Everyone in the state saw it coming, but that didn’t make it any
easier. As legislators entered the 2009 session, they faced a biennial
revenue shortfall of $2.4 billion. Governor Gibbons’ proposed budget
still fell short by $1.6 billion. And while he vowed to veto any tax
increase, legislators, ultimately, felt that they had no choice. They
passed several new taxes that took effect this July – many of them
having significant repercussions for businesses.
So here in Nevada, where the July 2009 unemployment rate hit a
record 12.5% – the third highest in the country – businesses find
themselves struggling even more. Here’s a look at what these new taxes
are, how businesses around Nevada are responding to them and what they
could mean for our future.
A Look at the Numbers
Overall, the 2009 session resulted in almost $1 billion in new
taxes for 2009-2010, the bulk of which will sunset in 2011. According
to the Nevada Taxpayers Association (NTA), the increases are comprised
of the following:
Sales Tax
While the base rate did not change, the Local School Support
Tax (LSST) portion, which is earmarked for local school districts, was
increased by .35%, meaning that less money is required of the General
Fund for education.
Modified Business Tax
This quarterly payroll tax that is based on gross wages was
adjusted based on a two-tiered system. The first tier rate of 0.5% is
on the reported quarterly payroll that does not exceed $62,500. The
second rate tier is on the reported quarterly payroll over $62,500, and
increased from .63% to 1.17% on July 1. This increase alone is
projected to bring in almost $346 million over the biennium.
Business License Tax
The $100 fee was increased with a $100 tax. Together with the
Modified Business Tax, the projected revenue from this move is $83
million.
Room Tax
This increase of 3% affects room rentals in Clark and Washoe
Counties, with a 13% cap. Funds will only be diverted to the General
Fund until July 1, 2011, at which point they are redirected to schools.
Washoe County Fuel Tax
This increase will take effect on Jan. 1 in Washoe County only,
and will enable the county to issue $80 million in bonds over the next
year to cover a variety of infrastructure improvement projects.
As Carol Vilardo, president of the Nevada Taxpayers
Association, explains, the rate of vehicle depreciation in the state
was also delayed by one year, effectively making registration fees more
expensive than many might have previously expected. “This is
effectively an increase, because now you don’t get the 10% reduction
you might have otherwise.”
Reactions Around the State
While no one likes to pay more taxes, reactions to these increases have been mixed, depending on the industry.
“Once taxes are raised, they’re unlikely to ever go down,” says
Jason Thomas, a certified public accountant with Fair, Anderson and
Langerman, a full service accounting firm in Las Vegas. Thomas warns
that these increases could mean trouble down the road. “Once it’s
passed, the rate will go up when the conventional sources of tax
revenue contract, like sales tax and room tax.”
According to Vilardo, for some small businesses, these increases
could be disastrous. “For instance, look at the business license and
modified business taxes. With a sole proprietor who has one or two
employees, a hundred dollars can be a big deal – especially if your
employees are paid so that your reported payroll is over $62,500 a
quarter,” she says. “At the same time, there were minimum wage
increases, and probably in the near future we’ll see a substantial
increase in unemployment tax premiums. That’s not including every other
expense that a business incurs, like increased shipping costs and a
potential increase in property taxes. Then there’s sales and use tax.
Look at it all cumulatively, and in this economy there’s a very
substantial impact on businesses.”
Still, many business people around the state believe there was
no other choice but to raise taxes if Nevada is ever going to climb out
of this hole. Among them are those in the mining industry.
Mining Shoulders a Big Burden
In 2007, the mining industry paid roughly $200 million in
taxes, making it a top contributor to the state’s General Fund. Mining
is also one of the four industries that pays an industry-specific tax,
the Net Proceeds of Minerals (NPOM) tax, paid on the value of minerals
sold at market less the cost incurred by the miner to extract and sell
it. In 2007, it totaled $76 million.
Still, according to Nevada Mining Association President Tim
Crowley, mining as a whole supported the tax package. “We felt we could
contribute more to the state, that businesses have the ability to
contribute more, and that it was time when all businesses, mining and
otherwise, needed to dig deeper and help with this dilemma,” says
Crowley. “No business wants to pay taxes, but there was no question for
us that businesses needed to do more.”
Part of doing more is paying the NPOM tax in advance, rather
than in arrears – a decision made during the special 2008 legislative
session to aid with the state’s cash flow problem. “We’ve done this
before, and it wasn’t the best way to handle it from a mechanical
standpoint,” says Crowley, “but from a cash situation standpoint, it’s
really the smart thing to do when the state is struggling.”
Additionally, sales taxes in the amount of $90 million were paid
in 2007; although Crowley doesn’t have a sense of the numbers yet, he
imagines the tax increases will have a significant impact on the
industry. Plus, with salaries in gold mining in the $70,000-$80,000
range, mining pays the highest payroll taxes in the state. The
increases, though they’ll be deeply felt, were also supported by the
mining industry.
Finally, the association also self-assessed a fee increase on
mining claims to help the University of Nevada’s Mackay School of
Mines. It will provide about $400,000 more a year to the struggling
school.
What’s in the Cards for Casinos
In spite of the state’s ongoing efforts to diversify the
economy, gaming taxes still comprise nearly 30% of General Fund
revenues; combined with various retail sales and use taxes, liquor
taxes, room taxes, and Modified Business taxes, Nevada’s casino
industry accounts for roughly half the state’s funds.
And as Bill Bible, president of the Nevada Resort Association,
points out, 2008 saw record decreases in gaming revenues and hotel
occupancy rates – the most dramatic decrease since the Gaming Control
Board began collecting such data.
Meanwhile, the industry was hit with tax increases; in addition to
a 3% room tax increase, casinos will face the standard business tax
increases. Payroll will be hit hard, as will the increase in sales tax;
the industry provides about 20% of the state’s General Fund totals for
each.
Still, resorts as a whole supported the increases. “The package
itself takes a pretty good bite out of the industry, but we recognize
the dire straits that the state is in,” says Bible. “We recognize the
importance of education, support services and public safety functions.
Surely it’s a hardship to us in these difficult economic times; these
increases will be difficult to absorb. Many properties are already
operating at thin margins and some are close to bankruptcy.”
Bible suggests that the largest, busiest properties are likely
to be the hardest hit, while some of the smaller ones, with graduated
business tax protections, may be somewhat safer.
“I think everybody is hoping that some experts are right about
conditions improving, and that we’ll see increases in tourism next
year, at least in time for the next session in February of 2011. If
that’s the case, maybe we’ll have a different set of circumstances,”
says Bible.
Retailers Take a Hit
Retailers are feeling the increases the most. The state’s
heavy reliance on sales taxes – about a third of the General Fund
budget – is a big part of our problem. In the last quarter of 2008
alone, taxable sales decreased by 7.4%, according to the Retail
Association of Nevada (RAN). In the Reno/Sparks area alone, retail
vacancies are at 14%. So it’s not hard to understand why RAN opposed
the recent tax increases.
“Money’s tight anyway, and all of a sudden people are seeing a
further tax expense,” says RAN President Mary Lau. “In an economy like
this, consumers may now put off purchases of big ticket items, or pay
to make repairs on existing items that otherwise wouldn’t be
cost-effective in a better economy. Plus, not all Internet sites
collect tax, so if people choose to spend money online, it doesn’t
contribute to the state. So everybody’s hurting, and retailers are
laying people off or not hiring, just trying to maintain a certain
level of income.”
Lau says that a 3% slump in back-to-school spending (at the time
of this writing) may be an early indication of poor holiday sales as
well. Add to this a minimum hourly wage increase of 70 cents, and
retailers are certainly left feeling bruised – particularly the “mom
and pop” stores, as consumers head to big box discount stores to save
money.
Also of concern to RAN is what Lau terms the “appetite” some
lawmakers have for a net profits tax, as well as a lack of control when
it comes to spending. “We over-commit in times when we have money,
instead of holding back and looking for ways to save,” Lau says.
Contractors Getting Hammered
Construction was the first industry to feel the economic pinch,
and one of the hardest hit. As John Madole, executive director of the
Associated General Contractors, points out, the increases will likely
be painful. There’s sales tax, which is paid on supplies and then
extended to customers, payroll, significant workers’ compensation, and
fuel taxes. “For people who have a lot of trucks in their businesses, a
fuel tax increase is pretty significant,” says Madole. “I talked to a
guy the other day who buys 8,000 gallons of fuel a day. With fuel taxed
at 53 cents a gallon, that’s a huge amount of money.”
Contractors also find themselves in a unique situation when it
comes to collecting taxes on fixed price contracts established in early
2009. “Typically, if you want a building built, you collect several
estimates, take the low bid and award the contract,” explains Madole.
“The contractor would include taxes in the cost of the bid. If you
signed a contract on January 1 to build a $2 million building in one
year, and taxes went up July 1, you have no way to recover those
additional costs, so the contractor absorbs it.”
Part of the problem is an extremely small margin of profit
across the country on construction projects, at less than 2%. Although
stimulus funding for construction projects has encouraged growth in the
industry, contractors are bidding so competitively to earn jobs that
they’re coming in at 15-20% less than they normally would. “We’re
taking a business where a lot of guys have been out of work for a long
time, and we’re adding taxes to them, which makes it difficult for them
to survive,” says Madole.
Nonetheless, Madole and the AGC didn’t dispute some of the tax
increases, and have even recommended raising gas taxes, which haven’t
been raised statewide since 1992. “When inflation affects your
purchasing power, it makes sense to incrementally raise taxes to build
roads,” says Madole. “If you let a road go more than eight years
without an overlay, it quadruples the cost to repair it. So maybe we
need to have a more long-term approach to things, and plan five or ten
years down the road. I think instead that we tend to have knee-jerk
reactions.”
Will Taxes Affect Nevada’s Growth?
The Silver State currently ranks 50th for its tax burden
outside income, property and sales tax, and our property taxes are the
country’s 16th lowest. In mid-August, the American Legislative Exchange
Council, a Washington, D.C. think tank, ranked Nevada among the 10
states with the best economic outlook, due to its low taxes and
pro-business regulatory environment.
As executive director of the Nevada Commission on Economic
Development, the organization created in 1985 to diversify the state’s
economy and create jobs, Mike Skaggs watches the state’s taxes closely.
After all, Nevada’s lack of personal or corporate income tax is one of
the biggest recruiting tools in his arsenal.
Luckily, these taxes weren’t much affected by the recent
legislative decisions, as the new Modified Business Tax rate of 1.17%
is still very competitive with neighboring states.
“On the recruiting side, these changes don’t affect us a whole
lot,” says Skaggs. “But on the abatement side we were affected. We deal
a lot with trying to bring renewable energy companies here, and there
were some changes made on how much we can abate for new companies to
start up … we were dealing with a client before the session who was
talking about building plants, and now there will be less of an
abatement on the front end, so they’re having to borrow $200 million to
put in a facility. So in that sense, it makes the job a little
tougher.”
He’s talked to some existing business owners who have said
they’ll likely be laying off employees to keep costs manageable as a
result of the tax increases. He’s also concerned by some lawmakers’
talk of a corporate income tax, which could chip away at Nevada’s
ability to diversify by drawing businesses here. Still, he hears
encouraging reports about the state of the economy, and expects us to
be in a better situation soon.
What the Future Holds
While much of the country’s economic news is encouraging, the
fact remains that these tax increases sunset in 2011, just in time for
the next legislative session. With no stimulus money in the offing,
lawmakers will likely find themselves in an even more difficult
situation as they face a $2 billion shortfall.
That’s partly why lawmakers made a plan to hire an independent
consultant to analyze and make recommendations about the state’s tax
structure. Numerous studies, including one in 2003, have been done and
all drew the same conclusion: Nevada needs a more stable, more
diversified tax base that doesn’t rely so heavily on such volatile
industries as gaming and sales.
Carol Vilardo echoes the words of many when it comes to looking
at Nevada’s economy. “Our revenue base needs to be adjusted to better
reflect the way the economy is functioning, and we haven’t done that.
We need to get to the point where we don’t spend every cent of our
revenue on projects, and develop a good rainy day fund that allows us
to minimize cuts in a downturn. We need to put a lot more away than we
have been.”
