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Nevada Considering Problematic “Margin Tax”

2 min readBy: Joseph Bishop-Henchman

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In late January, the Nevada Supreme Court ruled that a ballot initiative to implement a "margin taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. " in the state could proceed to the 2014 ballot. However, the Legislature is empowered to tackle the topic in the first 40 days of its session. Three things could happen:

  • The Legislature takes no action. In this case, the initiative will then appeal on the November 2014 ballot.
  • The Legislature recommends a counterproposal. In this case, the initiative and possibly the counterproposal will appear on the November 2014 ballot.
  • The Legislature passes the initiative as received. This requires a two-thirds vote.

Today, legislators hold a hearing on the proposal, which is patterned after the "margin tax" problematically implemented in Texas. The Nevada tax would be a 2 percent rate, however, compared to the Texas 1 percent tax.

We evaluated Texas's experience with the margin tax here. Highlights:

  • The tax is structured with a fair amount of complexity:
    • Business taxpayers choose one of three tax bases: (1) total revenue minus "cost of goods sold"; (2) total revenue minus wages and benefits; or (3) 70% of total revenue
    • "Cost of Goods Sold" has been a key sticking definitional point, with the following items currently excluded: services, selling costs, distribution costs, advertising, taxes, and compensation.
    • Tax rate is 1 percent, with a special rate of 0.5 percent for wholesalers and retailers. This unequal rate has been unsuccessfully challenged in court, and previews the myriad rates that states with gross receipts taxes inevitably adopt (see reference to Washington here).
    • Businesses with less than $1 million liability are exempt. The exemption was intended to be sharply reduced but this has been postponed.
    • Taxable entities with less than $10 million can instead elect top pay 0.575% of total revenue.
    • Tax is owed on the Texas-apportioned share of combined reported profits from all related business entities.
  • Revenue has fallen far short of predictions, creating budget problems.
  • While designed to apply to more businesses than the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , the adoption of exclusions and preferential rates has led to a very inequitable system.
  • The evolving state definition of "cost of goods sold" differs from federal rules, creating complexity, uncertainty, and confusion.
  • Designed to be a simple tax, it in fact has all of the most complex features of corporate income taxes: apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. formulas, decoupling from federal rules, combined reporting, different rates for different businesses, and political efforts to obtain preferential tax rates.
  • There is a strong effort in Texas to modify or repeal the tax.
  • Public finance expert Professor John Mikesell has described the margin tax as a "badly designed business profits tax…combin[ing] all the problems of minimum income taxation in general—excess compliance and administrative cost, penalization of the unsuccessful business, undesirable incentive impacts, doubtful equity basis—with those of taxation according to gross receipts."

Click here to download a PDF of the 56-page Nevada proposal.