MINUTES OF THE
SENATE Committee on Taxation
Seventy-second Session
May 22, 2003
The Senate Committee on Taxation was called to order by Chairman Mike McGinness, at 1:49 p.m., on Thursday, May 22, 2003, in Room 2135 of the Legislative Building, Carson City, 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 Michael (Mike) A. Schneider, Clark County Senatorial District No. 11
STAFF MEMBERS PRESENT:
Rick Combs, Fiscal Analyst
Ardyss Johns, Committee Secretary
OTHERS PRESENT:
John O. Swendseid, State Bond Counsel, Swendseid and Stern
John Berkich, Assistant Manager, County Manager’s Office, Washoe County
Charles Chinnock, Executive Director, Department of Taxation
Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association
Alan Glover, Clerk/Recorder, Carson City
Kathy Augustine, State Controller
Birgit K. Baker, Administrator, Employment Security Division, Department of Employment, Training and Rehabilitation
Chairman McGinness:
We will open this meeting with Senate Bill (S.B.) 495.
SENATE BILL 495: Makes various changes to Consolidated Local Improvements Law. (BDR 21-1339)
John O. Swendseid, State Bond Counsel, Swendseid and Stern:
We have several amendments to offer: “S.B. 495 Proposed Amendments and Explanation” (Exhibit C. Original is on file in the Research Library.). The first 8 pages of the document contain proposed amendments with explanations. The last 16 pages are a mock-up of the bill with the amendments incorporated.
Chairman McGinness:
In item 3, what is the definition of “preponderance”?
Mr. Swendseid:
My understanding is “preponderance” here means a majority, at least 51 percent.
Chairman McGinness:
Regarding item 6, are there any historical notes on the definition of “reasonable”?
Mr. Swendseid:
You would have to look at the evidence. For example, if a city presented good evidence to prove a preponderance of sales came from tourists and the county had no evidence to the contrary, a tribunal could say the county acted unreasonably in not approving the district. If there is evidence to support the decision, it is reasonable.
Senator Coffin:
On item 3, you seem to have given the Commission on Tourism, an appointed statewide board, precedence over the county commissioners, an elected body. What compelled you to suggest this change?
John Berkich, Assistant Manager, County Manager’s Office, Washoe County:
This was raised by one of the cities within the county. Without this provision, we felt this issue would ultimately end up in court.
Senator Coffin:
What if the local municipal governing body became your first line of discussion and then it went up to the Commission on Tourism?
Mr. Swendseid:
The way the bill would work, if the district is in the unincorporated county, the county could create the district on its own. The county is the one that makes the finding, so this issue does not come up. If the district is within an incorporated city, the city creates the district, but it must get the approval of the county to do so. One of the cities was concerned the county might unreasonably deny permission for the city to create a district within its boundaries. As the bill was originally written, if the county acted unreasonably, the city would then have to take the county to court. This provision allows them to take the issue to the Commission on Tourism rather than the court.
Senator Coffin:
Does this bill allow a city to object to a project happening in a county because it would undercut business in an existing retail area?
Mr. Swendseid:
There is no special provision for that situation. The city can object at the required hearing like anybody else. There is no city approval of districts not located within their boundaries.
Senator Rhoads:
Do we have any fiscal notes on how much money this will raise and what the cost will be?
Rick Combs, Fiscal Analyst:
I believe the Department of Taxation submitted a fiscal note for this bill. They expressed a number of concerns, and I believe they have worked a number of them out with the requestors of the bill. The problem with projecting the impact of this bill on revenues is we are looking at prospective revenues. There is no way to determine how much might be considered lost revenue to the state or local governments because that revenue might not have materialized if the bill had not existed.
Chairman McGinness:
If the city is looking for a project and the county turns it down, the city can appeal it to the Commission on Tourism. Correct?
Mr. Swendseid:
Yes; however, if the Commission of Tourism or the Governor turns them down, there is no further appeal.
Senator Neal:
Have the Commission on Tourism or the Commission on Economic Development testified regarding this bill?
Chairman McGinness:
We have not heard from either of them.
Mr. Berkich:
They were sent a copy of the legislation in advance of the bill coming out.
Chairman McGinness:
Mr. Chinnock, are you more comfortable with this bill at this point?
Charles Chinnock, Executive Director, Department of Taxation:
We expressed some concern about the implementation of this bill. We have met with Mr. Berkich and Mr Swendseid since then and were able to address all the issues we had. We can now implement it immediately, much sooner than the July 1, 2005, date. An additional amendment to section 12, subsection 2, paragraphs (a) through (c), directs money not used to pay off the revenue bonds to be sent back to the General Fund and then redistributed in a new priority. We believe we can do this even if we have to do it by hand.
Senator Coffin:
I am uncomfortable with making this a statewide proposal. Reno and Washoe County have thought this out and have had a lot of deliberations on this matter. If they want to make the experiment, they should be commended. On the other hand, I am worried about the fights that might occur between city and county governments. The courts will probably be involved despite the appeal process. I am particularly worried about the statewide appointed body having power over the local elected government. I would suggest making this specific to Washoe County until we have thought it through or seen it in action.
Senator Tiffany:
I am not in favor of this bill. I do not know if it economically makes sense for the Department of Taxation if it is limited to one county. It is complicated to collect and distribute this tax, and more so if it is isolated to one county.
Senator Townsend:
This bill is a remarkable effort to deal with the problems we face in northern Nevada. I do not know what would be the effect of isolating the bill to Washoe County and adjoining counties. Mr. Swendseid, can you address this issue?
Mr. Swendseid:
As long as it is done in a manner that does not mention Washoe County specifically, say by limiting it to counties of a specific population, it would not create a problem for bonding. You could restrict it to counties with populations less than 400,000 or counties between 100,000 and 400,000.
Senator Coffin:
I would vote for the bill with that change, if it is clear the parties in Washoe County know what they are doing and want it.
Senator Neal:
I still have difficulty seeing how it would work. Local school support comes from these taxes, and usually when we tamper with money in this area we wind up taking it from the schools. I cannot see the benefit of this endeavor and will oppose it.
Senator Townsend:
I support this bill for that reason. If we do not grow our economy in the north with creative ideas like this, we will not have enough money to support schools.
Chairman McGinness:
I had some concerns about this bill originally. However, with the amendments and the layers of oversight, I am much more comfortable with it.
SENATOR TOWNSEND MOVED TO AMEND AND DO PASS S.B. 495 WITH THE AMENDMENT PRESENTED BY MR. SWENDSEID.
SENATOR RHOADS SECONDED THE MOTION.
Senator Coffin:
Is this without a population cap? Without input from Clark County, I would prefer to limit the bill at this time.
Senator Townsend:
With the agreement of Senator Rhoads, I will amend my motion to include counties with a population less than 400,000, or whatever number legal counsel advises.
Chairman McGinness:
The motion is to amend and do pass with language to exclude Clark County.
THE MOTION CARRIED. (SENATORS NEAL AND TIFFANY VOTED NO.)
*****
Chairman McGinness:
We will open the work session on S.B. 238.
SENATE BILL 238: Provides revenue in support of state budget. (BDR 32-1208)
Chairman McGinness:
We will be working from the work session document dated May 15, 2003 (Exhibit D. Original is on file in the Research Library.). The real property transfer tax section starts on page 10. There is also a letter from Mr. Alan Glover, Carson City Clerk/Recorder (Exhibit E). Apparently, the list of exemptions we worked from the other day was not the final list the recorders talked about.
Mr. Combs:
Mr. Glover’s letter indicates the effective date should be January 1, 2004, because it will take that long to adopt new regulations, make the computer program changes, and notify financial institutions of the increase. I do not have the expertise to tell you if they really need that much time, but it might be a good idea to move it to October 1, 2003, at least. If the committee wishes to provide a commission, this might be the consolation. This is a policy decision for the committee to make.
Chairman McGinness:
Ms. Vilardo has provided technical amendments to the various tax proposals (Exhibit F). Do you have any comments on the real property transfer tax?
Carole A. Vilardo, Lobbyist, Nevada Taxpayers Association:
I listed the recommendations alphabetically, and the real property transfer tax is on page 3. An event needs to be specified to trigger the collection of this tax, most likely either the close of escrow or the recording of the title. In addition, the bill should provide penalties for noncompliance, and should specify that it will not affect transactions completed before the effective date.
Senator Neal:
There is no actual transfer of property until the transaction is filed with the recorder’s office, correct?
Ms. Vilardo:
The way chapter 375 of the Nevada Revised Statutes (NRS) is written at this time, there is no requirement to record the title.
Senator Neal:
What is the public record filed to indicate there has been a transfer of property which then allows the assessors and other people to tax the property?
Ms. Vilardo:
According to the accountants who have called me on this issue, you can record a title on the basis that you are still working out the details of who will actually pay the recordation fee or transfer of title fee. They can be working on that 3 to 6 months after the title has been recorded. There must be a systematic procedure to establish this as a tax.
Chairman McGinness:
Mr. Glover, can you help us?
Alan Glover, Clerk/Recorder, Carson City:
Recorders have always interpreted this as at the time of recording. We consider the tax due and payable at the time of recording. However, the title changes when the deed is signed, not when it is recorded. Recording is simply the public notice that the transfer has occurred. Ms. Vilardo has talked about a change stating the deed is not valid until it is recorded. This is not my area of expertise, but it certainly makes sense. I do not know what other states do.
Chairman McGinness:
I am not sure this committee has the purview to handle that question. Would you come down with it at the time of recording the title?
Mr. Glover:
Yes.
Chairman McGinness:
Ms. Vilardo has also talked about a collection allowance and penalties for noncompliance. The penalty would be 10 percent within 30 days and 1.5 percent per month thereafter.
Ms. Vilardo:
It would need to be 1 percent to be consistent with Title 32.
Mr. Glover:
We share Ms. Vilardo’s concern. If this bill is enacted, we will be flooded with people attempting to record deeds before the tax rate goes up. I do not know exactly what should be done with people who negotiated their sales contract before the effective date, but the recorder’s office is so busy their title company could not get to the counter before the deadline.
Senator Townsend:
I believe all of Ms. Vilardo’s recommendations are important issues, and we will need to deal with them if we adopt this type of tax. If we make a determination on what basis to levy the tax and we stay within a flat fee, there are two ways to do a flat fee. One is on pages, the other is on value. Another possibility is to use a tier system, with perhaps a $100,000 cutoff, a flat fee from $100,000 to $200,000, and a different fee above $200,000. How difficult are these different plans to implement?
Mr. Glover:
The easiest to implement is a straight dollar amount across the board, no exemptions. A simple tier system with two tax tables for different value property is the next simplest. I spoke with the recorders from Clark County and Washoe County about implementation. The Clark County recorder said under no circumstances could that office implement a program change before January 1, 2004, and the Washoe County recorder was not sure if it could be done even then. They did not know what the cost would be. The change would be easier in the smaller counties, and I would estimate the cost for Carson City will be minimal, a few thousand dollars. In Washoe and Clark counties it will be substantially more because they use custom-designed software and it will have to be updated.
Ms. Vilardo:
From the perspective of taxpayers, it would be easier if you decided on a percentage, then converted the local flat rates to a percentage. This would definitely take until January. Judging by what happened in Clark County, a flat rate would be the easiest.
If you go forward with this bill, you will be using this as a revenue source for the state. I would recommend you get the Department of Taxation involved in the same way they are involved currently with the room tax, whereby on August 15, a report is given to them showing how the room tax is being used. I would also think you would want to give the department authority to notify all the clerks about the changes. They are the most logical people to do the notification.
Chairman McGinness:
Mr. Glover, is it the exemptions that make Clark and Washoe Counties unable to implement this by October?
Mr. Glover:
No. It is a matter of Clark and Washoe Counties reprogramming their computer programs to the new system. It is a mechanical problem. The exemptions have really nothing to do with it. The rural counties, which have a smaller volume and still do things by hand, will be able to make the change more easily.
Chairman McGinness:
Could you go over the exemptions attached to your letter (Exhibit E)?
Mr. Glover:
We are leaving in those exemptions that are not lined out. I will use the revised numbering. Exemption 1 is a sovereignty issue if it involves transfer to the United States. Exemption 2 is transfer of title for true status. This is a catchall and is very important. We can adopt regulations in this area to define it. It is used when you have to rerecord. If you remove the exemption, the title company would be paying the transfer tax twice. Exemption 3 deals with transferring title from one joint tenant or tenant in common to another. We had talked about taking this out at one time, but this is one way people pass property on to their children. This is a policy decision.
Exemption 4 has to do with transferring title between spouses. This combines two exemptions in the current statute. You might want to have this checked by legal counsel to ensure it does not change the meaning. Exemption 5 is transfer of title to or from a trust without consideration. This is another way title is transferred from parents to children. This language removes the refinements added in the 71st Legislative Session that caused some confusion and returns to the original language. This does not cover situations in which title is transferred for a consideration. In that case, the trust is selling the property, which is a taxable event. We added a requirement for a certificate of trust to be presented when the transfer is recorded to verify the validity of the trust. Exemption 6 covers unpatented mining claims. Since unpatented mining claims are not on the tax rolls, there is no way to track sales.
We recommend deleting old exemption 10. This is the one which gave recorders their greatest problems. If ownership is transferred from one limited liability company (LLC) to another, the transfer is exempt if the owner can prove 100 percent ownership of both companies. This can be extremely difficult to do. The building industry would probably like to keep this exemption.
Exemption 7 is transfer to relatives in the first degree of consanguinity, and we added the term “… and their spouse.” Currently parents can transfer a deed to a son, for example, but not to a daughter-in-law. In that case, the son will then most likely transfer it to his wife and himself. This removes that extra step. Exemption 8 is mandated by federal statute. Exemption 9 has to do with transfers ordered by the Securities and Exchange Commission. The recorders wanted this out because we never use it. I believe it was inserted when the telephone company was broken up.
Chairman McGinness:
I believe legal counsel told us we had to leave that one in.
Mr. Glover:
We recommended deleting old exemptions 14, 15, and 16. They have to do with transfers to universities and corporations sole and are used very rarely. Transfers to foundations get a tax write-off anyway. The exemption for transfers to corporations sole was added a few years ago with the breakup of the Catholic Diocese of Nevada. We had one in January where they sold off a final piece of property. The deed was dated in the 1860s in the name of the Catholic Diocese of Sacramento, and they needed to transfer it to the Catholic Diocese of Reno and then to the purchaser. It would have generated $300 in transfer tax.
Senator Coffin:
Are noncommercial transactions exempted? How do you assess value if no cash is generated by the transfer?
Mr. Glover:
If the transfer is without consideration, but there is no specific exemption, the value is assessed at either the value set on a deed of sale in the last 3 years, or the assessor’s value.
Senator Neal:
Senator Coffin, what is your understanding of “noncommercial transaction”?
Senator Coffin:
Some transfers might not have a value of considerations. Have we exempted all of those?
Chairman McGinness:
Are you talking about a trade of property straight across according to section 1031 of the Internal Revenue Code?
Mr. Glover:
Yes. When property is transferred from one LLC to another, the value of the transfer can be millions of dollars even when no cash changes hands. If the second LLC has a different ownership even by one person, it is a taxable transaction.
Senator Coffin:
Has it been our custom and practice to charge a transfer tax on these paper transactions?
Mr. Glover:
Yes, because they have true value to them even though no cash changed hands.
Senator Coffin:
Does this apply to a company and its subsidiaries?
Mr. Glover:
I am not an expert in this area. I believe companies and their subsidiaries are exempt.
Senator O'Connell:
If property is left to you in a will or trust, does that same rule of consanguinity apply?
Mr. Glover:
If you are named as the beneficiary in the will, it is not taxable. If the person dies intestate and there are many relatives, it is taxable. If it is in a trust, the title is not going to change, so you do not need to record the deed. The only time we know property has been transferred is when the deed comes in to be recorded. Property can also be transferred via sale of stock.
Senator Rhoads:
How much money would these exemptions generate?
Mr. Glover:
I do not have the figures. I will see if I can get more accurate numbers for you.
Senator Townsend:
How do other jurisdictions track transfers of stock in which real estate is held as an asset?
Mr. Glover:
I do not know. It is a very complicated matter.
Ms. Vilardo:
In all probability, because you are charting new territory, you will need an oversight committee to monitor implementation. I would recommend you specifically charge them with finding a way to track transfers through stock transactions.
Senator Townsend:
There is a committee on local government finance. Do they have a technical committee associated with them?
Senator O'Connell:
Yes.
Senator Townsend:
Ms. Vilardo’s recommendations are valid, but they raise other questions. That technical committee could be very helpful in this situation. A technical committee of some kind needs to be in place as we work through this. This bill will have an impact on local governments as well. Using a technical committee would allow us to investigate these bigger questions.
Senator O'Connell:
The technical committee definitely has the expertise to handle this. I believe they are in statute to continue until 2005, so they could easily be charged with this.
Ms. Vilardo:
I think your staff has the expertise to do this research as well. This might be a case for the technical committee to have a subcommittee. You would want clerks, title companies, and accountants involved. Unless you provide staff to provide notification of meetings and take minutes for this committee, you will have a mechanical problem with your technical committee.
Mr. Combs:
The Committee on Local Governments and Finances originally looked at distribution formulae and how funding was distributed from one area to another. In the 71st Legislative Session, it looked at broader issues not related to distribution, such as the financial health of local governments and so on. I would caution you not to overload the technical committee to the point where nothing can be accomplished because there are too many issues and the scope is too broad. This one item is not enough to push it over the limit, but it could become difficult to manage if there are a handful of items like this.
Chairman McGinness:
I appreciate that. They do an excellent job, and we lean on them heavily. Committee, we passed this recently, but without the amendments suggested by Mr. Glover and Ms. Vilardo.
SENATOR TOWNSEND MOVED TO INCLUDE ITEMS 13, 14, 15, 16, AND 17 OF MS. VILARDO’S RECOMMENDATIONS (EXHIBIT F) AND THE EXEMPTIONS PROPOSED BY MR. GLOVER (EXHIBIT E) IN THE PACKAGE ON REAL PROPERTY TRANSFER TAX IN S.B. 238.
SENATOR O’CONNELL SECONDED THE MOTION.
Senator O'Connell:
Do you want to include the suggestion you made as to the responsibility to the technical committee?
Senator Townsend:
I would certainly include that. If we run into trouble, we will work on it in the motion.
Senator Tiffany:
Perhaps the committee can send a letter to the Legislative Commission and direct them to direct the technical committee on this study.
Chairman McGinness:
We can ask the legal staff about the proper way to proceed. That sounds like it would be the cleanest. The event would be the recording of the title. There would be a collection allowance of 6 percent and penalties of 10 percent and 1 percent.
Senator Coffin:
I am addressing Senator Townsend’s motion. Mr. Glover mentioned the collection allowance, and he mentioned two ways to go. One is more appealing to me, and that is the per-filing charge and the page charge, as opposed to the flat 6 percent. That 6 percent would reduce revenue by a pretty big dollar figure. I am inclined to think it would be best to keep that at a local level.
Chairman McGinness:
Mr. Glover suggests we increase the fee for recording from $10 to $11 for the first page and from $1 to $2 for additional pages.
Senator Coffin:
I am not sure I would go to $2 for additional pages. Maybe $1.25 or $1.50 would be more appropriate.
Senator Townsend:
Is that in lieu of the flat 6 percent?
Senator Coffin:
Yes.
Senator Townsend:
I will amend my motion to include that.
Chairman McGinness:
The motion has been amended to increase the fee from $10 to $11 for the first page.
Senator Townsend:
I believe the motion was to amend the original motion to go from 6 percent as a fee to be held by the recorders for the purpose of compensating them for collecting money for the state to a flat fee per page; the fee will increase to $11 for the first page and to $2 for additional pages.
Senator Neal:
This is minor compared to what some of the other states charge for filing these documents. I do not find too much wrong with raising fees to $11 and $2.
Mr. Combs:
I need some direction from the committee on the effective date.
Chairman McGinness:
The real estate transfer tax is included in the Senate Taxation Revenue Plan (Exhibit G). With a collection date of July 1, 2003, the revenue is $44.8 million. If we go to a collection date of January 1, 2004, that figure is cut in half and becomes $22.4 million. Is there any way we could negotiate October?
Mr. Glover:
When I spoke to Clark and Washoe counties, they said it technically could not be done. This committee needs to talk to the proper people in those counties and pin that down.
Senator Townsend:
Clark County created its own computer system to track this information, correct?
Mr. Glover:
No. They bought software through a company called AmCad.
Senator Townsend:
Is it similar to Washoe County’s system?
Mr. Glover:
They use a different vendor, but it is the same general idea.
Senator Coffin:
A third point in Mr. Glover’s letter was to allow the recorders to go to the attorney general directly for opinions. Why is this in here?
Senator Townsend:
That was added because when exemptions were appealed, they were getting different opinions from district attorneys in the different counties.
Chairman McGinness:
What effective date would you recommend?
Senator Townsend:
I would include in the motion the effective date of October 1, 2003. I believe people can meet standards that are set, and the State needs the money. That is not an unreasonable date.
Senator O'Connell:
I will include that in my second.
Chairman McGinness:
Let it be noted that Mr. Glover protested this date.
THE MOTION CARRIED UNANIMOUSLY.
*****
Chairman McGinness:
I will open the work session on A.B. 481.
ASSEMBLY BILL 481: Makes various changes concerning state financial administration. (BDR 31-101)
Kathy Augustine, State Controller:
Assembly Bill 481 is the most critical area we are looking at right now to be included in your legislation. It would create a uniform and consistent returned check fee for all state agencies. State agencies currently charge different returned check fees. It would set that fee at $25 for a returned check, which is the norm for private industry, for all state agencies except the Department of Taxation and the State Gaming Control Board.
This bill would also create a program to withhold professional licenses for all state agencies. As you know, we have a pilot program in place with the Department of Motor Vehicles (DMV) and the Division of Wildlife that currently allows us to suspend drivers’ licenses and vehicle registrations of people who owe money to the state. This would allow us to expand this program across the board. The Department of Business and Industry has already signed a local interagency agreement with the state controller’s office to suspend the licenses of real estate agents who have written bad checks for their licensure fee. Withholding or suspending professional licenses will also give us additional leverage when collecting state debt.
I have a packet on this matter which includes a brief summary of the recent history of debt collection in Nevada (Exhibit H. Original is on file in the Research Library.). When I was chairman of the Senate Committee on Legislative Affairs and Operations, we had the Legislative Counsel Bureau (LCB) do an audit of the state’s accounts receivable. The auditors stated the State of Nevada lacked a coordinated and comprehensive system to maximize collections. They also found agencies were inconsistent and ineffective in their efforts to collect debt. We have made great strides since then, centralizing debt collection within the state controller’s office. The packet also includes a memo showing where we are now with debt collection. Since that memo was written on May 6, we have collected more than $40,000.
Chairman McGinness:
There are a couple of issues here. One of these is the standardized $25 returned check fee.
Ms. Augustine:
We estimate that will generate about $80,000 for the state.
Chairman McGinness:
How much has the pilot project with the DMV and the Division of Wildlife brought in?
Ms. Augustine:
We have collected $1,414,612. We have collected an additional $55,633 in‑house for the DMV since December 2001. We have not been working with the Division of Wildlife long enough to have figures.
Chairman McGinness:
When is the pilot program scheduled to end?
Ms. Augustine:
It is scheduled to end October 1, 2003. Assembly Bill 457 eliminates the pilot program, but we believe the suspension of professional licenses in A.B. 481 will cover this.
ASSEMBLY BILL 457 (1st Reprint): Makes various changes concerning collection of debts by state agencies and State Controller. (BDR 31-102)
Chairman McGinness:
The issue is to continue the pilot program, the check fees, and the suspension of professional licenses, or to expand the program to all agencies except those administered by the Department of Taxation and the Gaming Commission, correct?
Ms. Augustine:
Yes.
Chairman McGinness:
This is obviously a revenue generator.
Senator Tiffany:
During the closing budgets, we talked about adding another person for debt collection. Assuming you get the authority to collect debts for all the other agencies, do you have the personnel you need?
Ms. Augustine:
Yes. We currently have four people in our debt collection section. We have a chief accountant, an accountant, and two accountant clerks. Since our original testimony on this bill in April, the State Emergency Response Commission and the Department of Corrections have signed on with the controller’s office for debt collection. We are also meeting with the Western Interstate Commission for Higher Education to sign them up in a couple of weeks.
Senator Tiffany:
Another thing that has come up while we go through budget closings is some of the smaller agencies would like to be able to accept credit cards to pay for licenses, for example. We need to have a centralized area for processing credit cards. Would this fall under your control?
Ms. Augustine:
It will cost the State between $300,000 and $400,000 to implement a centralized collection for credit cards. We are looking at accepting credit card payments online, in which case we would not have to pay the fee to the credit card companies.
Senator Tiffany:
I brought this up because I assume you need authority to continue the program. If we had the ability to give you that authority, we might also want to ask you to look at this function so we can have one centralized department that can process credit cards.
Chairman McGinness:
I think that would be a little far of this committee’s authority. I asked to include this in the bill since it is a revenue generator. The question today is to continue the pilot program with changes or expand it.
Ms. Augustine:
I should also mention A.B. 457 required all state agencies to turn over their debt to the controller’s office. Presently it is permissive, and we are signing a separate contract for every agency. We are currently collecting at a rate of about 25 percent. We estimate to collect about $11,940,000 over the next biennium with the mandate.
Senator Neal:
I question whether this committee has jurisdiction on this matter. I think the Senate Committee on Finance originally gave you the authority for the pilot program.
Ms. Augustine:
The pilot program went through the Committee on Government Affairs. The original debt collection legislation did not deal with returned check fees and things of that nature. It was just centralized debt collection within the state controller’s office.
Senator Townsend:
I have a spreadsheet from a previous meeting that has been updated (Exhibit I). This page restates many things the committee has done and some of the things on the table. These are options from which the committee may start a dialogue. It is not a complete list, but it does represent a good-faith effort to get the dialogue going about various broad-based, stable, grow with growth, fair and equitable tax proposals.
The first item is the cigarette stamp fee. It was testified to in this committee there is a cost associated with the production of the cigarette stamps. Therefore there must be a fee allowed to the individuals who do that. The proposal is to reduce the stamp fee from 1.5 percent to 0.5 percent. This increases the revenue to the state from cigarette stamps from $1.1 million to $1.8 million. Currently the stamp fee is 3 percent. Reducing the liquor tax allowance to zero brings in $1.2 million. The increase in the business license tax (BLT) to $200 does not include a rollback. There was discussion of increasing this to $400 for employers with more than 25 employees who do not provide health insurance. This could be done by either making the BLT higher for those without health insurance or by making the BLT higher and giving those with health insurance a tax cut to $200. This is already done for employers with more than 25 employees who provide child care.
Senator Coffin:
I have a feeling that those who do not currently provide health care are those who cannot afford it. I ought to applaud this as an insurance broker, but I do not know if this is the right way to do this. When health insurance costs $250 to $350 per month per employee, I am not sure they could reach it even with 25, 30, or 40 employees.
Senator Townsend:
This is why the chart does not indicate additional revenue for this item. For one thing, we do not know how much money it raises when we are not currently collecting it. Second, we hope it will change employers’ behavior and encourage them to buy health insurance, which would reduce Medicaid and workers’ compensation costs.
The real estate transfer tax is figured here as a flat rate rather than a tiered system. A tiered system is difficult to work and would probably take longer to implement. Based on the action we took earlier on S.B. 495, the revenue can be estimated at approximately $33.6 million on that item. The restricted slots item has to do with slot route operators, who may run massive amounts of machines. In the interest of trying to be consistent, we applied the gross gaming tax to the slot route operators. This increases revenue from $2.3 million to $10 million. The Gaming Control Board is helping with the mechanics of this.
The business surcharge item is 1 percent of the employment security filings. This is the employer’s quarterly Contribution of Wage Report. It creates the tax within Title 53 of NRS and is under chapter 612. The Employment Security Division (ESD) is estimated approximately $2.8 million in 2004 and $1.4 million in 2005. Nevada must stay within the administrative guidelines of the U.S. Department of Labor. At 1 percent, it yields $90 million. At 1.5 percent, the yield would be $135 million for one year and $142 million in the second year; 2 percent would yield $180 million in the first year and $190 million in the second year. This would be assessed only on companies with 25 or more employees.
Going to the universal business tax (UBT) item, if you provide a $1 million exemption and begin it January 1, 2004, you accomplish a couple of things. With the larger exemption, you exempt approximately 70 percent of the businesses, allowing the Department of Taxation to get its feet under it and establish the kind of mechanism they need to deal with approximately 3000 businesses that will perhaps capture 70 percent of the revenue. It will also put them on a calendar year rather than a fiscal year and bring in $30 million the first year. The next year moves the exemption down to $500,000 and encompasses a full 12 months, which brings the revenue to $140 million. The premise of the UBT is to create a system by which the employer chooses the lesser of either 1 percent of gross margin or 0.25 percent of total revenue. This allows companies with high volume and low margin, like grocery stores, to pay a more equitable tax.
Senator Coffin:
Do you have any handouts on the proposed UBT?
Senator Townsend:
Yes. I had the LCB draft a proposed amendment on this (Exhibit J. Original is on file in the Research Library.).
The live entertainment tax is a flat 5 percent tax across the board on all live entertainment. It gets rid of all those exemptions currently in the casino entertainment tax statute. I met with the Gaming Control Board on this. They said as long as a licensee provides entertainment, regardless of the venue, they would be the auditor and collector of the tax. All other nonlicensees would be audited and collected by the Department of Taxation. I have included the satellite franchise fee that comes to the state under federal law. I have also included the effect of S.B. 308.
SENATE BILL 308: Revises manner in which revenue from property taxes is distributed. (BDR 32-704)
Senator Townsend:
The property tax proposal has to do with using an exemption of $70,000 for state ad valorem and lets the rate float up to 33 cents, bringing in $93.2 million in the first year. This does not affect the current structure of ad valorem whereby local government and school districts receive money. The proposal is to use that technical committee in discussions with the recorder’s office and the assessor’s office. The need to implement this immediately became problematic because it has not been done in the past. Therefore, the proposal is to place this with the technical committee and delay the start until July 1, 2005, to allow them time to meet with local governments, school districts, and so on, as well as the Department of Taxation. The charge is to make sure implementation is solid and correct, to ensure they have the financial wherewithal to put the software and hardware into place to make these changes, and to run a pilot program to find problems with the various exemptions or the separate state ad valorem.
It is very important to make this tax bill include a provision making each individual tax severable from the others. We do not want to lose our ability to pay our bills if we are taken to court about one item.
Senator O'Connell:
Mr. Combs, was the Economic Forum at $340 million or $380 million?
Mr. Combs:
The increase was from the projection of the last biennium and was around $340 million. I do not know the exact number.
Senator O'Connell:
If we started with $340 million and looked at the BLT, the cigarette stamp tax, the liquor tax, the gaming tax, the real estate transfer tax, the Secretary of State, and the restricted slots tax, we are up to $160 million. If you throw in live entertainment, that is another $25 million. We are now looking at almost $400 million with those figures alone. The number the Governor gave me was $704 million. We are already over the bottom line he is looking for. I think we have gone past the point that is needed.
Senator Townsend:
I do not disagree with any of that. I put figures on a page to let the committee look at different options and decide on the best long-term tax policies. I am not suggesting we take everything everyone has suggested and enact them all. I have a spreadsheet from the Senate Committee on Finance from this morning (Exhibit K). It shows a projected shortfall on July 1, 2004, of $392,745,713. If we can put all these options on the table and let people pick and choose, they can get to the lower number. The biggest problem we face is this immediate year.
Having said that, I will also tell you the Economic Forum’s numbers give me some concern. The opening of Thunder Valley, the casino in Auburn, California, has now been moved up to mid-June. Two of the most respected experts in gaming analysis in this country agree this opening could reduce revenue to Washoe County by 25 percent. This makes some of us in the north cautious on the projected revenues.
Senator Neal:
Gaming only makes up about 17 percent of employment in northern Nevada. I assume you are talking about 25 percent of that?
Senator Townsend:
It is estimated Washoe County will lose 25 percent of its total gaming economy when the casino in Auburn opens.
Chairman McGinness:
Let us look at the 1 percent business surcharge on this chart. Ms. Baker, can you give us some help on the mechanics of this? How will it be collected, and when?
Birgit K. Baker, Administrator, Employment Security Division, Department of Employment, Training and Rehabilitation:
We provided the revenue estimates and information on taxable wages Senator Townsend presented. We have six issues, and Senator Townsend is aware of those.
First, in order for the ESD to collect this surcharge, we would need to make sure the exemptions are clearly defined to meet the North American Industry Classification System (NAICS). This is how they are currently classified in our system, and using these definitions will allow this to be a simple collection process.
Second, regarding the employee limit, our division does not differentiate between part‑time and full-time employees. Again, it would simplify our process if the definition in this bill was the same.
Third, we will have to negotiate cost-sharing agreements with the U.S. Department of Labor. We have attempted to incorporate those costs into our fiscal note, but until the federal Office of Management and Budget reviews that information, we will not know if we have covered that sufficiently. There needs to be a vehicle for us to come back to the Interim Finance Committee and pick up enough General Fund money to reimburse the federal government.
Fourth, we have been trying to rewrite our central accounting system since 1997. We are currently on the way to doing this. If we were to collect this revenue, we would have to push this project out at least 6 months. I do not know what the additional project costs would be.
Fifth, the proposal must address interest and penalties and the basis for those charges, whether it is taxable wage or revenue. We can give you some information on that. We also need to establish rules of priority on when the amount is tendered to us.
Sixth, our appeals system currently has three tiers. The three levels are appeals referees, the board of review, and the district court. The only thing we deal with is disputes between employers and employees on unemployment claims. We do not have a mechanism for appeals involving this tax. Therefore, I have not been able to include any costs for this in my fiscal note.
Senator Townsend:
Is either the Nevada Tax Commission or the Department of Administration an appropriate place for these appeals?
Ms. Baker:
I suppose. I know that we are not set up to do it in our agency.
Senator O'Connell:
Would it not be simpler just to have this surcharge collected by the Department of Taxation?
Chairman McGinness:
Mr. Chinnock, would you like to comment?
Mr. Chinnock:
We could not implement it as quickly as the ESD. The number of other taxes we will be implementing will determine the time frame for implementation. If we receive the information Ms. Baker has discussed, we could develop a program to do it.
Senator Coffin:
Our tax staff has been overworked and has been focusing on the revenue side. It might be helpful if we had a briefing from the Senate Committee on Finance staff, who have followed this down to the nickel. There might be some fundamental understanding about what we need and what we do not need.
Senator O'Connell:
Have we not been replacing the 3 percent cuts with the shortfalls we have been voting on so far?
Senator Tiffany:
It is going to be a variety, because we closed a lot of budgets. Some of them have been reinstated, and some of them still exist. When they still exist, they are vacancy savings rather than cuts. I would say most have gotten the 3 percent restored, but some agencies have built in a 3 percent saving for this biennium.
Senator O'Connell:
We have been dealing with vacancy savings as long as I have been in the Legislature. Have people ever filled those positions? Are we using the money from those positions elsewhere in the budget?
Senator Tiffany:
It has been traditional to have vacancy savings. We fund the positions; sometimes they fill them, and sometimes they do not. If a department has ten positions vacant for a year and a half, we take the positions away. This has been done at least since 1993.
Mr. Chinnock:
That is correct. When we take our vacancy savings, we have to identify the positions. We cannot then fill them unless we go through special procedures to reimplement or move them so we can have a different position that is unfilled.
Senator O'Connell:
I do not understand. Do we have the people there? Have we accounted for the money, or has it been spent in other areas?
Mr. Chinnock:
In the Department of Taxation, if we have marked ten positions as vacancy savings, we do not have the positions or the money.
Senator O'Connell:
We have always heard vacancy savings were part of the cuts, but it seems the money is still being spent for these unfilled positions. Where is the savings?
Mr. Combs:
Vacancy savings are often used to offset when revenues are not as high as expected. That is the situation in the current biennium; positions are still being held vacant to get through this fiscal year. For the most part, money saved on vacant positions is not being spent on other positions.
Senator Coffin:
Mr. Combs, did you say we have cut the Governor’s budget request?
Mr. Combs:
No.
Senator Coffin:
None of these proposals, including the Governor’s budget, include any pay raise for teachers, which is being contemplated at 2 percent. Since they did not get a raise in the last biennium, it is probably contemplated they would want to get more than 0.5 percent per year for 4 years. That is something to consider. There are a lot of moves to fence off money within the money committees to salve the fears of those who feel all the appropriate money will get bargained away in negotiations. Regarding vacancy savings, we have eliminated a lot more positions than we have added.
Chairman McGinness:
Mr. Chinnock, if the Department of Taxation was to implement the business surcharge, where would you assess it? You deal with full-time equivalents (FTE) on the business license tax. Could we do away with the business license tax and introduce this business surcharge?
Mr. Chinnock:
I could see using the same information the ESD uses and the same line numbers. We would receive the information from Ms. Baker and bill according to that on a quarterly basis to the same employers she would have billed.
Chairman McGinness:
Your billing is on the amount of the payroll, am I correct?
Mr. Chinnock:
Yes. We figure this amount the same way the ESD does.
Chairman McGinness:
With the business license tax, we are taxing per employee. With the surcharge, we would be taxing that same employee’s payroll.
Mr. Chinnock:
Yes. Through ESD, it is more of a head tax. Under the Department of Taxation business tax, it is based on FTE, which is derived from hours worked.
Senator Tiffany:
We talked in the Senate Committee on Finance about the system the Department of Taxation would have and ESD’s ability to transfer the information. This was the assumed methodology rather than ESD collecting the tax.
Chairman McGinness:
Mr. Chinnock, regarding the UBT, you will be able to start the $1 million exemption on January 1, 2004. Have you recalculated your fiscal note? What would it cost you to implement that?
Mr. Chinnock:
I am about halfway through recalculating the fiscal note and hope to have it by tomorrow. I also plan to provide a cost for the several other taxes that have been included so we can see at a glance any combination of costs.
Senator Coffin:
Senator Townsend, how hard do you want to fight for this S.B 308 concept of growth? The local governments are upset about the idea that growth in their budgets will be hindered by the fact that they will not be able to get revenue from even voter-approved measures. Can we kill it?
Senator Townsend:
It is on the table for discussion. I am a cosponsor of that bill, and I do believe in it. Since there are no raises for state employees, university employees, or teachers in this budget, the next Legislative Session will face that challenge. If you do not have revenue, they will not be able to face that challenge. I believe S.B. 308 is an appropriate way to deal with it. In one of the legal opinions the LCB provided, an amendment would be needed for S.B. 308 to protect local government against locally volunteered or voted-on tax from being shared with the State. That was not the intent. Local governments would keep 100 percent of any tax on which they voted.
Senator Coffin:
Since the schools rely on property tax from the county, would we not be cutting it off? Was that your intention?
Senator Townsend:
We fund the Nevada Plan, Medicaid, Temporary Assistance to Needy Families, and other things driven by caseload. This was an effort to recover money from the growth in counties which is also driving caseload. I thought it was very well established in the original presentation on S.B. 308 in this committee on April 1, 2003.
Senator Rhoads:
I have a very difficult problem supporting the S.B. 308 concept. If a large mine suddenly moves into one of my small rural communities and the population increases by 200 or 300 percent in one year, the community has no revenue to meet its infrastructure needs because the local government is frozen at a certain point.
Senator Townsend:
I think your communities are protected under S.B. 308 if you look at infrastructure needs and bonding capabilities. Also, if your local community voted on it, they would keep 100 percent of the revenues. That is the amendment the LCB provided to Senator Raggio to deal with that important issue.
Chairman McGinness:
We will meet again on Saturday and decide on these issues then, including the BLT, restricted slots, the business surcharge, the UBT, the live entertainment tax, and satellite broadcasters.
Senator Neal:
Can we revisit the gaming tax?
Chairman McGinness:
Absolutely.
Senator Tiffany:
Senator Townsend, I see on your handout (Exhibit I) that you reduced the increase in the liquor tax from 100 percent to 50 percent. I assume since we passed the 100 percent, that is still the rate?
Senator Townsend:
Yes.
Senator O'Connell:
I would like to remove the UBT because it is just a modified gross revenue receipts tax.
SENATOR O’CONNELL MOVED TO INDEFINITELY POSTPONE THE UNIVERSAL BUSINESS TAX PROVISION OF S.B. 238.
SENATOR TIFFANY SECONDED THE MOTION.
Senator Coffin:
We have not had a hearing on the bill in a long time. We killed that bill in committee before it had a hearing. Perhaps we should lay it all out before we vote.
Senator Townsend:
I can provide the appropriate graphs by Saturday morning.
Senator Rhoads:
I personally do not like the UBT, but I would like to give Senator Townsend a chance to make his presentation.
THE MOTION FAILED. (SENATORS TOWNSEND, RHOADS, AND COFFIN VOTED NO. SENATOR NEAL ABSTAINED.)
*****
Chairman McGinness:
Committee, for Saturday I want you to look at page 32 of today’s work session document (Exhibit D). The page is titled, “Other Issues Included in Major Senate Tax Bills.” Please be prepared to vote on those proposals.
Chairman McGinness:
There being no further business, the meeting is adjourned at 5:00 p.m.
RESPECTFULLY SUBMITTED:
Lynn Hendricks,
Committee Secretary
APPROVED BY:
Senator Mike McGinness, Chairman
DATE: