a short-term, 3-month period and you are right, it is a burden on all of us.
Senator Neal:
The comment was made we stand to lose money. I gather the money would be lost in terms of not being able to match those grants the State receives from the federal government. Is this correct?
Ms. Gilbert:
Some of the proposals coming down from the federal government regarding TANF authorization and Medicaid are going to come as a flat grant and Nevada, in its growth, and our high rate of TANF and Medicaid caseloads is going to be hurt because our money is not going to be increased.
Senator Neal:
You are not talking about matching money.
Ms. Gilbert:
No, not at this time. They are mainly talking about setting up a flat rate.
Senator Neal:
I am a little confused because you said we stand to lose money if we did not do anything at all. It seems the growth for TANF would not be effective in terms of flat block grants. You made mention this is a proposal for 3 months. I thought you were saying some of the money derived from this 3-month period would go toward some type of matching fund and receive something from the federal government. I gather this is not what you are talking about.
Ms. Gilbert:
No, it is not. This would be long-term and fiscal-year decision. I think in June is when the TANF preauthorization is going to happen.
Elisa P. C. Maser, Lobbyist, Nevada Tobacco Prevention Coalition/Las Vegas:
I am here to provide some additional information on issues that have been raised recently in this committee and the Assembly. Essentially we are supporting an increase in the tobacco tax as part of the difficult balancing act you are facing in this Legislative Session. It does balance several things for the State of Nevada.
Nevada has a higher percentage of smokers than any other state in the nation with the exception of Kentucky. There is a large tobacco industry in Kentucky which we do not have in Nevada. Sixty-five percent of the smokers we have in Nevada report they want to quit and a large increase in the tobacco tax will provide a great incentive for these people. The tax increase is most effective with young people. It keeps them from starting or it helps them significantly cut down. Lower-income smokers are more likely to cut down, as well as ethnic people of color and pregnant women.
This raises the issue, if all of these people stop smoking then it is not a stable tax and we will not be getting the dollars we are needing. Historically, in the states surrounding us and nationally, every state which increased the tobacco tax has significantly seen reduced smoking and made the revenues over time. I have not seen the figures for when Nevada increased the taxes 14 years ago, but our taxes are only 35 percent now and perhaps the difficulty was we did not raise it enough to overcome the drop off you can expect to see. It is fairly small in terms of Internet sales, gray market, smuggling, and those things. My understanding of the Governor’s budget and the Legislative Counsel Bureau is they did factor in a decline in consumption and still saw increased revenues from the tobacco tax. You do have information in your packets (Exhibit G) which shows every state around us for the last 8 years has seen less tobacco use and increased revenues.
These are the two major points. The balance of benefits we think you can see from an increase, and politically, in this State, tobacco tax increase has more support than any other tax being proposed or any other budget cut. This is why we think it is a solution for the State of Nevada.
Jim J. Avance, Lobbyist, Nevada Retail Gaming Association:
What I am passing out to you is the last two-slot route tax increases from the Nevada Revised Statutes (NRS) 463.373 (Exhibit H) and A.B. No. 774 of the 64th Session (Exhibit I). One increase was in 1987 and the other was in 1993, therefore, it has only been 10 years and not as some others have reported as being 20 years. We voluntarily stepped up to the plate in 1993 to help balance the budget at the end of the session, and that is what those documents are.
Chairman McGinness:
Is there anyone else who wishes to come before the committee? This meeting is adjourned at 4:45 p.m.
RESPECTFULLY SUBMITTED:
Gale Maynard,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: