Arnaud de Borchgrave, veteran war correspondent with more battlefield wounds than even Hemingway, is fond of saying, “Political pundits prophesizing into crystal balls are destined to eat crushed glass.” Glass consumption notwithstanding, it hardly takes a prophet to predict the 2003 Nevada Legislature will be defined by the one word lawmakers dread most – taxes. On whom they are levied, and on whom they are not, will likely shape the Silver State’s economic forecast for years to come.
To be sure, other critical legislative issues will be waiting for them when lawmakers arrive in February. Even with the Special Session band-aid applied to the medical malpractice issue, doctors will be back in Carson City telling legislators of the insurance ailments affecting their industry, and prescribing remedies to keep physicians from fleeing the desert. Contractors too, will come bidding, providing committees with their own legislative punch lists to remedy construction defect litigation, which is currently preventing Southern California condo hunters from retiring in Las Vegas. Last, but not least in terms of political musculature, teachers will arrive at the Capitol armed with per-pupil funding requests.
If you missed seeing the gaming industry mentioned in this prospective scenario, don’t worry – they’ve dodged the bullet. With the demise of Joe Neal’s exaggerated taxing schemes, big gamers have slipped quietly under the revenue-hunting radar screen. Being experienced with a gross receipts tax and with their own exemptions already worked out, a relatively small increase in the gaming tax rate is something the big properties can live with.
However, as lawmaker’s answering machines are telling them, not many business owners in Nevada feel the same way.
Tax and Spend: An Election Mandate?
Few, if any, legislative leaders would disagree with Gov. Kenny Guinn’s re-election night assertion that, “We need more revenue.” Lawmakers remember how they and the governor handed off the taxing matter last session to the appointed members of the governor’s task force on tax policy. Still, the governor stood eerily alone and un-GOP-like on election night, declaring he had a mandate to raise taxes to cover state spending over the next decade.
Historically, Nevadans have not had a problem institutionalizing and taxing vices in the state. Proposed increases to the so-called “sin taxes” on such things as liquor, cigarettes and certain amusements – sinful and otherwise – have not gotten a big rise out of lawmakers. Increases in property taxes have seemingly not stirred homeowners’ ire on any grand scale. Of course, they haven’t received any tax bills yet, and they don’t necessarily have accountants and lobbyists advising them on the implications.
Raising taxes on businesses, which lawmakers work for and receive contributions from, is causing more than a little angst among those who make their living monitoring the political climate for the next election. Some members in Guinn’s own political ranks see Republican gains nationally and statewide in a different “mandate light” than the governor spun on election night.
The proposed gross receipts tax is the big bugaboo many state businesses fear the most. The governor and his handpicked task force say the tax is broad-based and ultimately fair. Mike Sloan, vice president of Mandalay Resort Group and a member of the governor’s task force, believes the state needs to reach into “other parts of the economy” besides gaming to help fill Carson’s coffers.
Sloan, referring to Washington State, said the panel “looked at other places. We don’t have to reinvent the wheel.”
Washington State: A Role Model?
Proponents of the gross receipts tax can expect a steady stream of business representatives from Seattle testifying before the taxation committees about just what kind of tax wheel has been fashioned in the Evergreen State. To quote Marx – Groucho, that is, “We should learn from the mistakes of others. We don’t have to make them all ourselves.” And while no one should infer that our neighbor to the northwest has a tax structure deserving of either Groucho’s or Karl’s pontifications, it has been roundly criticized by business leaders who have fled to greener financial pastures like Nevada.
One of them is a former vice president of Boeing Capital, Tom Motherway. “The gross receipts tax didn’t work well for Boeing Capital in Washington State,” said Motherway. His answer was to start a new firm in Reno – Montrose & Company. It manages over $5 billion in portfolios for Boeing and other big financial players worldwide. Motherway said he’s waiting to see the details of the Nevada plan, including whether certain deductions for pass-through exemptions might be in order for those that act as an intermediary for a client’s money. He does however, warn that capital can flee quickly, and in the present digital economy, so can businesses.
In fact, in 2001, Boeing Corporate, one of Washington State’s revenue linchpins, packed up and moved its company headquarters to tax-friendlier Chicago. At that time, Republican State Senator James West of Spokane said, “Boeing’s decision to relocate its headquarters is like a canary in the mine shaft for Washington’s business climate. It’s the latest sign that our state (Washington) is not pro-jobs.”
Another one of Seattle’s business giants apparently became concerned about Washington’s business climate. Microsoft Licensing, Inc., which accounts for about one-quarter of the computer giant’s $28 billion annual revenues, quietly moved its licensing operation to Nevada in 1997. If it hadn’t been for the anthrax scare in the wake of Sept. 11, most Nevadans wouldn’t even know Microsoft is here. Company officials declined to comment on the impact a proposed gross receipts tax might have on their remaining in Nevada, but one can’t help wondering if a letter with a new tax bill inside might scare them even more than the threat of anthrax did. The governor and the task force may have been looking at extracting greater revenues from companies like Microsoft. However, Microsoft has moved before because of a gross receipts tax climate, and one suspects Bill Gates might just be smart enough to move again.
Some legislators in Nevada feel a gross receipts tax may be the Silver State’s version of the little yellow bird. They and their supporters in the economic development community fear the gross receipts canary may send the wrong message to others thinking of landing in Nevada.
Will It Affect Diversification?
Las Vegas Chamber of Commerce CEO Kara Kelley, testifying before the task force back in September, echoed a common concern of many in the business community, saying, “The regressive nature of this tax will have a greater impact on start-up businesses. We are concerned that it may create a disincentive for businesses considering relocating to Nevada.”
Chairman of the Senate Taxation Committee, Republican Mike McGinness of Fallon, worries about the impact on his district’s rural economy. “Businesses in my district are mostly small, and a lot are agricultural. They see the gross receipts tax as unfair,” said McGinness. Whether he votes with his district or with the governor remains to be seen. And no doubt Bill Raggio will have a lot to say about how it finally shakes down in the Senate. But look for the Fallon radio station owner to be a major player, along with whomever the Democrats appoint to chair the Assembly taxation committee. Just as important to watch is who the Republicans put on his or her committee.
Carole Vilardo of the Nevada Taxpayers Association agrees that Nevada has long ignored the issue of revenue restructuring. But she warns against replicating the Washington State model. “A tax system should reflect a state’s economy. Washington grew up differently than Nevada; it hasa more traditional economy with seaports, railroads, heavy manufacturing and the like,” she said. Vilardo says Nevada is more entrepreneurial in nature, and taxes like those on business services might be better alternatives. Alternatives galore will no doubt be brought forth during committee hearings.
UNR economics professor Tom Cargill says the painful debate over just and unjust taxes, and “just taxes” is the result of Nevada’s past sins of omission and commission. Wherever the blame is placed, and whatever solution lawmakers arrive at, Cargill said, “The result will make the state less friendly to businesses planning to come here.” The professor reminds those interested in the results of tax increases, “Businesses don’t pay taxes – people do. Taxes are always passed on in the form of higher prices, lower wages and fewer benefits.”
Who Plays and Who Pays?
One way to follow the legislative equivalent of the Super Bowl is to see a program of who’s “for” and “against” the gross receipts tax. Lining up on the pro side will of course be the unions – both culinary and teachers – along with public employees who will benefit from the expansion of government services. Generally, Democrats are the recipients of their campaign largesse, but some key Republicans will have their chits cashed in from the various unions’ election-day support.
Lining up against are businesses, both big and small. Contractors, bankers, realtors, car dealers, and even mini-car racers have let it be known they’ll oppose the tax. Nevada Mining Association, which was a part of the governor’s task force, seems on board for the present, but that could easily change with the mercurial nature of the gold industry and the obligatory regulations that accompany any new level of government involvement with their revenues. Democrats too, have business ties. An indication of how the tax is flying in the tax committees will be to watch how the more fiscally moderate among them are leaning on the issue.
The governor’s power, and the burden of exercising it, loom large over the coming session. He clearly commands the power of the pen, and can veto legislation deemed important to any intransigent lawmaker. Look for the chief executive to employ the hardball likes of Harvey Whittemore, Billy Vassiliadis and Pete Ernaut to apply the necessary backroom armlocks to wayward members of the legislative flock. The problem may be that even with the size and stature of Harvey, Billy and Pete, they may not be able to get their lobbying arms around enough of the tax resisters to make the numbers work.
With the Gibbons 2/3 tax imperative alive and well in both the Senate and the Assembly, the current numbers don’t look good for the governor. Conservatives, such as Sen. Ann O’Connell, are already saying the gross receipts part of the package is DOA. And newly emboldened Minority Leader Lynn Hettrick, who didn’t especially like Ernaut’s tactics when Pete was a member of the Assembly, may be looking to flex a little of his caucus’s own political muscle in the face of the governor’s surrogate persuaders.
Medical Malpractice
Larry Matheis of the Nevada State Medical Association said Nevada doctors and the businesses they operate do have problems with the gross receipts tax. But, he said, for many physicians the price for medical malpractice insurance is a far more severe issue, causing many to leave or quit practicing medicine altogether in the Silver State, taxes or no taxes. Matheis agrees that last summer’s compromise during the special session called by the governor, was an “important first step, but just a step,” in solving the insurance crisis for doctors.
Doctors and their lobbyists will come to Carson with a 96,000 signature initiative requiring the 2003 Legislature to re-open the malpractice insurance issue. “Keep Our Doctors in Nevada,” the group that gathered the petition, is calling for repeal of all exceptions to the $350,000 cap on pain and suffering awards in malpractice judgments.
The governor has said the summer reforms have not been given enough time to work. Doctors say they haven’t resulted in a decrease in premiums, and likely won’t. Trial lawyers won’t easily agree to any firm caps, and insurers will attempt to justify to both why premiums are so high.
In that sense, the players and the arguments have not changed much. Look for this to be a volatile issue this February, especially if some member’s wife has had a problem finding an obstetrician lately.
Construction Defects
Developers and builders are not exactly tickled pink about the prospects of a gross receipts tax. But they are “seeing red” when it comes to the issue of skyrocketing liability costs and excessive litigation coming from construction defect lawsuits.
The Coalition for Fairness in Construction, comprised of all the various builder’s groups in Nevada, will appeal to Nevada lawmakers to pass legislation they say will protect homeowners by allowing their homes to be fixed before lawsuits are filed, thus helping to increase the availability and affordability of construction liability insurance for themselves.
Builders argue that the cost of excessive litigation has resulted in housing prices going up, townhome and condo projects becoming virtually non-existent, and insurance companies pulling out of the local market.
The coalition has hired Billy Vassiliadis to lobby lawmakers to rewrite NRS 4600 to approximate California reforms requiring attorneys to first prove damage from a defect before proceeding with litigation. Hopefully, Billy V. can get the trial lawyers to back off what the construction industry calls their mostly “frivolous” lawsuits – unless of course, a hunk of drywall falls on a member’s wife.
Teachers, Taxes and the First of Many Steps
Most teachers put together a wish list before each school year. School districts do much the same. The Nevada State Education Association (NSEA) thinks in terms of legislative priorities, and they pretty much got their list checked off and signed prior to the 2003 session.
NSEA placed its executive director, Ken Lange, on the governor’s tax panel. The teachers union Website lauds “Lange’s presence on the tax force…as a constant reminder to all the panelists of the education funding crisis in the state.” The crisis, translated into legislative goals for the coming session, is “to increase the level of funding for each K-12 student to at least the national average beginning in 2003.” Calculated for the 350,000 students statewide at $1,400 per pupil, that results in nearly $500 million more annually than the state currently spends.
Combined with other stated legislative goals for greater health insurance and retirement benefits, increased state funding for special education, added money for technology implementation and school modernization, and a host of other funding requests, it should come as no surprise the teachers union sees the need to “broaden and stabilize Nevada’s revenue structure to provide the necessary sources of funding…”
Lawmakers need not worry. NSEA President Terry Hickman has stated that task force recommendations are “only a first step in the tax discussion.” Inquiring minds may wonder what other steps NSEA has in mind for the 2003 session and beyond. Hickman answered that as well, saying that, “If the kinds of taxes levied in California were applied to Nevada, we’d have excesses to spend on things like early childhood education.”
Historic Session
The 72nd session of the Nevada Legislature may one day be remembered as an historic rite of passage for the Silver State. It may be seen in terms of the epic or incremental way lawmakers decide to deal with future taxation. Either way, when the Speaker’s final gavel has struck, Nevada will likely be on the road to a place it has never been before.
