Tax Analysts Blog

Ignoring the People in Nevada

Posted on Feb 4, 2015

Last November, Nevadans went to the polls and wrecked a proposal to adopt a margin tax. Voters rejected the idea of creating a new tax, 3 to 1. The proposal was opposed by Gov. Brian Sandoval (R), and rightfully so. The margin tax was basically a gross receipts tax imposed without regard to profitability. Plus, it was structured in a way to ensure that businesses would be able to game the system.

The state apparently needs money, and the governor is proposing to increase a "fee" on businesses. Specifically, Sandoval is calling for an increase in the state business license fee based on a business's gross revenue. The current fee is $250 and is justified to cover the administrative costs of registering and regulating business enterprises. Most states have these fees, and they are usually nothing more than small nuisances. But Sandoval would like to impose the fee based on the amount of gross income -- not profit -- earned by state businesses.

The fee would be levied on different industry categories and would be in addition to the existing modified business tax. The modified business tax is essentially a poorly thought-out payroll tax. Reports say the new fee will be as high as $4.2 million a year.

If you do business in Nevada, you'll pay a fee. That fee will be based on the amount of revenue you earn. Am I missing something? Isn't the governor essentially proposing a gross receipts tax? The fee is, after all, tied to your gross receipts. Didn't Nevadans just overwhelmingly reject that idea? If I were the business community in Nevada, I would be up in arms.

This is all part of Sandoval's goal of raising about $430 million in new revenue, mostly for the schools. To get there, he also wants to raise cigarette taxes by 50 percent. Nothing says "I love kids learning" more than asking poor addicts to pay for it. Sandoval also wants to increase the modified business tax on the mining industry. But what should bother everyone is the new fee structure. Fees are fine -- but taxes disguised as fees are not. The governor is proposing a tax increase, and he really should have been honest about it.

This post is an excerpt of an article that previously ran in State Tax Notes.

Read Comments (10)

robert goulderFeb 3, 2015

Each week brings new tales of state lawmakers promoting bad tax policies due to
myopic political considerations. Elected officials simply don't care about
enlightened tax policy... and why should they? Their priorities are fundraising
and not offending key constituencies. Such is the nature of our democracy. Call
me cynical, but I'm surprised every state in the country doesn't use cigarette
taxes to pay for public schools.

david brunoriFeb 4, 2015

Robert Goulder, you are dead on about the cynicism of it all. Mr. Weber I
understand your point. But think about this. If we use cigarette taxes to fund
schools, and everyone quits smoking, what then? And, if schools are important,
why ask only a small minority of addicted poor people to pay for them?

david brunoriFeb 4, 2015

Emsig, Bruce Bartlett once called Jonathan Swift the first supply sider.

You know that cigarette taxes are inappropriate for funding education. My
problem is asking an addicted minority to pay for even a part of an important
public service like schools.

And I believe the corporate tax should be repealed at the state level because it
does not work and we do not have the will to make it work. If we were serious
about the CIT, we would all join the MTC, adopt combined reporting, stop giving
out incentives, etc. But we don't.

Emsig BeobachterFeb 4, 2015

David: You know perfectly well that any increase in tobacco taxes that would be
earmarked for education would represent only a small portion of school funding.

If every one stopped smoking, the state would find other sources of revenue;
and save enough on reduced MEDICAID spending to pay for education out of
general revenues.

I'm also relieved to learn that you can keep two contradictory ideas in your
head without it exploding. You're against a gross receipts tax because it does
not take the firm's profitibilty into account. However, you're also against
state corporate income taxes which are based on profitibility. You should
espouse the Jonathan Swift tax.

jeff weberFeb 5, 2015

The fee is obviously a gross receipts tax and it will probably, in the end, be
anti productive. However, your argument re the increase in cigarette tax is
not persuasive. Don't smoke if you don't want to pay the tax, and if the high
price stops people from smoking, then all the better. I have no problem with
that one.

emsig beobachterFeb 5, 2015

Jonathan Swift's tax proposal was to basically tax the vanity and sexual more
of the adult population of any society. Mr. Swift opined that his tax would
result in perpetual surpluses for the government. If that were true, it would
not necessarily be a good tax policy.

Cigarette/tobacco taxes would be an inappropriate base for the provision of
education if it were the ONLY basis for funding education. In any case, money
is fungible so we really don't know how the additional funds would be spent.

Furthermore, tobacco products are probably overtaxed if the only reason a
special excise tax is imposed is to correct for negative externalities.
However, most policy makers are convinced that the demand for tobacco products
is inelastic so the proper policy, using the Ramsey Rule, is to impose heavy
taxes on these products but light; or no; or even subsidize other goods and
services according to their demand elasticity (if that can really be measured,
but it would provide full and lifetime employment for micro-economists and
econometricans).

P.S. Even if it were possible to make the corporate income tax "work" properly,
it would still not be a great source of revenue for states due to the extreme
volatility of the base -- corporate profits. In addition, little is truly known
about the incidence of state corporate income taxes that one cannot assume that
is necessarily a highly progressive tax. A state based VAT or a margins tax
would be preferable to a state corporate income tax.

PPS My responses to your blogs are a definite positive externality. Where else
can your followers receive first class albeit disjointed economic reasoning at
no charge to themselves?

Charles SmithFeb 5, 2015

"If we use cigarette taxes to fund
schools, and everyone quits smoking, what then?"

Promote or subsidize smoking of course. See how municipalities have responded
to speed cameras being successful at reducing speeding and therefore speed
camera revenue. They've responded by installing more cameras to collect more
revenue. Or how state lotteries have transformed into state casinos. And how
alcohol and (alcohol taxes) is promoted by state-owned liquor stores,
state-subsidized sports stadiums, state-subsidized casinos.

david brunoriFeb 6, 2015

Charles, Very insightful as I think that is exactly what will happen.

Emsig, the Ramsey rule is nothing more than a cynical justification for taking
other people's money. By its logic we should impose a 500 percent tax on all
food. Food is, after all, pretty inelastic.

emsig beobachterFeb 8, 2015

A tax on food would most likely result in more vegetarians/vegans as people
give up truly expensive products for rice and beans. Not all categories of food
have inelastic demand. True, as a whole category, the demand for food is
inelastic but not necessarily individual components of the entire category of
food.

If one is truly worried about the impact of this tax on the poor then a lot of
the proceeds of the tax could be rebated to families on the basis of their
income/wealth through expanded Earned Income tax Credits, SNAP benefits, etc.

Of course we don't know how the whole thing would play out because as more is
spent on the entire category called food less would be spent on other goods and
services thus the whole vector of relative prices could change dramatically.

If such a tax were imposed, I envision organized crime reopening "speakeasies."
But, instead instead of selling booze, these speakeasies would sell food. Hope
every one likes borscht, cabbage, Chicken Kiev, vodka, blini, etc. NASTROVIYA.

emsig beobachterFeb 8, 2015

David, all taxes are cynical attempts to take other people's money.

However, if you can disprove the Ramsay Rule mathematically you'd win a Nobel
Prize in Economics (Nash and Kahneman to name two who were not economists but
won the Nobel Prize in Economics).

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