The last legislative session in Nevada was one of the most productive the state has seen in recent years. Love it or hate it, there is no denying the outcomes of that productivity and the work of the 78th Session will be discussed for years to come. With around 1,000 registered lobbyists and as many bills passed, 20 freshmen lawmakers and the state’s largest tax increase, legislators had their work cut out for them. With that in mind, a panel of experts recently gathered for a breakfast seminar and answered a host of questions related to the 2015 session.
The panel discussion, which was held in mid-July, was moderated by Connie Brennan, publisher and CEO of Nevada Business Magazine. The breakfast was hosted by the magazine along with sponsors Bank of Nevada, Holland & Hart and L/P Insurance Services. Panelists included John Guedry, CEO of Bank of Nevada; Nick Rossi, president of L/P Insurance Services; Senator Ben Kieckhefer, assistant majority leader; Speaker of the Nevada Assembly, Marilyn Kirkpatrick and Scott Scherer, a partner with Holland & Hart.
With insights ranging from specific business industries to an insider look of the most recent session, this panel was comprised of executives and elected officials that were able to give a 360 degree overview of what passed, what didn’t and what Nevada business leaders can expect in the future.
“This is going to be a session that is looked back upon as one that contained a great number of successes, particularly for business,” said Kieckhefer. “We were able to move significant pieces of legislation through the process, on to the Governor’s desk and have him sign those that positively impact the state and will for a long time. We successfully addressed many issues regarding economic development and our incentive packages that we provide to businesses both expanding and moving into our state. We addressed issues in the construction industry, which is still one of the hardest hit industries coming out of the recession. We fundamentally touched on how we fund education.”
“Overall it was a good session to change Nevada from where we’ve been and to move forward to ensure that we continue to grow, have the economic drivers we need and have the workforce for our children’s future,” added Kirkpatrick.
A Whale of a Problem
Taxes were the topic at the forefront of many business-owner’s minds this past session. After a far-reaching budget and tax plan was initially proposed by Governor Sandoval, results across the state were mixed. From conservative business voices, concerned over how a tax increase would effect the economy as businesses struggle to recover, to education proponents touting the need for more funding to Nevada’s much maligned education system, debates were loud with both sides producing arguments with, at least some, merit.
“The general consensus in the business industry was that it was important we fund education and make sure we’ve got a workforce that helps us diversify our economy,” explained Guedry. “We also want to make sure we have a balance between that and how we tax businesses to ensure that businesses want to continue to come and expand here.” It’s clear legislators had a tough battle on both sides of the fence and their solution was Senate Bill (SB) 483.
The most comprehensive tax package passed in the history of the Silver State, SB 483 covered everything from taxes scheduled to sunset to the commerce tax and an increase on the cigarette tax. “The big tax bill, SB 483, kind of rolled everything into one,” said Scherer.
Among other changes, the bill increased the cigarette tax by $1.00 per pack and made the sunset taxes permanent. The bill is expected to raise $1.1 billion to fund the $7.3 billion general fund, a number which includes approximately $600 million of sunset taxes.
Kieckhefer explained that, “the number that keeps getting thrown around in terms of the size of the tax increase, a big chunk of that is the sunset taxes that are already being used to fund state government.”
Sunsets
A primary element of the tax bill included the 0.35 percent sales tax which was set to sunset but made permanent. In addition, the modified business tax was made permanent and then modified by the bill and the business license fee was increased slightly.
Scherer explained that, “the net effect with the modified business tax, or the payroll tax, was there used to be an exemption for the first $85,000 in a quarter. That exemption has been lowered to $50,000 in a quarter. The rate under the old sunset bill was 1.17 percent for most businesses with payroll above $85,000 and is now 1.475 percent above $50,000 in a quarter.”
“A part of this whole discussion was how to spread out some of the burden and ensure more people were making an investment into the state infrastructure,” said Kieckhefer. “The reduction to $50,000 catches a few more people. The increase in the filings for corporations and the business license fee for corporations catches more people.”
The changes to the business license fees included making permanent, for most business entities, the $200 annual filing fee. This is exclusive of corporations whose business license fee increased to $500 annually in the bill. In addition, the annual filing fee for all business went up by $25.
“If you’re a corporation it will be significant,” said Scherer. “If you’re an LLC or limited partnership, it’s going to be basically the same. The corporations got hit the hardest there. It’s an annual fee, not a huge number. If you’re in business, the ones that have the revenue coming in are going to be impacted the most.”
In regards to making those taxes permanent, Kieckhefer said, “When we went into this session, we realized what the Governor addressed in the ‘State of the State’ is that these have become part of our operating budget. They are keeping us where we are right now and we’re deceiving ourselves if we believe they are going to sunset.”
Commerce
Added to SB 483 through an amendment and a variation of the Governor’s originally proposed tax bill, the commerce tax applies to businesses that have $4 million or more of Nevada gross revenue. The tax raises concern for business leaders who view it as another iteration of the recently defeated margin tax or as a gross receipts tax.
“As a business, one that is the fastest growing agency in the state of Nevada and payroll intensive in Las Vegas, Reno and Elko over the last three and a half years, we’re digesting the commerce tax and a 30 percent increase in the payroll tax,” said Rossi. “We’re balancing that against a recognition that one of the most important investments a state can make in its future is in the hearts and souls and successes of those in our state who are under 18. That is a big project and I think everybody in this room will be intensely evaluating that.”
Guedry added that he was concerned with the industry classifications in the bill and how that will effect business. “It was the most effective session I’ve seen, he said. “But, I think in this respect, I’d like to see us continue to focus on what would be a suitable replacement for that tax that would give the state the revenue it needs to fund these much needed services and not have a risk of businesses outside the state refusing to come here because they’re not sure where that tax is going to go.”
Identifying 26 industry classifications and an additional catch-all classification, the commerce tax kicks in after the $4 million threshold is met and is then based on a business’ revenue. Kirkpatrick cautions against knee-jerk reactions to this tax, explaining that legislators, as opposed to ballot measures, can more easily make necessary adaptations as the need arises.
“There’s no perfect tax,” she said. “There’s always unintended consequences. That is the beauty of the legislature. It’s one of the reasons we ensured it was a whole year away, so it wasn’t in our existing budget for 2016 and we had time to adjust. I would caution folks, any time you go to the ballot, it ties the hands of the legislature. Whether you agree or disagree with it, it ties the hands of the legislature and then we’re stuck with whatever the voters decided. We have to be very careful when we do that because then, there is no option.”
“Let’s be responsible about how we raise taxes,” said Guedry. “Make sure it’s transparent, make sure it’s fair and broad-based and we are attracting businesses into the state.”
Construction
While the tax bill was certainly a hot topic coming out of the last session, also much discussed were the changes made to the construction industry. Assembly Bill (AB) 125, in particular, is expected to have a significant impact on the industry. The bill modifies the previously enacted Chapter 40 as it relates to construction defect.
“As an insurance professional that’s been involved in the arena for several decades, I’m cautiously optimistic about this,” said Rossi. “I’m optimistic because I think the legislature did very good work in addressing, head-on, some of the defects in Chapter 40 construction defect legislation. I’m cautious because you never know what’s in a law, particularly in the insurance arena, until it gets litigated. At this juncture we’ve got some really good foundational support on the language of this law.”
According to Rossi, AB 125 did a number of things to clarify defect law for Nevada. The bill tightened definitions and made it more difficult to classify certain claims, such as peeling paint on an eight year-old house, as defect. Another change, attorney fees were eliminated as their own private category of recovery and the statute of repose was reduced from 10 years to six. One final piece of AB 125 Rossi mentioned was that the bill mandates that a homeowner cannot bring a defect notice without first submitting the claim to a warranty insurer and having that insurer deny the claim.
“I was really impressed that there is some strength in homeowner warranty language in this bill,” said Rossi. “I have my fingers crossed that the Nevada Supreme Court, when it eventually gets there, will uphold this language.”
Kirkpatrick, along with her fellow assembly members, worked with the Southern Nevada Homebuilder’s Association to pass AB 125. “For a year and a half, we recognized that it was a problem,” she said. “In a bi-partisan manner business, general contractors, sub-contractors, lawyers, insurance folks and many legislators worked to insure the issue was addressed. That’s why that bill passed, a lot of the ground work was done early on.”
Kieckhefer added that this session brought about more investment for construction around the state as well. “One of the primary things the state did as it related to the construction industry is invest,” he said. “We’re starting to see some of the fruits of those efforts in past legislative sessions that are putting more dollars into the infrastructure in our state, which is obviously a direct help to the construction industry. In addition, the construction defect can’t really be understated in terms of its importance.”
He added that the new legislation will, “allow local builders back into the marketplace because they no longer have to be so afraid of the blood money they’re going to have to pay on construction defect claims. It’s going to allow your smaller Nevada-based homebuilders to thrive in our state, which is great for all of us.”
Education
Ever a hot-topic in Nevada due to the state’s low scores in national rankings, education was a big talking point in the last session. On the one hand, legislators searched for a way to fund the industry and hope to have done so through SB 483. On the other hand, legislators had to address accountability within the schools as well as performance issues.
“When I think about what we’ve done with education this session, it breaks down into three categories,” said Kieckhefer. “It’s about choice, reform and investment.”
“We put dollars specifically to class size reduction,” said Kirkpatrick. “From my perspective, it’s been a long time coming trying to get that funding to go back to the kids in the classroom to ensure they’re getting the tools they need.”
“The dollars are more accountable,” said Guedry. “They’re going to specific programs that have a prudent track record and they’re going to expand on that successful track record.
In addition to more targeted funding of education, legislators worked to provide a way to evaluate school administrators and teachers. Guedry added that there are, “also some other accountability measures that are important. One of those is failing schools will get taken over by the state superintendent’s office and they can be reassigned to a charger school operator.”
“A good administrator should have no issues; a bad administrator should not be in that classroom,” said Kirkparick. “The funding going to specific resources was one of the biggest changes that many folks are not happy with. But, we can ensure that the kids will see the fruits of that with administrators having to go back and re-apply for their jobs after about five years.”
Added to these measures was the school choice legislation which allows parents to redirect some funds into education savings accounts (ESA). Those ESA dollars can then be used at Nevada schools, including private schools. The funds give Nevada parents over $5,000 annually to work with and money left over after the student’s graduation can be put towards college.
All in all, it’s clear that legislators going into the 78th Session were playing for keeps. Keeping Nevadans in mind and striving to provide equitable solutions to an array of issues the Silver State faces as it finds its way out of the recession, lawmakers had no shortage of challenges to address. However, agree or not with the results of this session, there is no denying the productivity and solutions-orientated performances of Nevada legislators in 2015.
“I didn’t see our state having the ability to grow and get back on our feet if we didn’t do something,” said Kirkpatrick.
