Nevada Prepares for Tax Hikes, Avoiding the Worst Mistake but Making Its Odd Payroll Tax Even Odder

May 20, 2009

Nevada lawmakers are preparing for tax hikes, well summarized by Molly Ball in the Las Vegas Review-Journal. Lawmakers in Carson City claim to have already cut $1 billion from the state budget, leaving them with tax hikes as the only option to plug the deficit. I don’t know if that’s exaggerated — budget cuts usually are — but whether it’s true or not, the tax hike proposals can be assessed on their own merits. Do they make sense?

Some do sound reasonable, which is to say that they haven’t threatened to kill the golden goose — the state’s zero tax rate on income. Nevada is routinely touted as a mecca for business for this very reason — no taxes on personal or corporate income.

But is it entirely true that Nevada doesn’t tax income? No. It’s still a very low rate, but in 2003, legislators enacted what they call a business payroll tax, unique among the 50 states, and now they’re raising it. Here’s how the Review-Journal describes the proposed change:

The current rate of 0.63 percent drops to 0.5 percent on the first $250,000 of annual payroll. According to the state Department of Taxation, 74 percent of Nevada businesses have total payrolls under $250,000.

The rate then would rise to 1.17 percent on payroll amounts above $250,000, a change that is forecast to bring in an additional $346 million to the state over the next biennium.

This attempt at “progressivity” in a business tax is nonsensical. A business is not a person, and the total payroll might be a group of low- or middle-income people.

For example, consider a company with two people on the payroll — the owner making $175,000 and a sales/office manager making $75,000. With a total payroll of $250,000, the firm will pay a low rate of 0.5% under the proposal. Compare that to a competitor with 10 people on payroll: the owner making $150,000, four sales staff making $75,000 each, and five clerks making $20,000 each, for a total payroll of $550,000. That firm will pay a much higher tax rate, taxes that will translate into lower wages at that firm. But that’s the firm with lower wages already!

We’ve written before on the absurdity of graduated tax rate structures on business (see here and here). If Nevada lawmakers actually raise a business payroll tax in the teeth of this unemployment rate, at least they should apply the same rate to all business.


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