MINUTES OF THE
SENATE Committee on Taxation
Seventy-second Session
March 18, 2003
The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 2:00 p.m., on Tuesday, March 18, 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 Ann O'Connell
Senator Sandra Tiffany
Senator Joseph Neal
Senator Bob Coffin
COMMITTEE MEMBERS ABSENT:
Senator Randolph J. Townsend (Excused)
STAFF MEMBERS PRESENT:
Rick Combs, Fiscal Analyst
Ardyss Johns, Committee Secretary
OTHERS PRESENT:
Ray Bacon, Lobbyist, Nevada Manufacturers Association
Kara Kelley, Lobbyist, Las Vegas Chamber of Commerce
Mary Lau, Lobbyist, Retail Association of Nevada
Samuel P. McMullen, Lobbyist, Retail Association of Nevada
Larry M. Osborne, Lobbyist, Carson City Area Chamber of Commerce
Donal Hummer, Jr., Lobbyist, Harley-Davidson Financial Services
Steve Reynolds, Owner, Signpro Carson City
Michael D. Pennington, Lobbyist, Reno-Sparks Chamber of Commerce
Thomas J. Powell, President, intohomes Mortgage Services
Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association
Steve Johnson, President, Berry-Hinckley Industries
John Haycock, Chief Executive Officer, Haycock Petroleum
Eric M. Jenson, President and Chief Operating Officer, Jenson and Associates
Art Majors
Debbie Sheltra
Dennis Sponer, President, Scripnet, Inc.
Wayne A. Frediani, Lobbyist, Nevada Franchised Auto Dealers Association
Jackie K. DeLaney, President and Chief Executive Officer, Sun West Bank
George William Treat Flint, Lobbyist, Nevada Brothel Owners Association
Karen Pearl, Lobbyist, Nevada Telecommunications Association
Margaret A. McMillan, Lobbyist, Sprint Nevada
Al Bellister, Lobbyist, Nevada State Education Association
Knight Allen
James T. Endres, Lobbyist, McDonald Carano Wilson LLP
Rich Rose, President, Cal-Neva 7-Eleven Franchise Owners Association
Jim Conley, Vice President, Cal-Neva 7-Eleven Franchise Owners Association
David K. Schumann, Lobbyist
Lucille Lusk, Lobbyist, Nevada Concerned Citizens
Stephanie D. Licht, Lobbyist
Doug D. Busselman, Lobbyist, Nevada Farm Bureau
Lynn Chapman, Lobbyist, Nevada Families Education Foundation
Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association, Inc.
Bill Wallace
Misty Grimmer, Lobbyist, Nevada Residents Agents Association/Reno
Chairman McGinness:
We are calling this meeting of the Senate Committee on Taxation to order at 2:00 p.m. We will be hearing testimony on Senate Bill (S.B.) 238. A business coalition has put together a presentation and we will hear from them first.
SENATE BILL 238: Provides revenue in support of state budget. (BDR 32-1208)
Ray bacon, Lobbyist, Nevada Manufacturers Association:
I will begin by talking about the process we went through while giving a Microsoft PowerPoint presentation (Exhibit C). It was put together by a group called the Business Representatives Group. You have been given a copy of an outline of my testimony today (Exhibit D). Our group started shortly before the tragedy of September 11, 2001, with conversations about living up to the commitment we made at the end of the last session to develop a business proposal to work on the State’s tax issues. We have gone through roughly a dozen meetings with about 40 people at each one. Each averaged 3 to 4 hours and represented about 72,000 businesses and business people, from sole proprietors to absolutely the largest sector. We represented not only the largest companies in the State of Nevada, but the people who were in those meetings represented some of the largest companies in the world and every part of the private sector.
We started our first meeting by identifying the tax needs of the State. The Governor’s Task Force on Tax Policy in Nevada was just starting to meet at that time and we clearly and willingly stole from their information. Even from the very first meeting there was broad agreement on the need of some fundamental changes in Nevada’s tax structure, which is a point I need to emphasize. By the end of the second meeting the issue of no taxes was never really on the table. We recognized there would be some level of taxes and tax changes. We took a look at many tax ideas never having come up before the task force that were tried in other states. We dissected those ideas and decided whether or not they fit with Nevada. We felt it was absolutely essential for the State of Nevada, a State so focused on a single economy, to preserve the prosperity of the private sector and the economic development.
In looking at the principles we set forth, we said we would target no single industry. We said we would look primarily at business-paid taxes. While we discussed things like the sin taxes, which are primarily paid for by people, those were not something we put forward in our proposal to the task force. We next decided it was absolutely essential to maintain a viable private sector, which clearly, in parts of this State, is very much at risk. If the private sector goes at risk, the public sector will fail. Ghost towns like Unionville, Midas, and Cherry Creek are an excellent example of that fact. They are ghost towns because in most cases they had a single private sector that at some point in time failed.
Mr. Bacon:
Successful communities, Carson City for example, have a manufacturing sector, a fairly substantial retail sector, as well as the government sector. Las Vegas may be dominated by the gaming industry but it has a broad and expanding retail sector, a viable service sector, and a huge transportation sector. Successful communities are the ones maintaining a strong and diverse economy. While mining may dominate the Elko economy today, at one point in time, 20 or 30 years ago, it was clearly ranching and there has always been a tourism factor there. As I think everybody in this room realizes, some areas in our State are now at significant risk. The reason is typically because the private sector is not viable or is failing. If a private sector fails in a community, it will almost guarantee increased costs to government.
Did we have universal agreement on every tax idea that came up and every tax idea put forth in our proposal to the task force? The answer is, absolutely not. There will still be items where various groups will have a different position, but most amazing was the amount of consensus we came up with among such a broad spectrum of people involved. From my 12 years dealing with this body, far and away the most diverse issue has always been taxes. To come as far as we have with as much agreement as we have is truly amazing.
I think we have all agreed there is a need. As you well know, the magnitude of that need has changed substantially over time and has certainly been a moving target, which made our task challenging. You are finding the same challenges in this body. What does the spending level need to be? What is the revenue projection? What programs do we need to have? What is the growth in government? Where are we going with these things? I would love to tell you everyone was satisfied with all the answers, but it would be untrue. While participants across the board in this broad coalition were clearly willing to ante up more taxes, they also agreed there needs to be a serious look at spending, accountability, and performance, especially in the areas of education and welfare where we are spending a big chunk of our money. One of the things most people do not think of is government is an overhead expense for society. Typically, in the private sector when times get tight, overhead is one of those places where you cut. Always keep in mind it is the private sector’s prosperity driving this economy, and looking at the overhead expense may be absolutely essential. Government clearly can do improvements and those should go hand in hand with the tax increases.
The last thing I will touch on is tax policy. You heard from Knight Allen last week about remembering Adam Smith and we think it is essential. Those fundamental principles of taxation he espoused in 1776 are still fundamentally valid. The tax system should reflect the economy. We think the plan we put forth on taking a look at the business tax and the tax on services clearly does that. Taxes, wherever possible, should be visible and voluntary.
Senator Coffin:
If the rest of your presentation is based upon the idea that government is overhead, you will probably run into a stone wall with me because it is not all overhead. It is educating children and taking care of the mentally ill. I do not want to hear a screed about government being some sort of burden on society. Give me some real feeling for what we are trying to do here because I believe the Governor has worked very hard to cut his budget overhead. I believe a lot of other people have tried to cut their budget overhead as well, and every budget has to have some overhead. If you know of areas where there is excess overhead, get to there, but be very careful because half of our budget is education. I just want to make sure we do not get into an antigovernment screed here.
Mr. Bacon:
One of the cornerstones of the Governor’s programs as well as the task force policy is the gross receipts tax (GRT), with which the vast majority of the business community has serious issues. The Governor was looking at stability and we will agree the GRT does bring some level of short-term stability. However, it clearly discourages new businesses and it tends to destroy marginal businesses.
We need to start by reducing the volatility of the existing taxes, the sales tax and the gaming tax. We need to at least take a look at the items in Senator Neal’s bill and expand the base of the sales tax to many of the exceptions. We may not agree with every one of them but certainly they should be discussed. One of the things we think needs to happen is to avoid sticker shock wherever possible while creating a good, politically acceptable, tax policy that will benefit business, government, and citizens. I will turn the next portion over to my colleague.
Kara Kelley, Lobbyist, Las Vegas Chamber of Commerce:
I have some prepared testimony today (Exhibit E) and then I will be happy to answer any questions you may have.
Senator O’Connell:
Has the chamber taken a position on section 11 of the bill?
Ms. Kelley:
Not per se. I think we were a little perplexed by section 11. Business taxes are essentially consumer taxes, which I have previously stated publicly. I have been challenged by many people explaining to me that in certain cases it cannot be passed on. I am not sure if that is really what the bill drafters intended, but we remain sort of resolute in the fact that businesses take taxes as well as other operating overhead as the cost of doing business and price their goods and products accordingly.
Mary Lau, Lobbyist, Retail Association of Nevada:
I am testifying in opposition to S.B. 238. We were participants in the business representatives coalition and still are. We fully support the positions taken by our fellow members in opposition to the GRT. We feel it is an administrative burden. We have had our certified public accountant look at it as a representation for the various cross sections of our members. Some businesses have certain fixed prices they have no ability to adjust. The retail association board has taken a position in opposition to the language in section 11 because we clearly feel everybody has to have the opportunity to look at prices and how they are constructed in order to figure out where and how they want to buy. This bill will not be punitive to large businesses. They can absorb things. Small businesses do not have the opportunity to absorb these types of costs, activities, and taxes. Included in a discussion I had with several members, including the Governor’s office, is consumers have the right to know on what they are being taxed. When you include taxes in your price, it becomes a hidden tax. If you look at the law on sales tax, a retailer is responsible for the sales tax. If they do not collect it, they pay it. It is a tax on the retailer. It has become philosophically not so because it is a line item for ease of ability for audit, the consumer, and for everybody concerned. It is required by law to be rung up separately. Consumers know what they pay in all areas of taxes.
As far as the other areas of the bill go, the admissions and amusement tax was part of what we agreed to in various forms. We also agreed on the business license fee. We did not, however, look at $100 per business. Part of our philosophy was that the tax department is going to be charged with compiling information on businesses. Businesses are going to have to pay quarterly if this tax is, in fact, passed. If it is not passed, we feel our department has to get information on what businesses are available. We felt a business-licensing fee at the State level was a good idea. It is up to this body to determine what the fee will be because we very strongly feel our tax department needs some modernization and needs to be able to accept and collect the taxes due now. We have money sitting out there on the table, as it were, because our department is not able to administer and collect things appropriately and share the information within the tax department.
We object to the sharing portion talked about in section 43 with “county fair and recreation board or the governing bodies of the county, city or town for the continuing exchange of information concerning taxpayers.” We do not like the language that says “sharing information” about our businesses with counties and boards and this type of thing. I do not know if it exists in statute elsewhere.
Regarding the business activities tax (BAT), the maximum we looked at was $200 per head. We approve of the liquor and cigarette tax but not at the proposed $1.05 on cigarette tax, which is far too much. We are building consensus toward $0.35 cents. If you more than double a cigarette tax, you will get the law of diminishing returns. We looked at the secretary of state fees and agreed they need to be raised. However, the resident agents are the resident experts and they were looking at bringing in a package we would like to see.
Samuel P. McMullen, Lobbyist, Retail Association of Nevada:
I want to emphasize a couple of points and set the stage for future debate in which we will be involved and which is not in front of you in terms of the bill today. As Mr. Bacon said, we went through a large process. Large in terms of the number of attendants, in terms of the time we took, but I also think large in terms of the commitment we made 2 years ago. It looked to us like there was going to be a need for significant revenues. We first need to say we worry about the State, about the places where we do business, and about the people we take care of as individuals, or who our employees take care of. It is not something where it is simply about whether a business can make more money.
There were a lot of things to consider and I am proud to say this representative business group talked about a lot of those things and made those a part of their debate. It was not just whether or not you wanted to pay tax. It was a number of other things, and I would say, from the information set forth by the Governor in his first fiscal forum, in May 2000 through the present, we have appreciated the fact people have been looking at these issues and developing information about the problem. The problem got a lot more serious in the middle of last session when we entered into more of a recession than any of us believed possible. Then September 11, 2001, aggravated it but really did not change the underlying economic factors of this State. A recession makes it difficult for businesspeople to talk about taxes, but we did it nonetheless. It was made even more difficult by never really understanding exactly what the number was because it kept moving. The Governor had done a service by pointing this out to us. We were, as you have seen, driven as much by policy as we were by anything. We also had some group principles.
On the policy-driven side, we decided this ought to be a solution for a long time, meaning it had to be injected with all the great policy discussions, decisions, and directions possible. We wanted to do the things A.C.R. No. 1 of the 17th Special Session talked about, like stabilizing existing revenues. Broadening and stabilizing the tax base, or the total tax structure, was a very important thing. It was clear to us this was something that could only be solved by a broad-based response, not by tagging any one industry or any set of industries. We made a group commitment and decided everybody would pay their share and we would try to do something that had a long-term solution built into it. It had to be enough dollars to solve the issue. Frankly, we could have taken the position to just patch it up after September 11, 2001, and go home and worry about it in 2005. We did not think that was prudent or correct. We could have taken the position to just figure out where the break-even budget is and stop there. We always programmed into our discussion some additional dollars, predominately for education. We tried to keep the lines of communication open with not only the administration of the school districts, but also the teachers because it was important to us. We needed to make sure we had done enough for this State to really pave the way for the future, including education. We needed to do it in a way as not to hamper business development, existing businesses, existing jobs, or existing people who rely on the jobs in this State. Most importantly, we needed to look at things more meaningful than just the broad phrase of economic development.
Mr. McMullen:
We needed to make sure we reduced our reliance on tourism. As important as tourism is, and as strong an engine as it is for the State, I think you have to be careful about counting on it too much. We were concerned about a level of taxation that could be punitive or too much. Those are the kinds of things we discussed, but more than anything, we tried to make sure we did not do something to dissuade the kind of economic development we needed to happen in the future. I think that is one of our primary concerns with the GRT. We worried about the cost effectiveness to implement it, and we worried about accountability, results, and expenditures.
Most importantly, we thought there had to be an answer this session. It is really not something we can spread over a couple of sessions just because of the politics of it, so we did a couple of things. In July we made a preliminary statement about what we thought. We took the courtesy, as we have told you before, to wait until the task force did their final report. We decided to start off with a substantial component of business-only taxes because we thought if our good faith was not out there in terms of things we wanted to tax, only us first, then we really did not have the ability to be presenting something else. We then decided an expansion of the sales tax base or something similar was a smart way to go and decided to call it a “service tax.” We were looking for a way in which businesses would pay more but also consumers could pay less. We needed to figure out a way to structure this so we could go forward with a big enough engine that was politically acceptable for this Legislature and for the future. Consequently, we will be part of the debate as you move forward on other bills.
A lot of the testimony you will hear today is people saying “no, no, no” to certain things. I think it is very valid and correct to some of these issues for people to say they have concerns, but our position is broader than just saying “no.” Our position is about funding the needs of this State, funding the future, and doing it in a responsible way with business doing a large share.
Senator Rhoads:
Approximately how much money does your plan bring in over the next biennium?
Mr. McMullen:
It is a complicated answer because I think it assumes certain things will happen. We started out thinking the long term might be somewhere in the $250 million to $400 million range per year. We had a specific concern about what the shortfall would be, but once it was defined, we would add $200 million to $300 million to try to make sure all of the caseloads and the other drivers, particularly education, were accomplished correctly. In a sense, it is dependent on what people decide is the level of expenditures, and what is needed to cover the existing levels of service. It is hard to put a number on it, but our thought process always was to program for a full and final solution this time. We have ideas we think will fund it and will be happy to discuss those when it is the appropriate time.
Senator O’Connell:
In your deliberations did you talk about the Rainy Day Fund, and what is your position on spending the Rainy Day Fund now? Also, what is your position as far as the restoration of the Rainy Day Fund?
Mr. Bacon:
We did have a limited discussion regarding The Rainy Day Fund. We did not even have the Rainy Day Fund until about a decade ago. It took us a fair period of time to build it up. It has probably been one of the smarter ideas we have had over time, but simultaneously, if you are going to have a Rainy Day Fund and never use it, it probably cannot be defined as a Rainy Day Fund. Since it took us a while to build it in the first place, you probably do not, or may not, have the ability to replenish it immediately, even though you would always love to have it there. That is where we left the discussion. It is a great idea, but instantaneously refilling it and never using it are both ideas not seeming to make prudent sense. An issue you always run across is whether or not the recession is going to get worse. None of us know the answer. Tell me what the outcome of the war is going to be and how long it will last and then we will have a fair idea of what the economy is going to do. It is always going to be a judgment call and you have to make the best judgment on how much of the Rainy Day Fund to use and how fast to replenish it, and we wish you luck.
Senator O’Connell:
You talked about business paying more and the consumer paying less. You did not, however, go into much definition. Are you speaking about spreading the sales tax and then the reduction of the sales tax with the 2 percent?
Mr. McMullen:
Yes. Without going into all of the detail, we were specifically driven by trying to have our tax structure match the economy in which we are living right now. We would spread it in the maximum way possible to services, which would also allow us the maximum reduction in the sales tax on products. There are decisions you as Legislators need to make about the types of things appropriate to reduce the regressivity of the expenditures of taxes on services by those who can least afford it. There is every indication the sales tax amount could be reduced at least 2 percent, but it depends on the policy decisions you make in terms of exemptions and things that make a smart tax policy.
Senator O’Connell:
Did you put together any kind of a list as far as your thinking about what professions would be affected by a service tax?
Mr. McMullen:
The basic concept of the group was, in order to maximize the reduction of the sales tax on products you had to spread it to as many services as broadly as you could. It does not mean all services, because I think there might be a higher burden than you would like to place on some of those purchasers of services. We did know that the progressive side of this was the services purchased by business and those purchased by people who could well afford them. Part of our thinking was, this is an opportunity for you, as Legislators, to craft a solution that does not just patch together the pieces to get to the dollars needed. We talked about this 6 months ago. This is not just in response to the Governor doing an excellent job of trying to format a solution for a very difficult problem of which he is trying to make sure we are aware. You have a chance now, we thought, to structure this correctly. You have a chance to do something correctly for the long term. It does not have to tax everybody. It does not have to clutch and grab for taxes the way we have sometimes done in the past in trying to patch the budget together and make it all work.
We clearly think there are some services that will be exempt such as health care, child care, anything raising the cost of energy or electricity, and anything raising the cost of construction of a home. Actually, in our later deliberations, we thought the cost of construction in general should be exempt because it ended up being something like a manufacturing exercise where you stack the tax in there. We talked about advertising because, in effect, it would be like taxing the engine that grows more sales of products, or of services, and sort of artificially adds an increment to the price just for purposes of continually churning up sales. Those are the ones we thought made some sense, but are by no means exhaustive. There are certainly people who are going to come up here and testify as to those who should not be taxed and you will be responsible for making a policy decision on which ones those should be.
Senator Coffin:
You said we are proposing this thing but we will have some strings. Are those strings already out there in bill form somewhere, or are they strings you are going to propose as this evolves?
Mr. McMullen:
What I was trying to say is if we are going to come up with as much money as we are talking about, I think it will be incumbent upon you to make sure people understand those dollars are going to be spent as wisely or more wisely than we spent them in the past. We were looking at making sure those messages were clearly sent. When we talked about this level of taxation, with 40 or 50 businesspeople in these rooms at a time, you can bet there were questions about how this money would be spent.
Larry M. Osborne, Lobbyist, Carson City Area Chamber of Commerce:
Our Chamber of Commerce represents approximately 1000 local area members and I am very pleased to say several of those members are in the audience here today. Rather than express to you our reasons for opposing S.B. 238, I have brought two members of our Chamber of Commerce who will speak on how it would impact their particular businesses.
Donal Hummer, Jr., Lobbyist, Harley-Davidson Financial Services:
In my opinion, Nevada is on the verge of either becoming the Delaware of the West, an epicenter for banking and financial companies, or it is going to be a byline in a book about tragedies caused by taxes. We are against the GRT. I was actually one of the three people involved in Harley-Davidson Financial Services from the start-up 10 years ago. When we came out here looking for a state in which to set up a finance company, we looked at three things: the regulatory environment, the corporate tax structure, and the education and availability of the employee pool. On the first two marks, obviously this State has done very well in the past. I cannot speak highly enough about the Division of Financial Institutions and how professional and helpful they are, and obviously how the State tax structure has been, which is why we started here.
In my opinion, GRT will put a chill on future expansion of companies like mine and new companies coming in. On behalf of the State, over this last year I have spoken to numerous financial companies that were thinking about starting thrifts and moving to Nevada. Two of them already have their filings on, which is a matter of public record. Two more are waiting in the wings. All of those financial companies are very concerned about the GRT because it is something for which they were unprepared. They see this as saying maybe Nevada really is not going to be a business state.
A bank or financial service company such as mine can go anywhere in this country. We are not time sensitive, and with all the things modern technology has made available to us, we do not have to be located in any particular place. We locate in a place where we believe we can be a contributor to the community and the community can also help us in meeting our goals. The GRT has everyone, at least in our type of industry, concerned about how it is going to be calculated, on what, when, and where. It is not dependent on how many employees we have or the resources we use in this State. It is dependent on how well we run our business and how profitable we are.
Our company provides high-quality, high-paying, valuable jobs to this State. Ninety‑nine percent of those jobs are paid for by money coming in from outside the State. That is where our revenue is. We make very little off of Nevadans. All of our money comes from outside the State of Nevada, from Canada, from Puerto Rico, and from Europe. We are bringing money in to pay for the residents of this State. These are not minimum wage jobs, but jobs with benefits, 401Ks, matching programs, and educational grants. We are helping 41 employees right now with their tuition for college in this State.
We are not alone in how we think of our employees. Financial institutions, as a whole, value the ability and the competency of their employees and the quality of life they have. Those are the types of companies I am afraid you will chase away if you allow a tax like this to go through. I understand the State has some severe financial problems, and education is one area needing more money. We need to raise the level of education standards for all the residents of the State. I just think the GRT is not the way to get there. It will make you more dependent on tourism, gambling, luxury tax, and sales tax. The companies you really want to attract are either not going to come here, not going to expand if they are here, or eventually figure out a way to move to a state more attractive to them. We realize taxes have to be raised to raise money for the State, but they should be raised on things we can calculate, things we can look at so we can say it is quantifiable.
You have talked about a head count tax. I think raising it three times is a little high. It is especially high for small businesses. Larger business, such as ours, can pay a little more, but I still think $300 a head is a high tax. You could consider taxing the annual renewal for our finance licenses. Tax things you can quantify, things you can put into a plan not dependent on how well we do. Those are the kinds of things you can look at and still raise enough money and not chase away the companies you want to have here. With this tax, as it has been presented so far, a company of my size could pay anywhere from $500,000 to $2,000,000 depending on how it is calculated. Other finance companies, very similar to us in size and number of employees, are looking at the same thing. If you were a company either thinking about expanding in this State, or coming to this State, would you want to take on the burden of an additional tax you would not have to pay someplace else?
Senator Tiffany:
Have you ever had a business in another state?
Mr. Hummer:
We actually have two other offices, one in Chicago and one in Plano, Texas.
Senator Tiffany:
In those states, what type of business tax do you pay?
Mr. Hummer:
We are not paying anything in Texas right now and we only have our administrative office in Illinois, which is a small office. We do pay some business tax there but it is not based on our revenue. It is based on the number of employees.
Senator Tiffany:
I am assuming you read the bill. What were the particular things about the GRT you felt were untenable, that you just could not deal with?
Mr. Hummer:
I read it, but I am not sure how it is going to be applied. We do a lot of lending throughout the world. Is it going to be applied to lending we do just in this State? Is it going to be applied to lending we do throughout the world? Is it going to be applied to profit on lending? How is it going to be calculated?
Steve Reynolds, Owner, Signpro Carson City:
I have a small business in Carson City. Frankly, the GRT scares me very much. All of the small business owners I have talked to about it are scared of it as well. The success of small businesses tends to depend on the success of the large businesses. If a company like Harley-Davidson Financial Services moves out of the area, we have to react to it. We react by laying off employees. If I lay off my employees and I do not expend as much money, the businesses serving me lay off employees also. I look at Carson City. We have approximately 2000 small businesses here. If we had an economic downturn and each one of those small businesses laid off a full-time employee, even a part-time employee, it would represent a significant amount of money not moving into Carson City. When money does not move, the taxes collected by the businesses through sales and other taxes are not coming into the government to pay for services. Not a single businessperson I have talked to, involved in anything outside of the casino business, is not frightened of this GRT and the effect it will have on the attitude about business and on the economy. Most times when recessions occur, and after September 11, 2001, we can assume we are in some form of recession here in this State, it is the small businesses and their hiring that pulls us out.
Frankly, I am considering expanding my business by buying another one that is looking at going out of business, and taking on its employees. A GRT is just another thing I have to look at and consider whether or not I should bother. When I have a sales tax or an increase in the sales tax, I can pass it through to my customers who have the opportunity to make a decision about whether they really want to make a purchase or not. When you issue a GRT on a small business, we do not have the same choice. Whether we are making money or not, we have to pay the tax. Many small businesses are not in business because they make large margins. They are in business because they enjoy being in business, because they enjoy hiring people, or because they have found a niche in which supplying a product or a service allows them to have employment. I think we would find, if we looked at it, margins in small businesses are comparable to a lot of the larger businesses. When you take that much more of the margin away, there is that much more reason for small business people to not expand. It puts a tool in place on which the government can easily decide to expand a percentage and get even more money in the future without going through a proper review or consideration of the effect on businesses in the State.
Mr. Osborne:
Even though the Carson City Area Chamber of Commerce opposes S.B. 238, we will come back and offer support for other taxes to help the State. We do recognize there is a need. No one has come up with a total figure yet as to what the need is exactly. We understand too, there are several bills out there we will be taking a look at and we will be coming back to offer up our share as a business contributing to help the State.
Michael D. Pennington, Lobbyist, Reno-Sparks Chamber of Commerce:
It is our intent today to stand in opposition to S.B. 238, specifically for the purposes of the GRT and the tripling of the BAT. We do support full funding of the kindergarten through twelfth grade (K through 12) system, including the amount they did not receive last session. We support increases in higher funding for the higher education program for the State for the increased student loads. We are also in the process of reviewing the various alternatives being proposed, as well as others that might possibly be considered. We would like to see some caps put on future government spending so when the economy turns around we will find ourselves in a better position. Mr. Thomas Powell is with me today. He is the president of intohomes in Reno and he is going to testify on some various aspects of how the GRT might affect and impact his business.
Thomas J. Powell, President, intohomes Mortgage Services:
Being involved with and supporting the housing industry, the need to increase revenues as the population grows, and to build and strengthen education, infrastructure, and services, is understood. I cannot grow my business without revenue growth and the business will not sustain growth if I do not invest in my people and infrastructure. The government is not a drain on the population. It serves to support the population so I am not opposed to finding new ways of getting revenue. However, I am greatly opposed to the GRT for three primary reasons from my business standpoint.
I am a high-volume, low-margin business. Last year my gross sales exceeded $140 million. My gross profit was $5.1 million. My net profit was approximately 32 basis points on gross sales. We need to determine the definition of gross sales because if it is truly gross revenue, then there is a different calculation. However, if it is the gross sales, it goes to the same as Harley-Davidson. We do not necessarily make money on the amount we lend. We make money on the amount we bring in. Another thing concerning me about the GRT is what we call pass-through. We collect a number of different items for lenders throughout the country as well as for escrow offices for appraisals. When you look at our financial statements, we are above the line as far as gross sales, but they are simply pass-throughs. We would have been taxed on an amount last year exceeding $873,000, which would have a negative impact on our company we could not recoup in any way. This cannot be passed on to a consumer, and it cannot be passed on to those vendors, so it is a direct way for us to be taxed on something we cannot recoup.
Second, intohomes operates as a limited liability company (LLC). This tax becomes an individual tax to my wife and me as the operators of the business. Both my wife and I work within the company. Because it is an LLC and we define it as a partnership, we do not take salaries. So the bottom line is what our income is, and it will be directly affected by the tax. It is therefore a personal income tax. I am a third generation Nevadan and that is not what the State has been about.
Lastly, it is a large bureaucracy. I went to school in California and worked in the Bay Area for a number of financial institutions until 1992 and I have to tell you, dealing with the California Franchise Tax Board is unbelievable. It is inefficient, it has tremendous enforcement power, and it definitely leads people away from free enterprise. That is what I see the GRT doing here in the State of Nevada. My wife and I and our company invest in Nevada. We support Huffaker Elementary School through the education collaborative and we support the Boys and Girls Clubs as both of us are board members and donors. My wife serves on the Truckee Meadows Community College board, and last year our company donated over 2000 hours back to our community. We are open to helping resolve this challenge, but we are not open to taking the whole challenge on our backs. We paid over $1 million in payroll last year, which means all of those employees have a need to be in business. They bought 18 new vehicles last year, so it affects the automobile industry. They bought five new houses, so it affects the homebuilders. It affects untold groceries, untold signs we bought from sign manufacturers, the advertising industry, and it goes on and on. Business creates, government supports. The GRT goes the wrong way.
Senator O’Connell:
My question is for Mr. Pennington. You had mentioned the support of education and higher education. We spend now in excess of 50 percent of our budget on education. What would you think should be the percentage spent on education?
Mr. Pennington:
At this point in time we believe there is a need for education funding in the State of Nevada. During the last session funding was cut from education as far as the needs put forward by the school districts.
Senator O’Connell:
I do not think we have ever cut education’s budget sir.
Mr. Pennington:
The information I was provided indicated increases requested by the school districts last session were not all met and it is the position of the Reno-Sparks Chamber of Commerce to try to see if we can make that more complete and whole through this session.
Senator O’Connell:
You cannot give me a percentage you think our budget should dedicate toward education in excess of the 50 percent?
Mr. Pennington:
I think K through 12 represents about 38 percent of the State General Fund, and the total education funding is about 55 percent. We believe there is a need to ensure their demands are met. I do not have an exact number and I do not have an exact percentage, but I can tell you the school districts are informing us there are needs and we just want to make sure those needs are met.
Senator Coffin:
I would like to know your reaction to a possible scenario that might occur based upon the original presentation by the first panel, which is the concept of taxing services. If services are at a certain level for a business, it would depend on the size of the business. Would they not tend to want to go in-house on things like accounting and legal? If you get to a certain point, you have to be careful because it might be cheaper to hire a lawyer or an accountant and you would then not be able to tax that income. How do you think it would stand in your chamber among those kinds of businesses?
Mr. Pennington:
We are currently in the process of evaluating the proposal relative to expansion of the service taxes. At this time we do believe whatever is done relative to that alternative, it should be done in small incremental measures. We do recognize the fact there would be an impact from what alternatives I have seen proposed this session. At this point in time the board of directors of the Reno-Sparks chamber has not taken a position relative to supporting the service tax alternative. However, we have been evaluating it and waiting to see as details unfold relative to what exemptions are going to be proposed in that alternative.
Senator Coffin:
Mr. Osborne this question is for you. You said something to the effect that most of your members make $450,000 so they would be exempt under the original Governor’s proposal, or am I misreading your testimony? Apparently you say they would object to doing the paperwork.
Mr. Osborne:
I believe what you are referring to was in previous testimony regarding the bills proposed by the Governor, called the emergency bills. I had indicated in prior testimony that a majority of our members employ five or less people. I do not know how many of them would be under the $450,000 exemption. In speaking in the hallway to someone, I indicated even those who were exempt from the $450,000 would still be required to fill out the quarterly paperwork to estimate their receipts for the year.
Senator Coffin:
I find the form very easy to fill out. It is not a problem and many of your people are in the retail business. Do you know how they will feel about filing a services tax form?
Mr. Osborne:
Generally the reports we get back from our business members who currently fill out either the quarterly sales tax report or do in fact fill out the quarterly employee tax form, indicate it is a very simple form, fairly easy to understand, and does not take a lot of time. Also, businesses now collecting the sales tax are allowed a 1.25 percent allowance for collecting it, but this bill would reduce the amount to 1 percent if they pay within, I believe it is 7 days. It would reduce it even further to 0.75 percent if they pay by the end of the month.
Senator Neal:
I would just like to know if you gentlemen feel we should increase the gaming tax.
Mr. Osborne:
The surveys we have done of our membership indicated yes, there was a strong support for an increase in the gaming tax. I do believe though it is without some of the actual structure. What would it do to smaller, more rural-owned gaming? What would it do to northern Nevada gaming, which is already experiencing some of its own concerns? Some of the bills at which we are looking do call for some increase in the gaming tax and I believe it will be a part of any package that is finally put together.
Mr. Pennington:
The board of directors of the Reno-Sparks Chamber of Commerce does not, at this time, support a basic increase in gaming taxes. We are really concerned about the economy in northern Nevada and we believe the substantial increases proposed in the gaming industry will be harmful to the entire effects of the northern Nevada economy.
Chairman McGinness:
I think it would be incumbent upon all chamber of commerce boards of directors to take a look at these bills, including Senator Neal’s and the new Amodei-Care bill and take a position.
Peter D. Krueger, Lobbyist, Nevada Petroleum Marketers and Convenience Store Association:
We are a trade association representing independent petroleum marketers and convenience store associations. I have a broad spectrum from my very smallest members to some of my larger members.
Steve Johnson, President, Berry-Hinckley Industries:
I am here today in opposition to the Governor’s proposed GRT. I have prepared testimony (Exhibit F). I will try not to repeat some of the testimony already presented and limit my testimony specifically to the petroleum industry.
Senator Coffin:
You said your net profit is about six-tenths of one percent of your gross. How much would you pay under a services tax?
Mr. Johnson:
I have no idea. First of all I do not know what services would be covered. I am not sure exactly what the rate would be.
Senator Coffin:
I keep hearing legal and accounting would be among them so you probably have to have both of those.
Mr. Johnson:
We have environmental services on which we spend a great amount of money. Those include professionals, engineers, and accountants. We have audited financial statements as well as lawyers. We are always getting sued; slips, falls, you name it. So we do incur significant legal, accounting, and primarily engineering services. We have a fleet of 160 transportation vehicles requiring services our own mechanics cannot provide. We spend hundreds of thousands of dollars, if not millions, on the repairs necessary to keep the transportation fleet operational. So with regard to your question, we do incur a lot of services but as to exactly how much, I have no idea.
Senator Coffin:
You penciled this out and actually think this will be more favorable for you?
Mr. Johnson:
Absolutely. It is without question.
Senator Coffin:
When your 500 employees find out you are proposing a tax they will pay, will they feel generous towards you, or do you think they will understand and sympathize? This is a question employers who support this would have to ask themselves.
Mr. Johnson:
I believe they would support us and I will explain why. In 2001 and 2002 our employees did not have a raise. Because a tax on services would be less than what our company would incur with a gross receipts tax, I could still provide them with a job. The impact on them could be minimal based on the fact they may not consume a great deal of professional services, or whatever services may be covered. If I explain these facts to my employees, I believe they would be behind us 100 percent.
Senator Tiffany:
This is kind of a subjective question, but do your employees believe public education is underfunded? The reason I ask is because I get a barrage of E-mail, particularly from educational employees, saying they are grossly underfunded. They claim it is a disaster and programs are going to be cut. Do your employees believe education is underfunded? Most of these taxes are earmarked for education.
Mr. Johnson:
I do not have knowledge to answer your question. If I did answer, I would only be guessing. I can, however, speak from a personal perspective. My wife is a schoolteacher. She teaches special education. She is going through a program to become a reading recovery teacher, which is a program to be cut from the Washoe County School District, based on the budget cuts they are going through right now.
Senator Tiffany:
That is some of what we are facing to make these policy decisions. Do we raise taxes and how much do we raise them? The lion’s share of those taxes goes into public education and health and human services.
Mr. Johnson:
I think a professional services tax would be more than adequate to cover the spending necessary in the education budget.
Senator Tiffany:
From your point of view with your wife, does she believe we need to fund education more and does she fear her job is going to be cut?
Mr. Johnson:
Absolutely.
John Haycock, Chief Executive Officer, Haycock Petroleum:
Mr. Johnson and I worked together on a fact sheet (Exhibit F). It has been submitted to the committee so I will try not to be redundant. I think the fact sheet will possibly raise your awareness of some of the concerns we have. I consider this tax scheme a threat to our industry and to my business specifically. When I say a threat, I guess what I really mean is it scares me because this tax scheme has no relationship to a firm’s ability to pay. There is an awful lot of revenue driven in our industry and we have good years and we have bad years. The numbers Mr. Johnson gave you, percentage-wise, are probably not much different than the numbers our firm produced last year. This year may or may not be as good a year. We have had better years and we have had worse years. My biggest fear, and the biggest threat this GRT represents, is the fact that if I do not make the net income, I am still going to have $140 million or $180 million in revenue and I am still going to have to pay this tax. I could probably absorb it once, maybe. I do not think I could do it twice. So it really is a genuine threat. I think if you asked me what kind of a tax scheme I could least abide by, I would have to say it was the GRT.
Chairman McGinness:
There is a gentleman in Las Vegas who may or may not still be there. Mr. Jenson needed to be on by 3:30 p.m., which was 10 minutes ago. We will hear from him and then come back to this panel.
Eric M. Jenson, President and Chief Operating Officer, Jenson and Associates:
Thank you for taking time out of your busy schedules to listen to the people of Nevada. I agree with the last two gentlemen who spoke. As we know, it is the Legislature’s job to carry out the will of the people and to enact laws in the best interest of Nevada and its citizens. I am a 7½-year resident of Nevada and the president of a small business domiciled within the State called Jenson and Associates. We provide our clients with Individual Retirement Accounts (IRAs), 401Ks, mutual funds, annuities, life insurance, and other financial products to help them prepare for their futures. We do this through our affiliation with a broker-dealer called World Group Securities.
For the last decade or more Nevada has been an excellent place for business owners to build companies and create jobs for those around us. The favorable tax environment, coupled with minimal red tape, has created an environment for businesses of all kinds to flourish in our State. My small company paid out close to $2.5 million in 1099 payroll last year, and about $60,000 in W2 income. This money is used to buy homes, pay property tax, purchase food, purchase automobiles, purchase gas, pay sales tax, and for gambling in casinos, all of which create tax revenue for the State. The GRT threatens to disrupt the business-friendly environment, which has helped our State grow and prosper over the past decades.
I am personally concerned that a GRT would have a negative effect on many businesses in our State. Just the threat alone of a GRT late last year caused a substantial client of mine to delay doing business with me. The client stated to me that if the GRT passed, he would have to leave the State and do business elsewhere. He also stated he would have to wait until April or June to see whether or not the GRT passed before he could make a decision regarding the sizable investment he wanted to make. The loss of this client cost my company in excess of a $100,000 profit. That may not be a lot of money for a large company but to a small business owner, a $100,000 loss of income can have very severe consequences. That is just one example. Multiply my negative experience by the thousands of business owners across Nevada and the economic effect could be chilling.
During the past 2 years revenues to my company have fallen from their highs due to the stock market’s 3-year decline. Last September we moved into a smaller building and made sweeping cuts to expenses of all kinds. Even though revenue was down, our profits actually rose. Saddling the business community with a highly unfair tax such as the GRT, in my opinion, will only prolong the economic downturn. Raising taxes may create a temporary surge in revenue to government. However, in the long run higher taxes almost always result in less business expansion, fewer jobs, a smaller tax base, and ultimately, reduced revenue to the government. I think we all agree we need to diversify the State’s economy. Right now we are basically a one-trick pony. For the most part, as gaming goes, so goes the State’s economy.
Would it not be nice to use Nevada’s business-friendly tax structure as a means of attracting new and diverse companies to Nevada? How does a GRT on nongaming revenues help us diversify our State’s economy? I do not think it does. In fact, a GRT will have the inverse effect. By burdening businesses with a GRT, Nevada will be sending a message to the American business community saying we are no longer as open to new businesses as we once were. At the very least, a GRT will make businesses considering moving to Nevada think twice before making the move. In my opinion, a GRT will siphon off profits that would typically be used to expand business and hire new employees, and funnel those profits into bureaucracy. I heard of a study at a recent chamber of commerce meeting showing the potential cost of collecting the GRT at around $30 million and it may cost as much as $50 million by the time everything is implemented. It is difficult for me to understand why Governor Guinn is proposing to spend our hard-earned profits to make the government possibly more inefficient.
So what is the solution? I leave the solution in your capable hands. However, a few suggestions may be in order: (1) spend less money, (2) increase an existing tax for which the collection mechanism is already in place, (3) cut expenses, and (4) borrow to cover the shortfall. The economy will turn around and tax revenues will rise again, in my opinion. I am an optimist. Finally, (5) in conjunction with a slight increase in existing business tax, increase the gaming revenue tax by one half to one percent. I implore you as a business owner, please do not place a GRT on Nevada’s businesses. Please strive to preserve the phenomenal business environment that has made Nevada a great place to live and work.
Chairman McGinness:
We will now come back to the panel here in Carson City.
Mr. Krueger:
You have heard from two of my larger members Statewide and now I have two of my smaller members, Mr. Art Majors from Major Brothers in Carson City, followed by Debbie Sheltra from Reno.
Art Majors:
I am just a small one on the totem pole. It is quite disturbing to me because I have a gross of over $9 million. By the time you take $21,000 GRT and another $9300 head tax for a total of almost $31,000, it is just not going to make it for me. I just have two locations. The last 2 or 3 years now I have cut my business down to where I do not go out and get new business. I just keep what I have because the income tax I had to pay was getting too great. I was working my posterior off and I just figured it was not worth it. Now we come up with this tax and it just seems like more and more revenue from a small business gets taken away. We have 31 employees with families who enjoy working for us. I have no way of passing on this increase.
Debbie Sheltra:
For 25 years I was a businessperson in Washoe County. I am no longer in business. In my last 2 years of operation there was just enough net profit to keep the doors open. I employed about 15 people. The GRT adopted by the City of Reno had nothing to do with my volume. When the profits went way down in gas, my gas supplier withdrew from my market. I would have come into your numbers of over $450,000 in gross revenue, which had nothing to do with the bottom line. Finally, I found when I was paying the expenses of my business out of my personal pocket, it was time to close.
I paid all of those taxes, was a good Nevada businessperson, and you have seen me down here for 22 years lobbying for independent businesses among the other hats I have worn. I truly believe in small business, but unlike the Berry‑Hinckley operation, I was only one store and I could not even compete price-wise with the prices they have to offer. I think there are some answers. I bitterly took this problem to the Nevada Tax Commission. There are many stores, just in the Washoe County area alone, in which you are losing hundreds of thousands of dollars in noncollected taxes because small businesses are not collecting the sales tax. If you do not collect the sales tax, you do not have it. I think no one has any concept of what amount of sales tax is not being collected today. I took three different businesses to the tax people and it is a civil penalty; it is not criminal. Stores do not have to use cash registers. It is terrible the way the laws read today. I think the tax commission needs help and I think if we knew how much more you could get if those businesses were actually paying, you might not need this large amount now. I watched my customers and if there was a tiny percentage increase in the sales tax, my customers were still buying liquor and cigarettes and nonessential items. I do not see why we all cannot pay a little bit more there, because when you continue to add costs to doing business, you will affect what has happened to me. You will put more of these small independents to the point of choking and out of business.
Chairman McGinness:
Is your location operating as a convenience store now, or did the old location close?
Ms. Sheltra:
It was re-leased to another operation and I do not know how successful they are at this time.
Dennis Sponer, President, Scripnet, Inc.:
I am president of a local pharmacy benefit management company here in Las Vegas and a licensed attorney with a master’s degree from the University of San Diego School of Law. I am opposed to the GRT for two reasons. First, different businesses get to keep larger or smaller portions of their gross receipts depending upon their industry. Second, the tax has a pyramid effect; the same revenue is taxed multiple times.
I would like to walk you through how my company will be affected by the tax. To give you a bit of background on my company, Scripnet processes prescription drug claims for property and casualty insurance companies throughout the country. I started the company in 1997 and in 2002 Inc. magazine ranked my company the 34th fastest-growing, privately held company in the United States. We employ 25 people in Las Vegas and will have revenues of approximately $18 million this year. Scripnet sends prescription drug cards to covered individuals who are identified by our insurance company clients. Individuals present the Scripnet card to one of our network pharmacies, the pharmacy electronically bills Scripnet, Scripnet bills the insurance company, the insurance company pays Scripnet, and Scripnet pays the pharmacy. Over 80 percent of Scripnet’s gross receipts are paid immediately out to our contracted network pharmacies. Therein lies the rub with the GRT. For every dollar Scripnet has paid, we would pay one quarter of one percent to the State. Last month Scripnet was paid over $1.5 million by its customers. Almost all of the money came from outside the State of Nevada. Under the proposed tax, we would then pay $3750 to the State of Nevada. Our biggest concern with the GRT is it does not account for the fact that over 80 percent of the $1.5 million we collected in February is paid out to our network pharmacies. You see, even though we get to keep only $300,000 for overhead and operational expenses, we pay tax on the full $1,500,000. The GRT, as proposed, is equivalent to a 5 percent or more net income tax. In our case, in 2001, it would have been equivalent to a 19 percent net income tax. We also feel the definition of pass‑through revenue in the proposed S.B. 238 is not well enough defined to alleviate our concerns.
The gross receipts tax also does not take into account the profitability of a business. Out of the $300,000 monthly gross margin, we pay the salaries of our employees, the rent, utilities, we make an allowance for bad debt, and pay all of the other things that go into running a business. In the end we hope to make a small profit. However, some businesses that are paid $1.5 million per month get to keep a larger or smaller percentage of the $1.5 million than others. For example, our $300,000 in gross margin is equivalent to, say a law firm with $300,000 in gross revenue. We feel a tax on profits would be more equitable.
Mr. Sponer:
The GRT is also harder on start-up companies than on established ones. Indeed, in all but the first year we were in business, our gross receipts exceeded the $450,000 minimum; this, despite the fact we lost money in 2 of our first 4 years in business. For example in 1999, our third year in business, we lost over $47,000 on $513,000 in gross receipts. In 2000, we lost over $78,000 on $2,300,000 in gross receipts. If forced to pay a tax in 2000, our net loss would have increased by almost $5000. In Scripnet’s case, it has taken us years to get into a position to start to earn a consistent profit. The GRT hits a business from day one, whether or not it is earning a profit. We believe entrepreneurship and economic diversification are important to Nevada. The GRT would stifle those goals.
Finally, we believe a GRT is unfair because of its pyramiding effect. In Scripnet’s case, our network pharmacies in Nevada would have to again pay tax on the money we pay them. For example, if we pay tax on the $1.5 million we were paid in February, then pay $1.2 million to our network pharmacies, the pharmacies must pay tax on the $1.2 million again. Further, if the pharmacies pay, say $1 million to their drug wholesaler, the wholesalers would have to pay tax on the payment from the pharmacies again. Out of the $1,000,000 the wholesalers have to pay about $900,000 to the actual manufacturers of the drugs, assuming they are in Nevada, and the manufacturers would have to pay tax on the payment from the wholesalers again. In this example, the total GRT would be $11,500 on $1,500,000.
In the end we believe the GRT is unfair. Is $44,000 a year unduly burdensome to my company? Probably not, but it is the equivalent of one employee’s salary and it certainly would have been burdensome when we were just starting out. This new tax will lead, we believe, to the loss of existing and new investments in our State, which means fewer job opportunities. Those businesses that cannot afford this tax increase will eliminate some jobs and those who do stay afloat will trickle this increase down to the consumer, in higher prices for goods and services. My company would be grossly affected by the GRT and I am concerned not only for my company but for the well being of my employees. As a business owner and a concerned Nevadan, I am opposed to the GRT and am asking you to explore other, more equitable methods to raise needed revenue.
Chairman McGinness:
We have the auto dealers and the bankers association up next.
Senator O’Connell:
I am speaking for both Senator Coffin and myself. Our spouses are very much involved with the banking industry and I would like that on the record.
Wayne A. Frediani, Lobbyist, Nevada Franchised Auto Dealers Association:
I will read my prepared testimony (Exhibit G) and then answer any questions.
Senator Neal:
When you talk about broadening the sales tax, at the present time about 60 percent of the sales tax is paid by Nevada residents, about 30 percent is paid by businesses, and the tourists pay only about 10 percent. It seems to me the greater burden is then being shifted to those who are going to spend the most money in terms of salable goods. Those are usually the middle class and the poor. Are you saying these are the people who should bear the burden of this?
Mr. McMullen:
No, we are not. I think the point you are making is, if regular citizens pay 60 percent, then reducing the sales tax on products would reduce the share of taxes they would pay. If you look at a tax on services, we have many businesses telling us they spend more on services than they do on products. We believe there will be a significantly larger portion of services purchased by businesses than is currently their share of the sales tax derived by product sales. In addition, if you do what we suggested, which is exempt those service transactions used by people who cannot afford them, it will reduce even more burden of the service tax on regular citizens, which is one of our goals.
Senator Neal:
The big goal really is gaming. Whether we raise these taxes or not, we are going to be back here in a few years because of the way gaming operates. The big problem we have is gaming, particularly in southern Nevada because we have let that monster spread to the point now where it has dominance. The citizens are paying the cost. For each 8000 employees in a hotel-gaming casino, the cost to the State is approximately $4.3 million. There is no other industry extracting that type of cost. Nobody wants to deal with it and I see it as our major problem. Am I the only person here who is looking in the direction of reaching up and wrestling with this monster to bring it under control in terms of cost to the State?
Mr. McMullen:
In answer to your question, it seems like you are doing a very good and aggressive job of raising the issue, which is always valuable. I think the dialog is great. We looked at these particular issues from the point of view, as I said earlier, of broad-based concerns and broad-based answers. You are talking about a tax we frankly did not choose to address, which is a tax on a particular industry at a particular level. I think there was a large concern about what level of taxation should be put on gaming if any at all. I think you make a very cogent set of points. I have heard it many times, and I do not mean to discount those. Another thing we discussed was how every business creates impacts. Every individual and every citizen creates impacts and, in a sense, they all have a share in paying for those impacts.
Senator Neal:
I hear what you are saying. I just had an interview with the person who writes the international magazine on gaming. It is published out of London, England, and when I told him I was proposing a 10.25 percent gross gaming tax, he laughed. He said in England, for each pound wagered, the queen gets 33 percent. Then after everything is paid, all of the bills, whatever is left, she gets 50 percent of that. So what is it the queen knows that we do not know here in Nevada?
Mr. McMullen:
I am not saying you have easy choices in front of you and I think the issues you are raising are serious ones. It is not lost on anybody, especially from the business side, that gaming already contributes a very large share through industry-specific taxes. They have made it very clear they want to pay their fair share.
Senator Coffin:
The gaming industry spends a lot of money on lawyers, accountants, and other professional services. Obviously some of them pay huge design fees and on and on. Are they likely to do that with fee-based people, or are they inclined to possibly bring some of them in-house to save? I mean we are talking a lot of money here. Of course I do not know what tax rates you are proposing, so I have no idea.
Mr. McMullen:
We thought 5 percent to 5.5 percent would come out as being equal for an overall rate. That would be something a business would factor in and decide if their cost structure would be better handled by internalizing. I think the real answer though is, probably not. I am not saying it will not happen, but we do not think so. I have been involved with businesses that tried to internally do their laundry, for instance, and found out it was a silly idea and then they would go back and outsource it. A lot of the businesses we talked to liked the fact that the tax is very transparent, where they can make a decision when they are outsourcing or using external resources. They know exactly what their cost structure is, which will also be true for any consumer. They can decide just like they do when they buy a car, whether they can afford the $21,000, the $24,000, or the $27,000 because the sales tax will be added to the cost.
Jackie K. DeLaney, President and Chief Executive Officer, Sun West Bank:
I am a standing member of the Nevada Bankers Association (NBA) and I am testifying today on their behalf. I will read from the testimony I have prepared (Exhibit H).
We have today just a very brief illustration of the point shown in the second bullet on page 2 of my testimony (Exhibit H). In the first scenario we have $5,000,000 million in interest received on a transaction and our cost of funds on that transaction would be $4,550,000. Say the gross margin would be 1 percent or $50,000. Based on the proposed GRT, the cost of the tax to us would be $12,500 leaving a modified gross profit of $37,500.
In the next scenario where interest rates could triple three times, the same book of business could generate gross interest received of $15 million. The cost of funds would go up proportionately still producing the same gross profit and at the same time the GRT would then be three times. The modified gross profit is what would remain for us to pay other expenses and operating salaries and so on. So you can see in an example like this how it could impact us as an industry. It is clearly an inequitable situation considering we are looking at the same book of business in a situation where interest rates could have tripled. In essence, under a GRT situation or scenario, interest rate volatility would have significant detrimental impact on the financial services company, and interest rates are something we do not control.
Senator Neal:
Is Citibank part of your organization?
Ms. DeLaney:
It is a member of the NBA.
Senator Neal:
The reason I ask is it has a credit operation in the State too, does it not?
Ms. DeLaney:
That is correct.
Senator Neal:
Do you know how it would be affected? We have transactions coming from all over the country to one central point here. Under the gross receipts scheme the tax is supposed to be paid at the end of the commerce stream and I was wondering how Citibank would be affected since it has made the end of its commerce stream here in the State of Nevada.
Ms. DeLaney:
I do not think it is really my place to speak specifically about Citibank’s financial picture, but obviously if it were taxed on all the receipts coming in from all the credit card payments it gets throughout the country, it would be a significant impact. That is just general knowledge, but I do not think it is appropriate for me to speak to Citibank’s specific situation.
Senator Neal:
Is the bank you represent a State bank, a national bank, or what?
Ms. DeLaney:
Sun West Bank is a State-chartered, Nevada-based community bank.
Senator Neal:
So you do not deal across State lines?
Ms. DeLaney:
Not at this time.
Senator Coffin:
Does the banking industry pay a franchise fee or a State tax of any kind?
Ms. DeLaney:
We do pay fees related to the Division of Financial Institutions.
Senator Coffin:
How do they compare with fees banks pay in other states?
Ms. DeLaney:
I do not know but I will find out and get back to you.
George William Treat Flint, Lobbyist, Nevada Brothel Owners Association:
I would like to be concise but there are some things I need to say. Before I mention anything on the brothels, let me say my little wedding chapel family corporation made $12,900 last year in pretax profits after I took out a $14 per hour equivalent wage. The GRT and employee head tax would, if implemented, take all but $300 of that profit. My wife, who does not know a lot about economics or family business, said to me the other day, “George, what we’ve got to get across is that most of these little businesses don’t have any margin now.” I have heard that very same thing now for the last 2 hours and 25 minutes. I am here to tell you the little family business I own, as tough as it is living in a marriage economy in northern Nevada that suffered by 50 percent in 20 years while Las Vegas has grown 150 percent, is still ready to tighten the belt some more and pay that tax if your public policy and your wisdom says to do it. I am becoming frustrated by all the things all the businesses in this State cannot do, which brings me now to the brothels.
One of our brothels just went through Chapter 11 and one of them is very close to it right now, but we are prepared as we were in 1991 when there was a tax‑on-services bill in the Assembly. We are prepared to get behind section 36 to section 44 of this bill if necessary, which is the admissions and entertainment tax. Additionally, if it is your wisdom to choose a different direction with this bill, we are also prepared to get behind the tax on services. I have already met with the Department of Taxation on both these concepts. Some fine-tuning and some tweaking will probably have to be done, but in reality we are not going to stand here and tell you what we cannot do. We will get behind either one of those taxes and support it to the hilt and do it with a smile.
Having said that, let me bring before you in my limited time, a concern we have. I will walk you through the three points of the bill as quickly as I possibly can. On page 5, section 16, “A natural person engaging in a business shall be deemed to be a business entity …” et cetera, et cetera. We go from there to page 31 where we talk about raising the business tax on employees from $25 per quarter to $75 per quarter. Section 76, subsection 5, raises the annual business license to $100. On the very last page of the bill, the repealed section does away with the natural person exemption that exists now for businesses with no employees. This means every lady working in my client’s industry would suddenly become an independent contractor and yet, a licensed businessperson. That in itself is not such a terrible thing even though we have about 1000 women working in this business in this State. However, you have about 6000 dancers in Las Vegas who would come under the same umbrella and I really think we have to take a second look. Mr. Hillerby reassured you it would only involve people who have to file a 1040 form, which you do not have to do for income tax purposes until you reach about a $9700 income. However, for the purposes of reporting self-employment, you do have to file a 1040 form if you make $400 or more.
Mr. Flint:
I am told there are 950 Avon ladies in the State of Nevada. They are independent contractors and some of them do not even make $400 per year in commissions and yet, under this bill, they would have to pay $100 per year for a license and a $75 per quarter head tax. There are 550, I am told, Mary Kay ladies and a few hundred cab drivers. We then get into the health care workers and would you believe 700 or 800 lobbyists? Is that what we really want to do? I have an 86-year-old neighbor who is an unfortunate recipient of a social security check of less than $600 per month. She lives in a mobile home park where her rent is $558. To be able to live, she subsidizes her income by doing alterations and earns about $100 per month. As I read this bill, she would become liable for a $100 per year business license fee and a $75 per quarter head tax. I do not believe it is the intention to charge the little people out there something like $400 per year if they are not even making much more than that in total commissions. There are some inequities there. I left with you a handout called “Sex Tax: The coming thing” (Exhibit I). It is out of the San Francisco Chronicle. It talks about the wisdom of the Nevada Legislature in proposing to tax my industry. It says in California they would have to be even more aggressive to address the same issue because they have a $36 billion deficit. They suggest a tax on all sex and they suggest charging different tax rates for certain kinds of sex. The most expensive would be adultery. Now the press has had a lot of fun with me and with my clients around here for 3 months and I would not trade places with you for the world.
I will refer you to a copy of a letter I have furnished you (Exhibit J), from Allen Lichtenstein, attorney-at-law. Presently, the licensed, legal business I represent cannot advertise except in very narrow parameters. Therefore, if we are going to become a participant in this tax program, we would like to offer a friendly amendment as shown in the letter, giving us a little flexibility in advertising. At some point in time between now and June 3, we can approach it more formally.
Karen Pearl, Lobbyist, Nevada Telecommunications Association:
You have been given a copy of my testimony (Exhibit K) as well as a map (Exhibit L) of the locations of the telephone companies my association serves.
Senator O’Connell:
As your industry reviewed this bill was there any change at all in your central assessment?
Margaret A. McMillan, Lobbyist, Sprint Nevada:
Our tax department reviewed this and since they did not comment, it is my assumption there is no change on the centrally assessed portion. I would like to add to what Ms. Pearl has indicated. There are two companies, Sprint and SBC that are under an Alternative Regulation Plan (ARP). Under that plan SBC specifically does not regularly come in for a rate increase, so we would like some provision, allowing those companies under an ARP to have these included as a pass-through.
Al Bellister, Lobbyist, Nevada State Education Association:
I will give you a different view of the bill. The Nevada State Education Association (NSEA) actually supports the concept behind S.B. 238 and we commend the Governor for actually presenting this bill to the Legislature for your consideration. The bill broadens and stabilizes the tax base in the State of Nevada. It is important to NSEA to accomplish that purpose this session. Senator O’Connell, I would like to direct my remarks to you for a moment based on a comment you made earlier regarding cuts in education in this State. In 1982-1983, we reduced per-pupil expenditures. In 1992-1993, we again reduced per-pupil expenditures. This session we are faced with a $70 million supplement appropriation for K through 12 and I think we are looking at this for one reason. We rely on a very narrow tax base. When sales tax receipts go down, education funding suffers. It is an intolerable uncertainty you are placing upon a primary service this State provides its citizens, and that is K through 12 public education. We cannot maintain programs and offer services to the fastest growing student population in the nation. We grow at 10,000 to 15,000 students each and every biennium. This biennium is no exception. If you put this tax package in the context of the budget that goes with it on the expenditure side, we believe if you adopted it as presented, we may still have to face cuts in K through 12 public education. The budget does not have adjustments for inflation for operating categories such as textbooks and supplies or for fuel for pupil transportation. Without significant tax increases presented to you in this bill or other bills out there now to broaden and stabilize the tax base, we will face significant cuts in K through 12 public education. If you look at the cuts up for consideration by the voters and the citizens of Clark and Washoe counties, you are looking at significant cuts, deep cuts in the programs affecting children. You are looking at cuts in gifted and talented education, increased class sizes throughout the grade levels, supply cuts for classrooms, cuts in music programs, athletic programs, and our inability to maintain and upgrade technology in classrooms. It is across-the-board if we do not do something this time around.
Mr. Bellister:
I heard reference earlier to the recent U. S. Census Bureau study that looked at the ranking of per-pupil expenditures in the State of Nevada. We are 46th or 47th in the nation. We spend about $5700 per pupil versus the national average of $7200. We are $1500 below the national average. It was interesting to hear from Mr. McMullen and his group who had the Microsoft PowerPoint presentation on business and taxes. I heard the same thing, I think, Senator Coffin heard. It sounded to me like they will ante up with strings attached, and one of the strings attached was accountability. We have layer upon layer of accountability in this State for K through 12 public education. We have accountability for expenditures, we have annual audits, and we just passed a bill out of the Assembly side supported by NSEA to conduct performance audits for school districts. I do not know how much more we need to do on the expenditure side.
On student achievement, we have the Nevada Education Reform Act passed in 1997. We test students currently under that system throughout the grade levels. I can say to you with pride, and you should also share our pride, the vast majority of the schools in this State perform adequately. Some are high achieving and some are exemplary. We have a new layer of federal accountability under the No Child Left Behind Act of 2001, United States House Resolution (H.R.) 1 of the 107th Congress, which will expand student testing of Grades 3 through 8 and high school. I submit to you, without significant increases to K through 12 funding from this State, we will be unable to implement the requirements of H.R. 1. There are consequences for failure to make adequate yearly progress for student achievement. Some of those consequences include a longer day, or a longer school year. Where is the money to pay for those consequences? We need to take a good hard look at that. We cannot continually ask for more and more accountability without providing adequate resources to assist the schools to achieve the goals being placed upon us.
Last but not least, the No Child Left Behind Act of 2001 has within it the requirement that all teachers in this State be highly qualified. If we do not do something to increase funding for education so we can have competitive salaries for teachers in this State, we will not be able to attract teachers, much less retain them once they are here. We lose over 1000 teachers each and every year. They come here and they leave, in large part because we do not pay them an adequate salary. I urge you to consider this bill and other bills similar in their approach to broaden and stabilize the tax base in this State so we can stabilize funding for K through 12 public education.
Senator O’Connell:
I stand corrected if you are correct. Tell me how we cut education’s budget and by how much. Are we talking about per-student contribution?
Mr. Bellister:
You came back in the 1983 Session and passed S.B. No. 287 of the 62nd Session, which reduced per-pupil expenditures from $1821 to $1786.
Senator O’Connell:
Were there more federal dollars added at that time?
Mr. Bellister:
No, Senator. We had a downturn in the economy in the State of Nevada and what we did was actually cut per-pupil expenditures. When I say per-pupil expenditures, I actually mean basic support per pupil. You came back again in the 1993 Legislative Session just after the Price Waterhouse study advised that you do something, and do something quickly, or you would be confronted with the probability of having to cut support of basic programs in this State. It was at that time in 1993 you passed S.B. No. 329 of the 67th Session, which reduced the basic support from $3310 to $3231.
Senator O’Connell:
And it was not made up in any other area?
Mr. Bellister:
No, not to my knowledge.
Senator O’Connell:
We have had hearings addressing whether or not we have efficient money for students, especially books and supplies in the classroom, and I cannot remember how many times we have funded specifically outside of the regular budget funds. Those funds were to directly compensate for any shortages or any problems you had. Could you tell us a little about what happened to those funds?
Mr. Bellister:
If I understand your questions as it relates to textbooks and supplies, there was a legislative audit out of the 1999 or 2001 session. It looked at school district expenditures as they related to textbooks. The Legislature, when it adopted the Distributive School Account (DSA), appropriated a certain number of dollars per pupil for textbooks. The school districts went over and beyond that and made the additional effort out of their own resources. We could give you story after story about classrooms that only have one set of textbooks throughout the school. What we also discovered, through this legislative audit, is classroom teachers pay out of pocket each and every year to supplement our failure to provide an adequate number of resources in the classroom.
Senator O’Connell:
You do not have to tell me about the classroom teachers because I hear about it on a constant basis. I think it is why we have identified funds specifically to cover those costs. However, it is my understanding that those funds, through collective bargaining, have been taken away and diverted to other areas.
Mr. Bellister:
No affiliate of the NSEA ever goes to the bargaining table and says to a school district, “There is a pot of money. Allocate it for the purchase of textbooks and supplies,” and says “Give it to us in the form of compensation or enhanced benefits.” We do not do that and I would encourage you to review the results of the recent audit because it does not come to that conclusion.
Senator O’Connell:
You say we have just had a recent audit in 1999 and we are going to have another audit, the performance audit? Is it in the bill coming over from the Assembly?
Mr. Bellister:
Though I cannot give you a bill number, I believe it was Mr. Goldwater who sponsored the bill and it did pass the Assembly and is on its way to you. If the Senate concurs on the importance of this piece of legislation, we will have performance audits conducted in several of the large school districts in the State.
Senator O’Connell:
What did the 1999 audit cover?
Mr. Bellister:
It was a legislative audit specifically devoted to the issue of textbooks and supplies.
Senator O’Connell:
So it did not cover performance of the expenditures?
Mr. Bellister:
We have annual expenditure audits, financial audits performed in each and every school district. We have the chapter 387 of NRS report that gives you expenditure reports. We fund, to the tune of several hundred thousand dollars a year, a program called “Insight,” which tracks expenditures down to the school site level. And then the audit to which I am referring is the audit of 1999 or 2001 on textbooks. Then there is the performance audit bill coming your way. So, there are several auditing services provided to the citizens, to the taxpayers, and to this body regarding school district expenditures.
Senator O’Connell:
The district has just spent $8.5 million on a new building facing Pecos and Flamingo. I believe there was a whole new group of administrators hired, some of them coming from, if I am not mistaken, the Ninth Street building. Where did those funds come from? I mean if we are talking about a situation as critical as you are sharing with us, and we do not often get this kind of information, then how could the district afford the hiring of new people in administration and an $8.5 million building?
Mr. Bellister:
I do not know the answer. I do not live in Las Vegas. I live in Reno. I could track it down for you.
Senator O’Connell:
I would really appreciate it.
Knight Allen:
In response to the NSEA I would like to say there is no such thing as a stable tax base. If there were any such thing, there would be no problem for any other states in this country. New York, New Jersey, Connecticut, Massachusetts, Rhode Island, Pennsylvania, Ohio, Illinois, and Indiana would all be cruising through this recession with fine fettle, not a problem in the world. All taxes to government must be generated by a capitalist market economy whose primary characteristic is instability. There is no such thing as a stable tax base so the question becomes, “How do you generate revenue in the best way?” The answer is always you.
Tax people on their free economic choices. You never tax the necessities of life and you try to get as much money as you can in as consistent a way as you can. You do not try to create a tax base in which those inside of government have a steady, stable flow of revenue going to them regardless of what is happening to the peasants. Because there has been so much interest today in the GRT, I faxed you something I did on October 9 with the Governor’s task force (Exhibit M), which shows the national profit margins for a whole series of industries. I offer it to you here today just to give you a broad perspective on how much money these various industries make on a nationwide basis. You have heard a lot about national pricing, but if you are going to buy in to national pricing, then national profit margins have to be a legitimate argument also. You see for example, the food wholesaler has a 1.5 percent profit margin, which represents a 16.6 percent bite if the GRT is put in. Then you get the pyramiding effect when you go up to the grocery stores with a 1.7 percent profit margin, which is 14 percent of theirs. They are going to pyramid that on top. There is no way in the world the cost of food is not going to be passed on to the people through the GRT, which violates the fundamental principle. I offer it to you as time runs out just so you can look at it. It was interesting to the Governor’s task force. They took a look at it and thought the numbers at least gave them a quantifiable idea of what the various industries are making and how the GRT falls so disproportionately. You can run down the numbers at your leisure (Exhibit M). I offer this to you just as information and say again, there is no such thing as a stable tax base. Do not tax the necessities of life. Tax the free economic choices of a free people.
James T. Endres, Lobbyist, McDonald Carano Wilson LLP:
With me this afternoon are two members of the Nevada franchise owners association for 7-Eleven stores. These folks have been in the business for quite a number of years and will be talking to you this afternoon about the effect of the GRT and other components of the Governor’s tax proposal as they relate to a franchisee as opposed to an independent store operator.
Rich Rose, President, Cal-Neva 7-Eleven Franchise Owners Association:
I am a 7-Eleven franchisee. I have been a franchisee for 23 years and have been associated with 7-Eleven since 1975. I am the president of the Cal-Neva 7‑Eleven Franchise Owners Association. We represent 53 7-Eleven stores in northern Nevada and the Lake Tahoe area. I am also speaking on behalf of the stores represented by the 7-Eleven Franchise Owners Association of Southern Nevada, bringing the total to 200 stores. We do support the Governor’s effort in trying to balance the budget and we are ready to pay our fair share. We know what it is to meet the bottom line to meet the budget. However, we feel the GRT and the BAT have a disproportionate effect on our business. We, as convenience store owners, small businessmen, and franchisees, operate on a very small margin. The average store in northern Nevada does less than $1 million in sales. The 7-Eleven Corporation, by agreement, takes 52 percent of our gross profit split. We get 48 percent. We are under agreement to pay for taxes and licenses. We get 48 percent of the gross profit split and we pay 100 percent of the GRT. That is an unfair tax and it is a double tax on franchisees in the State of Nevada.
Coupled with the 300 percent increase in the BAT, the average 7-Eleven store, which rolls to the bottom line, about 4 to 5 percent because the franchisees usually work their stores, will be paying about 10 percent of their bottom line for this tax. I did not even get into the gasoline. By contract, we get a penny a gallon for pumping gasoline. We do not own the gasoline. We pump it. 7‑Eleven controls everything including the pricing and the ordering. I was told by our market manager the other day if these taxes go into effect, three to five stores in the northern Nevada area will be given back to 7-Eleven by franchisees and would then be considered for closing. That represents as much as 10 percent of our market in this area. What would be the effect in southern Nevada, which is three times our organization up here? There would be 24 to 40 people out of work because we could not meet the budget. Two stores in the northern half of Nevada closed last year and more will be closing if these taxes are put into effect. Never before have small business faced such uncertain times and with these taxes these times are more uncertain.
I was asked to bring up the services our stores use and the effects a broad‑based tax would have on them. We have service contracts from janitorial, laundry, lighting, maintenance for equipment, maintenance for outside, and we pay for attorneys and accountants. These services represent anywhere from 15 to 25 percent of our expense line. If you take out payroll as our expense line, that is over 50 percent of our expense. Yet, we do feel this is a fair tax on us and we think it would be more reasonable to pay this tax than a GRT. We want to pay our fair share, but we do not want to pay more than our fair share. In answer to a couple of questions asked by Senators O’Connell and Tiffany, my wife is a nurse in the Washoe County school system and she was given notice there will be three nurses let go because of the budget crisis. All the nurses have to reapply for their jobs.
Senator Tiffany:
The point we legislators want to make with the funding of schools is we do fund the schools. They do get the per-pupil expenditure that would meet their needs and they do get money outside of the per-pupil expenditure. What we have is a collective bargaining problem. When Clark County comes back and says they are $70 million short, they are short because of collective bargaining. It is not because of the operational funding. I have a laundry list from the newspaper this week of all of the administrative overhead in the Clark County School District. There are 125 people alone just in curriculum development and out of those, 100 work 200 days a year and they make $90,000 a year. We can go within the transportation department, the school police department, all the social services, there is a homeless project; I mean I can go on ad nauseam. There are line-item expenditures out of the DSA earmarked for books that get taken away out of collective bargaining. Class-size reduction is one item we have all taken a look at and said do we really need to have it at 15 or 16 students per classroom? Maybe it should be 20? We could save $50 million a year on that alone. When we talk about funding for education, my contention is it is not underfunded. It is misdirected once it gets to the district.
Rich Rose:
You and I might agree very much on this issue. My wife is at the bottom of the totem pole and when they are cutting 3 nurses from a staff of about 33, raising class sizes, cutting sports programs, and they are cutting one administrator from Washoe County, you and I probably could not agree more. Yet I do feel we need to pay whatever it takes to educate our children in this State.
Senator Tiffany:
We have the No Child Left Behind mandate, we are addressing proficiency testing, we have standards in place, we have remedial classes for teachers to learn how to teach again, and so I think we are addressing that very seriously.
Jim Conley, Vice President, Cal-Neva 7-Eleven Franchise Owners Association:
I have been a franchisee since 1979 and have worked for the corporation since 1974. I am also vice president of the Cal-Neva 7-Eleven Franchise Owners Association. In considering a broad-based business tax you should consider how the businesses are structured and the way the money gets to the bottom line. In our franchisee agreement we are responsible for all taxes, yet the 7-Eleven Corporation gets 52 percent of the gross profit. As franchisees, we get 48 percent. Sales in the average store in northern Nevada are under $1 million. My store in Sparks had more sales than average at $1.25 million. After paying all store expenses, including 52 percent to the 7-Eleven Corporation, my income was $27,160. Under the proposed business tax plan I would pay $2007 for a quarter tax and seven employees would cost me $980 for the BAT for a total of $2987, or 11 percent of my income.
If a store has had a bad year such as I did in 2001, my income was $6731 on sales of over $1.5 million, the tax would have been $2759 or 41 percent of my income. I understand the need to balance the budget, but any tax placed on businesses must take into consideration the structure of the business and its expenses or the result could be the business must close or lay off employees.
Chairman McGinness:
Mr. Schumann we have your testimony in front of us (Exhibit N. Original is on file in the Research Library.) and I would appreciate it if you would summarize it. I want to remind you this is not a personal issue. I scanned some of your testimony. The Governor has an issue he has presented to us. This is not a personal issue between the Governor and us, or between any taxpayer and the Governor, so please keep it on an issue basis.
David K. Schumann, Lobbyist:
I will, and I will quickly get to the study here, but section 11 is a bad misunderstanding. You cannot say in the law “… must not be construed as a tax upon customers of the business entity.” That is like saying the law of gravity does not exist. Unless a business covers its entire overhead, it will go out of business. You heard it better from the petroleum folks than from me.
There is a study attached to my testimony from the American Legislative Exchange Council. What they found is if you raise taxes you will harm the economy of this State. A summary on page 5 in my presentation (Exhibit N) shows those states that cut taxes had five times the budget reserves of states that did not and their bond ratings worked better. Population gains were 3.8 percent in the tax-raising states, but 13 percent in tax-cutting states. So you gain people coming into the State who work and contribute to the economy. The folks who cut taxes gained 16 percent in employment growth and the people who raised taxes gained only 5 percent at a time when the nation’s employment went up 12 percent. The total State income grew by 22.5 percent in the tax-cutting states, which was twice the income growth of the tax-raising states.
I also have documentation here about per-pupil spending. The United States government, the Office of Education Research and Improvement, which is a part of the Department of Education, found that performance of U. S. physics and advanced mathematics students was among the lowest of the 16 countries that administered the physics and advanced mathematics assessment. That is not in Nevada. That is in the entire country, so the problem is not money and that is indicated on the next charts on page 15 (Exhibit N). Nevada spent more per pupil than Austria, Italy, West Germany, France, the United Kingdom, Australia, the Netherlands, Japan, Ireland, Spain, and Portugal. Most of those countries did better than American kids on the Third International Math and Science Study. It is not a question of money. It is a question of educational philosophy and the content of the textbooks, which frankly, are hollow. When I went to school, there were 30 to 35 children in a classroom. I guarantee you I received a better education from elders than the kids do today in a 15 to 20 student classroom. You definitely do not need to raise the per-pupil spending because the highest per-pupil spending is in places like New York, Washington, and New Jersey. Their student achievement is lower than South Dakota, and South Dakota spends less than Nevada. As Milton Friedman says, there is an inverse relationship between the amount of money the government spends on education and the academic results achieved thereby.
Education should not be sacrosanct. The illustration Senator Tiffany gave about the educators is par for the course. This State would be extremely unusual if this is not true in Nevada. In California, I can say with assurance, less than 50 percent of those dollars in the per-pupil spending get to the classroom. A lot of overhead can be cut. Please read this package I have given you (Exhibit N). I am saying things better people than me have documented in here.
Lucille Lusk, Lobbyist, Nevada Concerned Citizens:
Perhaps it is appropriate for the citizen perspective to appear at the end of the day because it is where we appear on the tax structure as well, at the end of the pyramiding effect described very well to you earlier by businesspeople. I would like to point out a few things in S.B. 238 that quite candidly absolutely took my breath away when I read them for the first time, beginning with section 11, which says the gross receipts tax must not be construed as a tax upon the customers. That is about the bravest statement I have ever heard and it is absolutely untrue. It is a tax upon the customers, which is exactly how it will be construed by everyone who is being honest about it. The meaning of the language in this bill can only have a couple of interpretations. One of those is that we are not allowed to say it is a tax on the customers. We are not allowed to write it on our bills or in the materials we send to our customers. The other one is the potential beginnings of price controls. If it really means the businesses are not going to be allowed to pass this on to the customers, then we are looking at a great deal more cost in enforcement than any of us can imagine. There would have to be monitoring of the prices of all businesses.
On page 5, section 17, line 31, is where you see the exemption for a business making $450,000 or less. Small businesses are not supposed to be concerned about this bill because of this exemption, but the bill in itself is proof exemptions never really last. Look at section 187, which repeals the business tax exemption on sole proprietors and single-person businesses. There we have it. There was an exemption we are now poised to take away. You undoubtedly also know the Washington Business and Occupation Tax started with an exemption similar to this $450,000. It was later taken away. Mr. Flint approached me yesterday and mentioned the effect this bill would have on the prostitutes. I told him I thought I would have to leave it to him to defend the interest of the ladies, but his point was very well taken. The independent contractors, those having very small operations, just enough to supplement their income, are going to be very seriously impacted by the removal of this sole proprietor exemption. As you know, the casino industry is clearly favoring the GRT. They have their reasons and they are understandable reasons actually, but they are attempting to make their case by emphasizing huge businesses that use a regional and national pricing structure. You have heard today from many smaller businesses operating out of Nevada. They are our backbone and they are the ones that will have to pass these prices on to the customers. If they are denied the opportunity to do so, they will be destroyed and we will lose the entrepreneurial spirit that has meant so much in America and in Nevada.
Ms. Lusk:
On page 7 of the bill, I was completely floored to read subsection 3, specifically looking at lines 16 through 23. This is where the Department of Taxation sets the criteria for what amount of GRT will be attributable to the business. Starting with line 16, it says “In determining the gross receipts derived from the sale of products, the Department may provide for the determination of the value of the products based upon the gross receipts from sales within this state of similar products of like character and quality, in similar quantities by other business entities, if the Department determines that the income derived from the sale of the products is not indicative of the true value of the subject matter of the sale.” This is saying we are going to look at the comparative value, the deemed income if you will, of a business, not their actual receipts. Anyone who does any level of pro bono work, any level of charity work, which we try to encourage in this State, or anyone who just has a sale giving a good price to the customer, they are going to be penalized. They are going to have to pay based on the “true” market value as determined by the Department of Taxation rather than on their actual income. I have not heard anyone talk about this yet, but it is there and there is no mistaking its meaning.
Finally, I do have to express some concern with some of the materials presented in some of these hearings regarding tax increases and their affects. You have seen these graphs, particularly the one talking about the tax increase on the family of three. This is very inaccurate because it reflects only the direct taxes in the bill. It does not acknowledge the honest truths that the GRT, the business license tax, and the BAT largely are going to be pyramided down, funneled down to those families. The tax increase on the family of three, and we will use the nonsmokers to start, is going to be a great deal more than what is recognized. We have this philosophy that we are not allowed to attribute the gross receipts to a tax on the consumers. We are not supposed to notice it. We are not supposed to know and a lot of times people do not know.
We do recognize there are challenges before you. We do not take the position there should be no taxes nor do we take the position there should be no government. There is a purpose for, and purposes validly served by government. When you honestly believe you have done all you can to economize, to implement your audit recommendations, when you have privatized all you can and you really still feel there is an element you have to address, we ask you to make sure it is addressed with an up-front tax. Make sure it is honest, not hidden behind “you are not allowed to say what it really is.” Finally, do not create any form of taxation requiring the development of a State Internal Revenue Service. There are some other bills to be considered. From what I have seen so far, I do not think any of them are perfect. You will probably have to cobble together the best you can. We are not at all convinced $1 billion in new taxes is needed, but we do realize you will have to address some portion of this. We believe you could make economizing a rough equivalent to the amount of taxes you need to raise. Ultimately, if a legitimate effort is done, the people will understand what has been done, appreciate what has been done, and support you in that effort.
Stephanie D. Licht, Lobbyist:
Today I am not representing my usual clients and hope you will divorce my presentation today from them. I am today appearing as a citizen of rural Nevada and on my own behalf. You should have a copy of the prepared testimony from which I will read (Exhibit O). What I have to present to you today is a proposed conceptual amendment to any tax bill you would like to hang it on. My recommendation is to continue the current system of tax collection with sensible modifications such as you have heard from Ms. Lusk, the Nevada taxpayers’ recommendations on all matters pending, Senator Neal’s examinations of tax exemptions, use of Rainy Day Funds, and so on. Perhaps this is a little simplistic, but math is not my strong point. If you determine the amount of the State budget deficit and divide by the per capita, you would arrive at $35 to $50. I have a check here for five times $50 I would be happy to donate to the State of Nevada to help make up the deficit this year. It would create in the office of the State treasurer a special account to accept any voluntary gifts. This is not my idea alone nor is it a new one.
The precedent was set with the Nevada Protection Fund. It could be interest bearing, the interest going back to the account. It could be set up and titled something like “The Nevada Services Tax” so that it would be capable of being counted towards a State tax so you could take it off your federal income tax. Contributions made to this account could be a limited percentage of federal tax, and your cancelled check would be proof of payment. The account would be subject to disbursement only by the Interim Finance Committee because they are our elected representatives.
To begin, have four subaccounts of education, health and human services, the Rainy Day Fund, and corrections, rehabilitation and training. In the first biennium you would grant awards based on justified need. Anything past that would be on the conditions of merit, such as economy, efficiency, new ideas, innovations, et cetera. In subsequent biennia you could expand the areas of designated funding to other State programs and agencies, and grants from the fund could be made on condition of competitive innovation. To implement would require perhaps five new clerk positions at the State treasurer’s office, and five computer input systems. Furniture and cubicles could be borrowed from present staffing vacancies in State agencies. The old press quarters in the Capitol Building might be available. You could conduct a media campaign explaining to Nevada citizens and businesses if they would voluntarily come to the aid of their State and pour money into the short-term fiscal crisis, they may find a reduction of individual and business tax from their federal tax.
Historically, Nevada has been innovative in the way it raises money. Every dollar in the account would be a dollar you did not have before and what is the worst that could happen? Nobody would send in any money and mine would be the only $250 in there. Who will pay a voluntary share? We know throughout recorded history of man, the folks in the upper crust usually pay proportionately less taxes. I do not know how that works out. It just does. The folks in the lower classes do not have the ability to pay and so the folks in the middle usually end up paying.
Ms. Licht:
Senate Bill 238 is kind of like a jigsaw puzzle. If you take all the pieces of this jigsaw puzzle, lay them out and kind of squish them around, eventually you would put the picture together. I do not know enough about taxes, but I think if you took the pieces to this bill and took them apart and put them where they belong, you would have a picture much like what I have said. Who is going to pay their voluntary share? People will say, “Well golly, the rich will not pay.” Well they are not paying anyway so get over it and get on with it. One of the greatest fears of man is the fear of the unknown, often manifested in anger and frustration. If people knew it would cost $35 to $50 per person in their family, would they cough up the dough? I took a fabulous survey of one person over the weekend and he said, “I will write you a check today.” Voluntary taxation is not new. Ancient people cast their money into the treasury, the rich man giving of his abundance, and the widow, all she had. Voluntary giving toward a Statewide goal generates goodwill and fosters the spirit of community. We are all in this together.
Now you have heard a lot of folks say they know they need to raise taxes. If gaming likes the GRT, they can pay into this fund whatever they decide they want to pay. Businesses could pay as much as they want to pay per head. Girl Scouts, volunteers, anybody could put money in there to come to the aid of their State. Businesses might consider Nevada a unique opportunity with a favorable tax climate in paying taxes on a voluntary basis with the possibility of credit against federal taxes having control over what they pay. This voluntary system of contributory taxation might provide enough relief to buy time for a legislative interim study and go forward from where the tax policy people left off. No matter how noble, top-down imposition of taxes often is not fair, equitable, easy to administer, timely, or easy to collect. Voluntary tax payment is fair because you only pay what you can. There is nobody to enforce it, there is no one coming to your door, there are no forms to fill out, or anything else except the little check. We could encourage competition between individuals, teams, divisions, and departments of State government for grants for projects and special merit pay with 5 percent of any award going to the department administration account or in the case of merit pay, 5 percent to the administrator.
Ancient people built the pyramids using power of the mind, their bare hands, hand tools, determination, and cooperation. When motivated, people working together can accomplish the impossible.
Senator O’Connell:
Governor Mike Huckabee of Arkansas did this. I do not know how much success he has had with it but it might be worth looking into. I cannot remember exactly how long ago this happened, but because he was getting so many letters from people saying they would pay more taxes, he set up a fund and replied by giving those people the account number into which they could send their money. Just out of curiosity staff might want to give a call and find out how successful it has been.
Ms. Licht:
This absolutely is not my idea. I have had friends come to me asking what they can do. If they had knowledge of what they could pay, I feel they would pay.
Doug D. Busselman, Lobbyist, Nevada Farm Bureau:
Thank you for the opportunity to read my prepared testimony (Exhibit P).
Lynn Chapman, Lobbyist, Nevada Families Education Foundation:
We are here in opposition to S.B. 238. I would like to start by asking, how much is enough? I was reading the front page of this tax bill and taxes are sometimes hard to understand. I was reading about levying an ad valorem tax and I had no idea what it was. When I asked somebody, I was told it has to do with property tax. I started thinking and wondered what would happen to people on fixed incomes and people with disabilities. Those people do not have a lot of money for their rent, and property taxes are included in their rent. What would they do? Would they move? Where would they move? Probably out of State. Families are trying to make ends meet and they are having a hard time with it right now. What are the statistics on family fights and what do they fight about? Well, it is money. Why? It is because they do not have enough. Where are families supposed to go to get more money? Maybe a second or third job.
My husband has worked in manufacturing for years. The company he works for has been in Nevada for 53 years and in the last 6 months he has been very upset because they have had to lay off approximately a third of the people who work there. Now we are looking at a GRT and a head count tax, which would mean more layoffs. I have a teenage daughter and a lot of her friends are looking for jobs and cannot find them. Why? It is because the older people are now getting those jobs to try to make ends meet because they have families.
Education is half the State budget. The school district always needs more money for this or that, but the things they always say they are going to cut out are the things we actually need for the teaching of our children. This seems rather strange to me and I see it as something like extortion. “You pay up or else we are going to take something away from you.” We families who home‑school are able to teach our children with a very small amount of money and we seem to be doing it very successfully. I averaged about $90 a school year for my daughter. Therefore, I think I have good idea. How about if you put home-schoolers at the head of the budget? We can go through and get out all of the fat in the budget for education.
My teenage daughter asked me to say something about the entertainment tax. She said, “Just tell them two words, and this is what I think about the entertainment tax. Bah Humbug!” It comes back to how much is enough? That is the question we are asking as families. How much is enough? We are running short right now.
Senator O’Connell:
How many children do you have and what ages are they?
Ms. Chapman:
I have one exceptional daughter and she will be 18 in a couple of weeks. She is a senior this year and I would like to add that she was nominated for a scholarship to go to Japan. Unfortunately, even though she was a finalist, she did not get the scholarship but she did go to Girl’s State last year. Our children do very well on very little money.
Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association, Inc.:
I am representing the trucking industry operating in and through the State of Nevada and appearing here in opposition to the GRT portion of S.B. 238 and to some extent, to the tripling of the head tax. Most everything has been said with respect to what impacts it would have on start-ups. Let me just share this with you. Our industry overall has a gross profit margin of between 2 and 3 percent before the application of federal income tax. The trickle-down theory you heard before, or the pyramiding of this would also impact our industry. That 2 to 3 percent I just told you about was last year’s operating ratio. We are now paying 50 percent more for fuel than we did a year ago. In fact, we are paying closer to 60 percent more, which represents a very large expense because we make our living on the road. The fact of the matter is the economy is not good. We are the first ones to tank when the economy tanks and we are basically the last ones to come out of it. Therefore, we feel it quicker and recover from it less quickly than others do. Bankruptcies per year in this industry in the last 5 years are double what they were 5 years ago.
Some of the other issues brought up apply to us too. Generally speaking, if you are in an elastic economy where you can price your products accordingly, it is one thing. If you are in an inelastic industry where you have a lot of competition and no room to move, to use the word absorb would be wrong at this point in time because we really do not absorb it, somebody is going to pay. It may be in the form of not being able to give our employees sorely needed raises, benefits, or maintain benefits we have. The fact of the matter is someone ends up paying the price for taxes and it will not be the businesses. It will be the consumer on the end product he buys, or your employees who are not going to get the pay increase or the benefits you had hoped to give them. Businesses simply pass those expenses through to the people whether they are employees or customers.
Bill Wallace:
I would like to make two quick points about the taxes everyone is talking about. I have twelve employees and my net profit runs between $70,000 and $80,000 a year. I have a neighbor who is a senior bank executive whose annual salary exceeds a little over $100,000. With the Governor’s proposed taxes the State will extract $5700 a year, or about 8 percent of my earnings. My neighbor, who earns more than I do, will not be asked to pay a dime out of his earnings, which I do not think is real fair. If we are going to tax, tax everybody. To me, taxes and fines are basically the same thing. They are two different words having about the same affect. If you tax somebody enough, you are going to discourage an activity. If you discourage it enough, then it will not happen anymore.
Misty Grimmer, Lobbyist, Nevada Residents Agents Association/Reno:
We also are in opposition to the gross receipts portion of this bill. We come at it from a little bit different angle though. As you know, the State of Nevada has passed incorporation laws and our tax environment makes Nevada a very friendly State for companies to come to incorporate. We are in the range of probably four times as many as the national average for the number of incorporations in the State of Nevada. The corporate filing fees filed at the secretary of state’s office generate in the range of $100 million or more per biennium for the State of Nevada, about $80 million of which comes from the clients of Nevada Residents Agents Association. In addition, our industry spends approximately $10 million a year promoting Nevada nationwide as an incorporation-friendly State. The difference between our members and many of the other people who have testified today is we are, for the most part, businesses on paper. We do not use any of the services of the State. We do not drive on the roads and we do not use the school district, which puts us in a different situation. We are simply generating money for the benefit of the State. The passage of a GRT would essentially eliminate the position Nevada has in the nation that encourages businesses to come here. The result could very likely be a loss in the range of $100 million to the State.
Another portion of this bill affecting our industry is the increase in the secretary of state filing fees. There is a bill coming from our industry through the Senate Committee on Judiciary.
SENATE BILL298: Makes various changes to provision pertaining to business. (BDR 7-987)
Ms. Grimmer:
The bill proposes a different structure for those fee increases, which will not only generate money for the State but will do it in a way that will not discourage businesses from wanting to incorporate here in Nevada. I hope you will wait to see and consider S.B. 298.
Chairman McGinness:
We are adjourned at 5:52 p.m.
RESPECTFULLY SUBMITTED:
Ardyss Johns,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: