MINUTES OF THE
SENATE Committee on Taxation
Seventy-second Session
May 1, 2003
The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 1:37 p.m., on Thursday, May 1, 2003, in Room 2135 of the Legislative Building, Carson City, Nevada. The meeting was videoconferenced to the Grant Sawyer State Office Building, Room 4412, 555 East Washington Avenue, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Mike McGinness, Chairman
Senator Dean A. Rhoads, Vice Chairman
Senator Randolph J. Townsend
Senator Ann O'Connell
Senator Sandra J. Tiffany
Senator Joseph Neal
Senator Bob Coffin
GUEST LEGISLATORS PRESENT:
Senator Maurice E. Washington, Washoe County Senatorial District No. 2
STAFF MEMBERS PRESENT:
Rick Combs, Fiscal Analyst
Ardyss Johns, Committee Secretary
OTHERS PRESENT:
Jeremy Aguero, Resident Agent, Applied Market Analysis, Limited Liability Company
Kara Kelley, Lobbyist, Las Vegas Chamber of Commerce
Samuel P. McMullen, Lobbyist, Retail Association of Nevada
Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association, Incorporated
Wayne A. Frediani, Lobbyist, Nevada Franchised Auto Dealers Association
Russell Fields, Lobbyist, Nevada Mining Association
Michael J. Brown, Lobbyist, Barrick Goldstrike Mines, Incorporated
Courtney Alexander, Lobbyist, Culinary Workers Union Local 226, Hotel Employees and Restaurant Employees International Union
Al Bellister, Lobbyist, Nevada State Education Association
Mary Lau, Lobbyist, Retail Association of Nevada
Sally Devlin
Van V. Heffner, President and Chief Executive Officer, Nevada Hotel and Lodging Association
Chairman McGinness:
We will open this meeting of the Senate Committee on Taxation. We are going to ask Mr. Aguero of Applied Market Analysis to come forward today.
Jeremy Aguero, Resident Agent, Applied Market Analysis, Limited Liability Company:
The Legislative Counsel Bureau asked our firm to take a look at the sales tax on services by building off of some of the analyses performed for the Governor’s Task Force on Tax Policy in Nevada. Certainly the long-term vitality of Nevada’s State and local retail sales and use tax system is threatened by a variety of economic and technological trends. To many, the primary concern is the increasing portion of economic activity in the provision of services as opposed to the sale of goods.
Nevada sales tax was initially enacted in the 1950s when services accounted for a much smaller portion of overall economic activity. During the past half century, the United States’ economy has shifted away from manufacturing and sale of tangible property to an activity based more exclusively in service-related transactions. Nevada has also become more services oriented just like the nation has. However, the nation has become more like Nevada as opposed to the alternative, with service-based industries in Nevada accounting for more than 70 percent of the State aggregate economy. In some cases, service transactions today did not even exist when Nevada sales and use tax was originally conceived.
Examples include computer- and Internet-related services as well as telecommunications-related services. As a result, State retail sales and use taxes are, in many cases, not well suited for today’s economy. Some believe expansion to the sales tax base to include services as many states have is one way to address this issue. Certainly, Nevada’s sales and use tax base is among the narrowest. Nationally, a report published in 1996 looked at a comparative analysis of services in the 50 states and found Nevada’s to be among the narrowest retail sales and use tax bases nationally.
You have in front of you a table entitled “Nevada Tax Base Estimate Summary, Tangible Goods and Services, 2004-2011” (Exhibit C). Tangible sales are of course already subject to taxation in Nevada. The services categories are the ones reported by the Minnesota IMPLAN Group Incorporated’s input-output model developed based on the Bureau of Economic Analysis accounts tables. They include everything from agriculture, real estate, and freight movement to professional and personal services. The aggregate total in 2004 for services is at roughly $51.9 billion. This compares to the existing base for tangible goods of about $37 billion annually.
The Nevada services economy is a robust and wide and growing base. That having been said, I would caution you the figures we provided to the Legislative Counsel Bureau and now to you represent a theoretical maximum of what could potentially be taxed. Of course the way in which you impose a retail sales and use tax, the way in which you deal with allocation, apportionment, whether or not there is a compensating use tax, will affect the ability of the tax to produce the theoretical maximum. I would caution you to consider these factors as you determine estimates and your course of action.
Senator Neal:
Are you for or opposed to the service tax?
Mr. Aguero:
I am neither for nor against any tax.
Rick Combs, Fiscal Analyst:
I think it might be important while Mr. Aguero is up here, to point out, as he indicated, the Legislative Counsel Bureau has asked him to do some work on a couple of items this session we were not able to fit within our ability to handle. Mr. Aguero today is just presenting this data to you as his work on this issue and he is neither in support of nor against it. He is just providing the data you need to make your analysis.
Senator Rhoads:
Is the $51 billion the amount of goods and services that could be taxed for the service tax?
Mr. Aguero:
The $51.9 billion, theoretically, is the amount of services demanded by local businesses and individuals. It has been discounted to take out government purchases. The question of what would actually be subject to any given tax is very much a function of the mechanics of the tax you impose. You might have an accompanying use tax and allocate enough money to be able to collect it more efficiently perhaps than we do with our use tax on tangible goods. You might choose to make it an origin-based or destination-based tax. Those things are extremely important and can get very complicated. This is the base where we would probably want to start. We would probably move downward from here.
Senator Rhoads:
Is that because of the exemptions and so forth?
Mr. Aguero:
It is the exemptions as well as how collectible some things are. We have talked to folks from Florida to Delaware and from Washington to Hawaii, many who have retail sales and use tax, some of which are very broad and others relatively narrow. Some of them have enacted a number of services over time. We have talked to a lot of their analysts who worked on developing some of these services. They have cautioned us to caution you, oftentimes, even though we know what the theoretical maximum is, people play a lot of games when it comes to services and you should therefore be cautious as a State.
Senator Rhoads:
What does the total revised tax base of $89 billion mean?
Mr. Aguero:
It is collective of both the base tax on tangible goods as well as the services base.
Senator O’Connell:
This is all figured on a 7.25 percent sales tax? It is not reduced to the 5 percent?
Mr. Aguero:
This is the sales tax base. It reflects whatever rate you want it to on these figures in order to come up with a theoretical maximum produced by any of these services.
Senator O’Connell:
When you say a sales tax base, are you just talking about the 2 percent?
Mr. Aguero:
No, when I say sales tax base, I mean the total amount of taxable sales having taken place. Perhaps it would be easier to look at the 2004 figure for tangible services of $37.2 billion and multiply it times 7 percent. It will give you the tax collections at 7 percent. If you multiplied $37.2 billion times 5 percent, it would give you the tax collections at 5 percent.
Senator O’Connell:
How did you arrive at these figures?
Mr. Aguero:
We used a model generally accepted in the economic community called Minnesota IMPLAN. It is an input-output model that looks to illustrate how transactions occur within any given economy. It is specific to the State of Nevada. One is created for every state and is built off of the accounts used by the Bureau of Economic Analysis.
We have also collected information with regard to other states having sales tax on services. It is somewhat subsequent to these analyses we have provided to you, but those states have been very forthcoming. The state of Florida, for example, has been very forthcoming in giving us its collection activity, as well as some of the analyses it has done with regard to the expansion of its base. Arizona is looking at something similar, as is the state of Washington.
Senator O’Connell:
Is this something New Mexico has done and is looking at reversing?
Mr. Aguero:
I am not familiar with New Mexico reversing its state sales tax on services. It does have a very broad sales tax on services. I can certainly look into it and get back to you.
Senator O’Connell:
I know they call theirs a gross receipts tax, but it seems to me it is more of a sales tax. I thought New Mexico’s governor was looking at reducing the state’s budget as opposed to increasing it.
Mr. Aguero:
New Mexico does call theirs a gross receipts tax, as does the state of Arizona and the state of Hawaii. I think, functionally, it is very much the same. I think some legal ramifications may draw distinctions between the two.
Chairman McGinness:
On page 3 of your handout (Exhibit C), the total services go from $51.9 billion in 2004 to $54.3 billion in 2005. What is the increase, something like 3 percent?
Mr. Aguero:
The difference in the services is based upon the forecast of growth of the overall economy using information provided by a number of sources, probably primarily employment growth figures. The size of the economy is a function of how many employees, or vice versa. It changes year over year because employment growth is expected to change year over year.
Chairman McGinness:
What was the factor between the first two years?
Mr. Aguero:
I believe it was a little less than 3 percent because that is about how much we are expecting employment growth to increase.
Senator Coffin:
Are any sales tax figures included under “New Residential Structures?”
Mr. Aguero:
It has been discounted, so you are only looking at 30 percent of the total, which is the labor costs associated with new residential structures. These are commodities, not industries.
Senator Coffin:
I wish, side-by-side with these numbers, we had a grid showing us the goods content less the discount for each particular category. I could then figure in my own mind as I try to weigh the differences between these plans, how much a citizen can save. For example, if you have already discounted them 30‑some percent, it is about $1 billion in new residential structures.
Mr. Aguero:
No, it is about $9 billion, so you are only seeing the 30 percent.
Senator Coffin:
All right, so $9 billion is taxed at “x” sales percent.
Mr. Aguero:
No, not everything is subject to tax. Some tangibles in there would not be subject to tax.
Senator Coffin:
Okay, taking off the intangibles, $6 billion would probably be taxed.
Mr. Aguero:
I have not taken a look at breaking down the price of a home, as in what would be subject to tax and what would not. I do not know if it is all tangible goods that go into the construction of a home. Perhaps I need to clarify. Remember, the retail sales and use tax is only subject to the final purchaser of goods, which is why it gets more complicated. It is not merely a split.
Senator Coffin:
So, you have pyramiding here.
Mr. Aguero:
Right, this would be the total amount of spending on new residential housing.
Senator Coffin:
If you were to take 1 percent off the sales tax in that one line item, then what do you say to the consumer?
Mr. Aguero:
If you removed the existing sales tax? We would have to do a study with regard to what the average consumer purchases. With regard to the incidence analysis, we have taken a look at what is called intermediate purchases, or purchases of business by business, and then institutional purchases which are purchases by governments and households.
Senator Coffin:
I think it would be nice to be able to see what the consumer saves. If you were going to tax at 1 percent for example, the services going into the construction of a residence, what are you going to say if you take off a corresponding 1 percent on the sales?
Mr. Aguero:
It is your direction. We will get you whatever numbers you would like to look at.
Chairman McGinness:
Mr. Aguero, due to the lateness of hour of this session, we would appreciate any information you have readily available.
Mr. Aguero:
We will have it for your meeting next week.
Senator Coffin:
So, your model does have that number?
Mr. Aguero:
Absolutely. We have 558 categories we review and analyze so you are seeing here only the services categories. It does not include manufacturing categories.
Senator Coffin:
I, Joe Politician, have to face Joe Consumer after he chews me out for raising his taxes. I have to say, “Yes, that is true, sir, we did create a new tax, but we reduced your other taxes. Here are the things you usually need and here is the amount we did save you on that.” To me, that is the heart and soul of this whole proposition.
Senator Neal:
Where did you get this list of taxable services?
Mr. Aguero:
It comes from the Minnesota IMPLAN Group’s input-output model. We then compared the services taxed in some other jurisdictions to find which line items we thought would be a good idea to pull out and provide to you, but all services are put in here.
Senator Neal:
Does this correspond to the services utilized here in Nevada?
Mr. Aguero:
Right, these show the demand for services locally within Nevada. They eliminate explorative services and they show the import of services.
Senator Neal:
So, the exported services are eliminated from this group.
Mr. Aguero:
That is correct.
Senator Neal:
So, we are only dealing with the imported services.
Mr. Aguero:
That is correct, but again, it was an assumption we made.
Senator Neal:
Why would we eliminate the exported services?
Mr. Aguero:
Because I think it corresponds with the tax currently existing on tangible sales, which is a destination-based tax. If I sell a widget into the state of New Mexico, it is not subject to tax in the State of Nevada. Somewhat similarly, we made the assumption perhaps if I sold my legal services into the state of New Mexico, those would not be subject. However, I think it is a very fine line and one for you to debate.
Senator Neal:
So, if I had a corporation developing widgets within the State, as you said, and I sold them in New Mexico, then it would not come under this category?
Mr. Aguero:
It would not show up under tangible goods because we have a destination‑based tax.
Senator Neal:
So, what if I sold it and it came back into the State?
Mr. Aguero:
Did you sell it at wholesale or did you sell it at retail?
Senator Neal:
For the sake of discussion, I sold it at wholesale.
Mr. Aguero:
Okay, you sold it at wholesale into the state of New Mexico. New Mexico taxes some wholesale, so you might get taxed there. If you then sold it at retail into the State of Nevada, the company to which you sold it would be required to pay a compensating use tax unless you had a minimum physical presence within the State of Nevada. Then you, as a company, would be required to remit the tax to the State.
Kara Kelley, Lobbyist, Las Vegas Chamber of Commerce:
We have provided handouts to you today (Exhibit D. Original is on file in the Research Library). We appreciate the opportunity to talk to you about the Business Representatives Group’s suggestion and proposal on an expanded sales tax to services. The purpose of our proposal was to design a plan in which businesses and higher income individuals would pay the bulk of the tax. We believe this minimizes regressivity to a certain extent and, in fact, we have designed it to lower the tax burden on low- and middle-income families.
Businesses are major users and purchasers of outside services and so, through this, we believe it is a broad-based tax since most every business uses services. It is a tax businesses will pay. Contrary to what you may have heard, either political spin or misrepresentations in the newspaper, I do want to clarify that, as it relates to the Las Vegas Chamber of Commerce. Our board members are not exempted. In fact, out of our non-gaming board members, our board member industries are taxed under this proposal at 70 percent, or 3 out of 4 of them.
Which services to tax and which not to tax are obviously policy decisions you will make. What we tried to do is craft a proposal primarily targeting services used by businesses. We looked at things like auditing, bookkeeping, air transportation, business associations, electrical service, janitorial services, legal services, and repair. However, we exempted home repair and while average Nevadans occasionally have to use legal services, they probably do not use them on a regular basis like businesses do.
We looked at taxable services primarily consumed by business. Those are listed on pages 2 and 3 of your handout (Exhibit D). We also looked at taxable services used by the affluent, which are listed on page 3. On page 5 we looked at trying to also include the taxation of discretionary services, which you will see are those nonessential to Nevada’s families. The decision of whether or not to use them ultimately lies in the consumer. On pages 6 through 9, we take you into the list of things for which we think should not be taxed. Those are services used by average Nevadans which, if taxed, would result in higher regressivity and unfairly burden lower and middle-income families.
We tried to focus on exempting residential services used, such as home repair and maintenance, but also new home construction and landscaping. We also looked at exempting educational things people use to better their educational levels and their skills.
We exempted repair services primarily used by average Nevadans, including automobile repair, apparel and tailors, and veterinary services. We also looked at non-taxable services that are economic stimulants like job training and related services and advertising. We exempted advertising because, from our perspective, it is something used by every business in order to generate additional sales and therefore, increases sales tax revenue.
We also looked at trying to reduce the level of pyramiding that might occur when you look at manufacturing and goods production exemptions. Those categories are shown on page 11 and include new industrial and commercial construction as well as new residential construction. We also exempted government-related services shown on page 12 of your handout (Exhibit D).
Not within our list are services that have been previously taxed. We have proposed to exempt them in order to avoid double taxation. Of course, services taxed by chapters 372 and 374 of the Nevada Revised Statutes (NRS) are included in those and listed on page 13.
The next page really shows the compelling story of this proposal. It is headed “Nevada Annual Average Household Expenditures.” These are the typical household expenditures an average family uses in a year. If we taxed all services and not including our exemptions, under our proposal with the reduction in the sales tax rate, the average family would save $89.37 a year. However, the next page shows with the exemptions we have proposed, the average household saving per year actually increases to $250.20. We are looking at a way in which to tax businesses as consumers of services, while reducing the sales tax rate from 7.25 percent to 5 percent, to be able to give tax relief to average Nevadans.
Finally, we want to point out this has the opportunity to generate quite a bit of revenue, which is within your purview to decide how it is spent. We believe it is reflective of our service-based economy. It will grow with the economy and provide stability for the State into the future. It also collects revenue at an earlier date than some other proposals and reduces the sales tax rate on products.
Samuel P. McMullen, Lobbyist, Retail Association of Nevada:
Just to clarify for the record, our presentation today is not just the Las Vegas Chamber of Commerce. We are also here as part of the larger Business Representatives Group. It is made up of dozens of businesses, organizations, and individuals who have worked hard over the last 2 years trying to make sure this proposal is in front of you now.
As a matter of some explanation, I might indicate, just to supplement Ms. Kelley’s testimony before I start on my presentation, we had initially assumed mortgage interest was not a service or was not taxed as a service. We had thought it would not be in these numbers presented to you by Mr. Aguero (Exhibit C). However, there is some indication it might be included in the banking number. The second area we initially thought was excluded, which may not be and may be included in these numbers, is rents and leasing.
There is a whole list of policy issues being presented here for you in terms of which services should be exempt and which should be taxed. These are only proposals, but having these numbers in front of you allows you to have the Legislative Counsel Bureau pull these apart and make sure we understand exactly what is in these brackets.
I will take you through the rest of the handout given to you by Ms. Kelley (Exhibit D). Some of this is a reiteration of what we have done before but I wanted to ensure you understood it, because you wanted some clarification of some of these concepts. We, as a group, may have overplanned. We were having difficulty trying to figure out exactly what the proposed deficit would be and what proposed add-ons might be required.
A lot of what we developed was developed in the sense it would be a macro source for a significant number of dollars. It would be significant that there would be some ability to create some tax relief in terms of the reduction of the sales tax, specifically, the component entitled the Local School Support Tax (LSST), which is 2.25 percent of the 6.5 percent rate.
If you will look at page 17, we envisioned a system where services would be taxed as a sidelight and in tandem with the existing sales tax. The revenue base would be sufficient enough to the point where the sales tax on products could be reduced up to the amount of the LSST, or 2.25 percent. That amount would be regenerated completely in a tax on services. At the same time, it would create an additional set of revenues over and above the replacement and the complete regeneration of the LSST. In the largest two counties having 0.75 percent in local options, the total tax rate would be 5 percent and the services tax, if implemented by you, would be taxed at 5 percent. It is a base of approximately $25 billion plus or minus, which is, of course, an estimate. Now you have the numbers in front of you, you can actually play around with these and see if that number stays there or moves, depending on what you think should be included or not included.
Page 18 is nothing more than a representation of what it would look like when fully implemented. You would have a services tax with a component in it allowing for an amount to go to the local governments to credit against the Distributive School Account and replace the revenue lost when you reduce the existing sales tax.
Senator Rhoads:
Do you mean the sales tax rate in counties not having the 0.75 percent local option would be 4.25 percent?
Mr. McMullen:
Yes, that is right.
We tried to create, on pages 19 and 20, two different potential scenarios for implementation of a service tax. The first one uses a very aggressive start date of January 1, 2004. However, there are some questions about whether such an early date is possible, based on the abilities and capabilities of the Department of Taxation. One of the things we heartily support is some enhanced computer and other systems help for them, so they can have the opportunity to move into some of these new tax systems and the integration of those. We clearly think it is an important issue.
Assuming you decided you would institute a service tax and you could implement it on January 1, 2004, there would immediately be a 1 percent reduction in the total sales tax rate, which would reduce the LSST by 1 percent. The revenues would then be looked at 6 months later, July l, 2004, by a government entity. There is a model suggesting the entity could be the State Board of Examiners, which would review and certify the revenue. The statutes you would enact would basically have ratchet points so, if in fact you met those, the rate could be additionally reduced.
We have shown here, for purposes of example, how the additional rate reductions could occur for every proven $125 million worth of production of revenue. Of course 0.25 percent on the sales tax is currently worth about $90 million every year, creating some cushion there. The theory would be if they see those revenues and certify them, then they basically, as a ministerial action, would implement the statute you would enact. It would say on October 1, 2004, the revenue should be in a position so the sales tax rate could be lowered; and then the same thing would happen again 6 months later after January 1, 2005. Our theory is there would be so much revenue, the whole LSST would be totally reduced and replaced by the services tax imposed as of April 1, 2005.
Senator Rhoads:
What is the significance of showing November 2, 2004, Election Day, on your chart? None of us are going to be here then.
Mr. McMullen:
We thought, in a system requiring a two-thirds vote for any tax to be increased, you have to do something we think is defensible to your constituents and you have to decide on what basis you think you are comfortable. Our thought process was we have the chance to structure a tax system and remove some of the problems and the regressivity of an additional tax. It would be something positive for people. At the same time, you could reduce existing taxes, which incidentally was one of the charters of A.C.R. No. 1 of the 17th Special Session. It specifically provided sales tax would be reduced in the future when these new revenues came in. We were trying to keep true to the charter of A.C.R. No. 1 of the 17th Special Session, as you set it when you voted on it.
Page 20 (Exhibit D) has the same type of mechanism. It just shows you how it would be implemented on July 1, 2004. I think the key examples for us, in terms of a potential sales tax reduction, are contained in pages 21 through 24. If you assume a taxable service base of $25 billion at 5 percent, it would produce approximately $1.25 billion each year. Divided by the half year, it would be $600 million. Certain counties would be less. If you reduce the $600 million by the LSST, dropped at the same time the service tax was put in place, approximately $180 million, you get available tax revenues in the first biennial year of over $400 million.
It is an incredibly powerful engine. It may actually be too powerful. If we have been criticized for anything, it has been that. The next page does exactly the same thing, but does the calculation based on a projected taxable service base of $20 billion, which of course would create $500 million, subtract the same 1 percent and you still have $320 million left. This idea is basically enough to come very close to balancing the biennial budget.
The last two pages show the same thing for a full year of implementation in the second year of the biennium. Here, you would have a full year at a $25 billion service base. The projected replacement of the LSST is $750 million. We thought the projection was $740 million when this exhibit was made and we have not changed it. In a full year, after you have completely replaced and regenerated the LSST, you have available new revenue of $485 million. Therefore, if you look at the half of a year through the first year of the biennium, and the full second year you have over $900 million in this one tax, and significant tax reduction for regular people on one of the most regressive taxes we all recognize.
The last page is the same thing only using a service base of $20 billion. It would then drive only $260 million. So, under the worst-case scenario, you have over half a billion dollars of available revenue in the biennium from this one tax proposal.
There is no magic in how we tried to guess at the amendments and exemptions other than we tried to be driven by policy. We were trying to make sure we showed this would be a tax on business; a broad-based tax implemented across the State that taxes business.
There were two additional sheets handed out to you. One is entitled “Transaction Tax on Services Rates” (Exhibit E). The transaction tax on service rates shows you basically what each percentage would drive without any exemptions. This gives you a sense of what the real range of this is as a revenue source. The internal economies of states are around 60 percent services and this holds true for Nevada as well.
In the second handout, entitled “Implementation of Transaction Tax on Services” (Exhibit F), we tried to create a worksheet showing what you might be able to do if you were to reduce the sales tax 0.25 percent, 0.50 percent, all the way up to the full 2.25 percent.
Again, our theory was we wanted a long-term solution and we wanted to do it this year. We do not believe it will happen in two pieces. We wanted to make sure it produced enough revenue to do something very serious, not only in terms of our existing budget needs and shortfall, but additional social positives such as huge dollars that could be spent for education.
Senator Rhoads:
Are we anywhere closer to finding out what this would cost to administer? We have figures from $9 million to $32 million.
Mr. McMullen:
I think there are multiple components of the cost of implementing a system or scheme like this. Not knowing the amount of exemptions or the number of businesses that would be exempt, I think the Department of Taxation came up with a number of approximately $41 million. I think the gross receipts tax had a 7-plus million dollar number for specific implementation in terms of labor and operating costs.
Each employee of the tax department can be worth a certain amount of revenue productions, at least, inferentially. If you think about this, it is probably about $10 million per employee to do the sales tax on services the way we have suggested. The gross receipts is probably more like $4 million per employee, so those employees in the tax on services system would effectively create $l.25 billion in new revenue, not just $200 million.
Chairman McGinness:
One of the criticisms I have heard regarding a tax on services is the pyramiding of taxes. How was that addressed?
Mr. McMullen:
We tried to look at all of these issues. The pyramiding issue is more easily understood in the chain of manufacturing and distribution and sale of goods or tangible products. There is a manufacturing cost and then the manufacturer sells it to the distributor. There may be a 0.25 percent tax attached at this point. Then the distributor would sell it again to the retailer, who then would pay a 0.25 percent tax on the total value of that sale. Then there is the end user, who would have to pay the 0.25 percent tax again. Stacked into the sales price for the item would be the taxes paid at all of those levels. I think that is the pyramiding concept.
We tried to exempt those services in the nature of goods-producing, or were in the nature of not just manufacturing but construction. Mining, for instance, was used early on as an example of a goods-producing activity. I do not think you can get rid of pyramiding completely, but we tried to create with the theory that we would limit the tax on services to a one-time charge. There are other options similar to those used in the sales tax environment where you might have a resale number.
Chairman McGinness:
Had you considered the exporting and importing of services mentioned in Mr. Aguero’s testimony? Say I am an engineer who does some consulting in New Mexico. As you see it, would Nevada be able to tax those services?
Mr. McMullen:
I believe we assumed services provided in another state would not be taxed. Only services provided in Nevada would be taxed.
Chairman McGinness:
If my business hires an engineer from New Mexico to come to Nevada, then those services would be taxed. Am I correct?
Mr. McMullen:
If the sale of a product occurs in another state, but is delivered here, the law requires a use tax be paid on the product. A similar system could work with a tax on services.
Chairman McGinness:
You were talking about the insurance premium tax, which I think it is something like 8 percent of the budget.
Mr. McMullen:
The theory was there are certain activities which either are not services or could be construed to be a service, but are already taxed. Insurance is a classic example. There is already an insurance premium tax.
Chairman McGinness:
You were not talking about replacing it, just not taxing it?
Mr. McMullen:
Right. Basically, what we are saying is we would not add on another 5 percent on the insurance costs in Nevada over and above the premium tax already charged.
Chairman McGinness:
What about mining and mineral extraction services? Are they taxed currently?
Mr. McMullen:
Some activities as a composite are already taxed. In the mining statute, taxes are paid on net proceeds. In the entire activity of mineral extraction there are certain costs and expenses. There is also certain production of revenue at the end. After you have netted it all out, the constitutional tax rate is charged. The same with casino entertainment. We have activities created within certain casino venues where, once you get it up and operating and producing and showing it to people, the whole activity is taxed at 10 percent.
So, what we said is there are services that are involved in an activity and are needed to create the activity. One might be, for example, an entertainer’s services. Those are already taxed at a very high level in both instances and we ought to tax those as a total activity. Therefore, you would not add any other tax to that activity.
Senator Rhoads:
Nowadays, instead of building new mills, a lot of times mining companies will contract out and haul the ore to other mills. When they contract out, would they be taxed?
Mr. McMullen:
I guess our simple answer would be no. I think there are different circumstances, but to the extent it is already covered as a deduction and has already been accommodated in the final definition, I think it would be wrong to tax it again.
Chairman McGinness:
Tell me about the mechanics of the replacement of the LSST. Right now, does the LSST money come to the State and then go back to the local districts so the mechanics of it really would not change?
Mr. McMullen:
The mechanics would not change. It might end up being a separate account as it is now and credited against the State’s obligation to send money out to each county. You would just recreate the same funding mechanism. It could be as little as an accounting transaction or it could actually, physically, be transferred, but there would be a discreet account on an equivalent basis.
Senator Tiffany:
Can you give me the top three reasons the Assembly decided it did not want to go with this type of a tax?
Mr. McMullen:
They had significant concerns this would not hit businesses, but would hit regular people. We have tried to go to great lengths to define why that is not true. There was a lot of attention to the issue of which businesses should and should not be taxed under some theory small businesses would be paying more. There was a larger concern this was not a broad-based business tax which I think has been answered. However, this is a function of what your opinion is and whether you agree or not.
Senator Tiffany:
Those are policy types of questions where I thought we were asking more procedural types of questions. If we go back to some of the questions Chairman McGinness was asking, like the pyramiding and the exporting, did you assume the tax commission would handle those through regulations? If so, did you factor in whether this can be implemented and whether the tax commission can adjust to all of these regulations quickly enough to implement them?
Mr. McMullen:
I think the first point we thought of in this was first you have to decide how far you want to go. Again, these are policy issues and I really do appreciate the fact people recognize we are way beyond suggesting procedural or even conceptual things. We are being asked to present incredible detail. If your policy is to make it extremely fair, and you want to make sure the use tax or the export import problem is adequately addressed, then you have to put a larger burden on the tax commission than we had proposed. We presumed this had enough revenue in it so those decisions could be left for further implementation. They might even be necessary. There are states that have decided the export, import, or use tax issue is not worth getting into and would instead look at the transaction dollars right in front of them and just enforce those. If you chose to do it the same way, then it would certainly reduce the procedural and other implementation aspects of it.
Senator Tiffany:
How did you answer the three questions of the business versus families and which businesses were exempt, as well as whether this really was a broad‑based tax?
Mr. McMullen:
This tax, just like the sales tax, would be implemented by every business in the State that sells services. What we were trying to do was make sure it was a broad-based tax, not only in implementation, but also, most importantly, in terms of who it affected. The real issue about whether it is on business or on consumers is who pays. By cramping down the base to only those fundamentally business transactions, we answered that question, which secondarily answers the issue of who is taxed, businesses or regular people.
You had testimony in your committee, as did the Assembly, showing a representative family and how it would have hit them if they were taxed on the nonexempt services. The amounts shown on pages 14 and 15 of your handout (Exhibit D) were based on the Nevada average annual household expenditures. This was put together by the task force. It was created from national data and extrapolated into Nevada. You can see by both of these examples, even with all of the services taxed, there has still, theoretically, been a reduction in their taxes
Chairman McGinness:
I think we need to address the import-export thing so as to not create some sort of a financial advantage for a person in another state. This might happen if it now becomes cheaper for a business to hire a consultant from out of State rather than the local person. You talked about the rate and how powerful this is. We could essentially lower the rate with the taxes this committee has already talked about. We could actually lower the rate further still, or designate a certain amount of the money for a certain amount of time to go back to the Rainy Day Fund.
Senator Coffin:
The concept of people being hung up on the idea this needs to be a business tax, which somehow cannot be paid by consumers, bothers me. I have been in business all my life, as was my father. It seems like whenever we had to pay an expense, we tried to add it to our product and so our customers actually ended up paying our expenses. Some misguided individuals many years ago tried to pass an excessively high tax on business, which ultimately would have come into the consumer sector, no matter how it was phrased on the ballot. It happened again in the mid-1990s, and now we have had this in front of us for two sessions. We have this study, which continually focuses on business, and I am not one of those who feel business should be the only group to pay.
Consumers are going to pay these taxes anyway, through the pass-through. It is bound to happen, so I am not so hung up on the idea you have to necessarily build your base just on those taxes you think are only going to be paid by business. It is going to be happening no matter how you mask it. You have been pushed rhetorically into a corner in a way, by people who feel you have got to present us a plan that just goes that way.
Even with the other proposed plan, the tax will ultimately be paid by the consumers. I want to make sure what we have is manageable. Which one, two, or three plans out there will be the most easily managed? It will be the ones having the least amount of bureaucracy involved and the simplest ones to understand. That is my goal, because I know we need more money and I know we are going to have to raise some taxes. My decision has to be how much and which ones.
Our committee moved rather quickly on the gross receipts tax 2 weeks ago and, probably, we should have listened a little longer. I voted against killing it because I felt we moved a little too quickly. We might have had a chance to hear more despite the unshakable opinion of some of the members of the committee. The point is we are going to need more money, based upon what I have seen in the budget. We will have differences of opinion of exactly how much, but it is not going to be a hundreds-of-millions difference. Maybe it will even be blended with the other tax proposal. I have no idea. I do know I have heard enormous public opposition to some of the other taxes being proposed, even more than the tax on business and the tax on services, which has a nice carrot in the sense of a reduction in the sales tax. I like that idea. I think you have tried to do both, so I commend you for those efforts.
Senator O’Connell:
I think it is incumbent on us, before we make any final decisions, to take a look at all of the impacts business is going to be facing. Something of grave concern to me is the fact that every business owner is going to be looking at a minimum of a 17 percent increase in the worker’s compensation insurance alone. Many of the bills we have passed so far this session have had increased business fees in them. I do not know if anybody has yet taken a look at the whole picture of what we are doing to business. That is something we need to do before we even get to the subject we have been discussing today, which is taxes on business in general. I would certainly appreciate having some kind of a full picture on the people who are going to be paying this.
According to Mr. Aguero’s statements, all of his figures are predicated on the increased employment. There is not going to be much increase in employment if we do not have a handle on exactly what the fiscal impact on businesses will be over the next 3 to 10 years. I think it is something we better think about before we think about these additional taxes.
Senator Tiffany:
What we are doing with our State budgets also reflects in business. We are looking at inflation in utilities, workers compensation, and medical benefits, all of which most businesses pay. When you add this tax on top of those, I think there probably is a good argument regarding the small businessman. We are not in great economic times. We are in “okay” economic times, which I think is very important. State government builds costs in by raising taxes. However, in business, we are just supposed to absorb those costs.
I would also like to say I have been getting E-mails from constituents, particularly parents who have children in schools. They are saying, “Raise my taxes.” They are not, supposedly, business people.
Daryl E. Capurro, Lobbyist, Nevada Motor Transport Association:
I think it is interesting that the issue of pyramiding would even come up with respect to this tax. We have tried very hard to reduce the impact or potential application of a pyramiding effect, especially when you realize the gross receipts tax is going to be pyramided virtually all the way down the line. It could be applied as many as four times before it gets to the consumer. Yet, there is a provision in the gross receipts tax bill saying you cannot pass it on, basically, which is ridiculous. People pay taxes. Businesses do not. We are tax collectors in many cases. The bottom line is the consumer ends up paying the tax.
The issue I would specifically like to cover has to do with the potential interesting upside with respect to reducing the sales tax. We have an interstate commerce company, home-based in Utah, having significant operations throughout the Western states including large facilities in both Las Vegas and Reno. When they purchase rolling stock or equipment, it makes no difference where the equipment is purchased with respect to the bid they get. Consequently, they will choose to take possession of that rolling stock or equipment in the state having the least tax impact. What I am saying to you is a lower sales tax would shift purchases to Nevada dealers. Instead of taking possession in Utah, which has a tax rate not quite 1 percent lower than ours at the present time, there would be some incentive for purchasing and putting that equipment into use in the State of Nevada.
Nevada law provides personal property put into service in a state other than this State and used in interstate commerce for a period of 12 months can be brought into the State of Nevada without a use or sales tax consequence after the 12-month period. They have paid the sales tax in the state in which it was purchased. What I am saying to you is big-ticket items make a big difference. If I have a company spending $10 million a year to upgrade and to turn over their rolling stock and equipment, 1 percent on the sales tax rate is a heck of a deal and it is a heck of a difference. The law I am referring to is NRS 372.258. I think this would be a positive consequence of implementing what you have been presented.
Senator Rhoads:
Last session, Senator McGinness and I tried to get the farm dealers exempted and it failed. We have people now who are going to Utah, Idaho, or California to buy a $100,000 tractor.
Mr. Capurro:
None of the calculations of revenue have dealt with the sales tax side. I believe you will have a jump in the sales tax area, too, which will provide additional revenue so it has a powerful effect overall.
Senator O’Connell:
I would like to hear from Mr. Frediani because the automobile dealers have always been a very steady force as far as our sales tax income. Can you tell me what is happening with them because of all of the incentives they have been offering and how it will impact them over the next several years with respect to car sales?
Wayne A. Frediani, Lobbyist, Nevada Franchised Auto Dealers Association:
The sales are not significantly off as we speak. I would say for the next year, forecasting out, it appears most of the major manufacturers are going to continue the incentives and the rebates and that type of marketing. It has been projected sales might fall this year by about 5 to 7 percent nationwide, from which last year, I think, was $16.8 million. So the economy for the car industry still looks pretty favorable for the next couple of years with the incentives the manufactures have to stay afloat.
Senator O’Connell:
So, are they really kind of long range on borrowed time there?
Mr. Frediani:
The manufacturers are in more of a predicament than the franchise auto dealer is as far as a profitability standpoint in sales. Our sales are still holding pretty strong. Part of the reason is the growth in Las Vegas. We have had a pretty robust economy and with the growth, our sales continue to grow year after year.
Russell Fields, Lobbyist, Nevada Mining Association:
I appreciate the opportunity to offer a couple more perspectives. We testified before you on April 8, in opposition to the sales tax on services concepts embodied in the Amodei/Care bill. The basis for our opposition was our belief that such a tax is not a broad-based business tax in nature. While I appreciate all of the efforts we have listened to by the foregoing witnesses from the Business Representative Group to shift the focus to business, we still struggle with the notion it is a broad-based business tax. Yes, businesses will collect and will pay the tax, but it is likely to be passed on to their customers, just as has been discussed by this committee earlier this afternoon. Why should I care? I care because our board of directors has absolutely said we would participate in a broad-based business tax. The only one we have seen so far really meeting the definition of broad-based is more along the lines of the gross receipts tax.
Senator Townsend:
Have you had an opportunity to compare what your industry would pay under the Governor’s proposal as opposed to what you would pay under this proposal?
Mr. Fields:
No, we really have not, which is why I am a little circumspect. We have not had that opportunity because it has only been within recent days the presentation I just listened to had come to the point where we could begin to evaluate it. We do know the industry would pay in a range between $6 million and $8 million under gross receipts.
Senator Townsend:
If you were to pay between $6 million and $8 million for the industry under this, then it would obviously be equal, so your only objection then would be that it is not broad-based.
Mr. Fields:
The objection there would be who and how many are in the pool. It has always been our desire to see as many businesses in the pool as possible. We are one of those industries paying an industry-specific tax. In our case, it is the net proceeds of mines tax.
Senator Townsend:
Were there not a specific number of businesses exempt under the receipts tax proposal?
Mr. Fields:
I think in the Governor’s bill, ultimately 62 percent of the businesses in the State of Nevada would fall under the standard deduction of $450,000. However, the remaining 38 to 40 percent of the businesses generate over 90 to 95 percent of the revenues. Therefore, if you are looking at the number of businesses, you are absolutely correct. If you are looking at the economic activity generated by business, it does meet the notion of broad-based.
Senator Townsend:
But if all business pays under this proposal, all business, not whether it is the 38 percent who amass 90 percent of the revenues, but all business, and there is a spillage over into nonbusiness of 25 percent or so, then does that not meet your standard?
Mr. Fields:
We would need to take this back to my folks. I think the answer would probably be yes, but does this not ultimately get passed largely through to the end customer? Yes, these businesses will collect the tax, they will pay the tax, just as one of the earlier witnesses said. All businesses are tax collectors, not taxpayers. The one exception is commodities-based businesses. With commodities, the price is what the price is. Gold is the commodity in our case. The only things we can control are costs and, therefore, there would be no passing through. This definition of broad-based has been modified over the last few days as the discussion has proceeded. The Nevada Mining Association has never said it would not look at other concepts and other ideas.
Senator O’Connell:
I guess Mr. Brown would be the best one to answer this. As Mr. Fields just mentioned, the only things you can control are your costs and the type of equipment you use in your businesses. I would imagine you are talking about millions and millions of dollars. Do you ever think about or take advantage of the lower sales tax we have across the border, or do you for the most part buy all of your equipment from a source here in the State?
Michael J. Brown, Lobbyist, Barrick Goldstrike Mines, Incorporated:
Our equipment is purchased globally. At this point, the equipment coming in to Goldstrike comes out of Illinois. It is delivered locally to Eureka and Elko Counties, principally because it has to be assembled there. It is quite large and it comes in as multiple pieces and has to be pieced together. I believe we use some Nevada-based wholesalers having the franchise rights for those equipment manufacturers to conduct the sales.
Senator O’Connell:
So, where do you pay your sales tax on the equipment?
Mr. Brown:
We pay it in Nevada.
Senator O’Connell:
It is mainly the use tax and it is paid at point of delivery?
Mr. Brown:
That is correct.
Senator O’Connell:
So, would it not be a cost savings for you if we were to have a broader-based service tax and be able to reduce the sales tax by 2 percent or more?
Mr. Brown:
I would have to see what rate the Legislature eventually sets for the service tax. I think we would have to look at what services they decide will be taxed and then one might be able to conduct a calculation. I suspect if the Legislature decides to begin taxing services, then we will have to revisit decisions we have made over the last several years of which services we contract and which can be conducted in-house.
I personally would caution lowering the sales tax on goods and physical products. In a State experiencing such a fiscal crisis and given the magnitude of the budget shortfall the Governor has set forward and the weakness of the two legs of the Nevada fiscal stool, I would urge caution in a supply-side economic approach. You would be reducing one tax in hopes a larger economic activity will generate more revenues.
Senator O’Connell:
So, you do not think that will happen?
Mr. Brown:
I cannot predict the Legislature, but I would urge extreme caution from my experience at the Department of the Treasury in the 1980s with such an experiment.
Senator O’Connell:
I would think that would be one reason for doing it.
Senator Townsend:
I do not want to debate someone who came from the treasury in the 1980s, but we had a huge buildup in the military during the 1980s, so we do not want to associate that with this tax. I do not think anybody on this committee is married to anything other than doing the right thing for the State of Nevada in funding this budget appropriately. However, any time you can reduce a tax for consumers, it has to weigh heavily. That is just my sense.
Mr. Brown:
I appreciate that and do recognize we did have major defense expenditures. Besides having served on the task force, I served with another group of business leaders in the State who met each month for a year. I know there are those in this State who wish to spend more in the education areas and I know there are demands on the State on the spending side of this budget, too.
I have looked at the history of how states put together their tax regimes. In the nineteenth century, the states funded principally with property, excise, and severance taxes. At the end of the Edwardian era, we began to see sales taxes. When income taxes were put into place at the federal level, we saw an evolution in state governments of corporate taxes, followed by personal income taxes, followed in the 1970s by lotteries. Those were followed in the 1990s by specific impact fees and only recently has the debate on sales tax on services unfolded. I am a bit perplexed Nevada is contemplating jumping to that part of the evolution in the process. As you look at how fiscal regimes were evolved in the various states, they tended to follow that kind of a chronology.
While sales tax on services is something receiving some debate in some states, it is not something being universally embraced. When we look back on the Treasury, which has considered several times a national sales tax to help fill the budget deficits, it has been rejected repeatedly on the basis of regressivity. Just as late as 1998, the U. S. Assistant Secretary for Tax Policy said sales taxes would be highly regressive and unfair to working families.
I think what the Governor put on the table, specifically with so many small businesses exempted, provided some measure of ability to pay for gross receipts. Again, I would just urge caution. You all hold election certificates. We are here to give advice and counsel and provide information. As I looked at the history of taxation from a chronological standpoint, I was concerned Nevada was leaping forward to something still really largely unformed.
Senator Tiffany:
I decided to run for office in 1992 and one of the people I went to visit was Carole Vilardo of the taxpayers association. She has talked about this since 1992, and I know most Legislators who are either freshmen or thinking about running or are on the tax committee consult with her on a frequent basis. I just would like to say this is not a new idea in Nevada. It is not a fresh idea. It is nothing that has not been kicked about before and thought about and talked about in some detail. The devil, of course, is in the details, which is the part that has never been worked out.
Mr. Brown:
I appreciate that. Like I said, these discussions go back into the 1940s, even at the national level. I serve on the board of the Nevada Taxpayers Association and I am quite proud of the work Ms. Vilardo does. I would point out, though, the California Taxpayers Association shares different views on whether they should extend sales tax to services. I would cite an article in the January edition of Cal‑Tax Digest (Exhibit G) by David R. Doerr, who is the chief consultant to the California Taxpayers Association, noting the notion of expanding the sales tax does a disservice to all. He then elaborates quite extensively as to why he does not believe it is a viable option.
Senator Tiffany:
This is not California. This is a service-based economy here. We are a different world, and having come from California, I would never ever say anything about the tax base there. It is one of the reasons I am in Nevada.
Courtney Alexander, Lobbyist, Culinary Workers Union Local 226, Hotel Employees and Restaurant Employees International Union:
I will read from my prepared testimony (Exhibit H).
An additional point I would like to make is there is not a serious definition about what each of these categories includes, on a taxable basis, what would be taxed under each of these. On the second page of the chart I handed out (Exhibit I) is a series of some of the questions we had. I would pose whether or not there would be unintended consequences in passing a service tax we would then have to go back and fix down the road. The business tax provides less than 5 percent of the State’s General Fund.
Let me make a specific number point. Tourists currently pay 28 percent of our sales tax, which equals out to $180 million every year. If you reduce the sales tax rate from 7 percent to 5 percent, you are going to lose that money and replace it with money paid by Nevadans through a services tax. Far less of the services tax, at least from the list I see, is going to be paid for by tourists.
Al Bellister, Lobbyist, Nevada State Education Association:
It is difficult for us to really formulate a position relative to this proposal since we have yet to see any concrete proposal around how the Local School Support Tax will be treated. However, we are concerned based on the presentations we have observed where the LSST apparently goes away over time. The LSST was designed years ago to supplement education funding. Implementing the LSST tax was supposed to free up General Fund money that, ideally, would be reinvested back into kindergarten through twelfth grade (K-12) public education. Over time, I am not quite sure that has happened, given the fact we are 45th in the nation in per‑pupil expenditures, and our share of the General Fund has been reduced from about 38 percent down to about 33 percent today. But the fact of the matter is the LSST is an earmarked tax for education and this proposal before you does not seem to address the question of how a replacement of the LSST would in fact be earmarked to support K-12 public education. Rather, it appears to simply be a General Fund revenue generator.
Mary Lau, Lobbyist, Retail Association of Nevada:
We are part of the Business Representatives Group and totally concur with the support given by Mr. McMullen and Ms. Kelley. As far as how the retail association came to their conclusions through the legislative committee, a quarter of our members are very large businesses. Most of our members are very small and are there through the workers compensation. We asked the tax departments of our majors to look at the other 50 states and tell us which worked best.
I agree with Mr. Brown’s testimony regarding the fact things have changed recently. Businesses for a long period of time went to outsourcing. They went to outsourcing under the advice of their certified public accountants. It was a way to offset taxes. So now we have what is largely called a services-based economy. Those were based on businesses that started via outsourcing, so we continue to support the service-based tax extending the sales tax into services. We think it provides for economic growth. It offers an incentive for businesses to come into Nevada with the concurrent reduction in other taxes and the concurrent stabilization of the economic abilities in Nevada.
With a reduced sales tax rate, if this is what this body chooses to do, businesses, when they come here, will make capital investments. We look forward to the raising of income it would provide. Consumers will get a break on those sales taxes on services.
We have been told we are overproducing and it is entirely up to this body how they need to overproduce. We feel for our small members you would not have to go so heavy into the previously requested business license taxes, which would help our small businesses. We feel economic growth will occur because the consumers will take advantage of sales.
Sally Devlin:
I think this bill on gross receipts is as fallible as anything ever done in this State because we are not in the twenty-first century. Until we get broadband, and until you do other things I have previously pointed out here in Senate reports, we are totally lost. We have no broadband so we have no Internet or telecommunications.
I will agree with several people on the education committee who would do away with the school districts, school boards, and the board of regents. I say this very seriously because they are absolutely unaccountable. You would save over $300 million to $400 million a year if we had virtual education in every field. I am talking about medicine, literature, libraries, math, and vocational training.
This bill is unacceptable. In a State where you have no business except tourism, gaming, and prostitution, you have nothing to offer your kids for their future. What you are doing now is absolutely regressive. We will lose businesses. We will still have no medicine and we will still have no mental health.
When we look at insurance premiums which our teachers, our emergency medical technicians, and our firemen pay, of $1000 a month, we are going to lose them too because they cannot afford to live in Nevada. If we were a progressive state, you would have people with skills moving here and who want their children educated because they will have skills through virtual education. This is not what you are doing. You are doing the “good ole boy” thing of “We do not want new neighbors.” That is what is going on and I wanted to say it publicly.
Van V. Heffner, President and Chief Executive Officer, Nevada Hotel and Lodging Association:
I came today just in regard to discussing any parts of the room tax.
Chairman McGinness:
We are not going to discuss that today. We have your packet (Exhibit J). I do not want to cut off your testimony, but if you would be brief, we would appreciate it.
Mr. Heffner:
I have already testified in opposition to the room tax. This is very appropriate so, here is a resource.
Chairman McGinness:
We are adjourned at 3:44 p.m.
RESPECTFULLY SUBMITTED:
Ardyss Johns,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: