Skip to content

Nevada Panel Considering Tax Reform Options, Including New Business Taxes

10 min readBy: Joseph Bishop-Henchman

Download Fiscal Fact No. 235

Fiscal Fact No. 235


Every state that manages without a personal or 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. routinely confronts calls to make it easier for the state to raise revenue by enacting an income 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. . As Nevada confronts the latest periodic call to enact a corporate income tax, state legislators have funded a study of the state’s tax system. The 25-member panel and its contractor have explicitly been instructed to “review proposals for broad-based business taxes.” Fiscal reform is expected to be a major topic for the Silver State in 2011.

Among the options under consideration, and critiqued in a new report by the Nevada Policy Research Institute, One Sound State, Once Again, are corporate income taxes, gross receipts taxes, and a broadened sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. .[1] The state should be careful about its options, as its ability to attract investment and capital depends greatly on its favorable tax climate.

Table 1
Year-to-Year Changes in State Tax Revenue in the U.S., as a Percentage of Previous Year, Fiscal Years 2000-09 (in real terms)











Total Taxes

+ 4.3

+ 0.9

– 6

+ 0.3

+ 4.9

+ 6.1

+ 6.4

+ 2.8

– 0.7

– 8.5

Property Taxes

– 9.1

– 8.1

– 8.8

+ 5.4

+ 6.1

– 4.1


– 0.1

– 3.3


General Sales Taxes

+ 2.6


– 1.4

+ 0.5

+ 4.3

+ 4.0

+ 4.4

+ 0.9

– 2.7

– 5.0

Excise Taxes

+ 0.2

– 1.5

+ 3.4

+ 5.3

+ 4.0

+ 1.1

+ 5.1

+ 2.7

– 1.2

– 2.3

Individual Income Taxes

+ 8.6

+ 3.9

– 13

– 4.3

+ 5.3

+ 8.5

+ 7.1

+ 5.1

+ 0.9

– 12.1

Corporation Income Taxes

+ 2.2

– 5.4

– 24.7

+ 9.9

+ 3.7

+ 21.3

+ 17.2

+ 8.0

– 8.0

– 22.6

Source: Data from U.S. Census Bureau and Bureau of Labor Statistics.

Corporate Income Taxes Are Not Less Volatile than Other Taxes

As the Nevada Policy Research Institute notes in a new report, One Sound State, Once Again, a corporate income tax is not a good choice if revenue stability is the goal. As the table below shows, corporate income taxes have proven to be the most volatile of the major taxes, as measured by year-over-year revenue changes (see Table 1).[2]

From this data, one can compare volatility by looking at the standard deviation. The standard deviation measures how spread out the percentage change numbers are or, in other words, whether the annual change percentages are always about the same (considerable stability in the rate of change) or whether there is considerable variability. From this, we find that state corporate income taxes are the most volatile of the five major tax revenue sources:

Table 2
Volatility Measures of State Tax Revenue in the U.S., Fiscal Years 2000-09

Standard Deviation
(Volatility Measure)

Total Taxes


Property Taxes


General Sales Taxes


Excise Taxes


Individual Income Taxes


Corporation Income Taxes


Source: Tax Foundation calculations from U.S. Census Bureau and Bureau of Labor Statistics data.

This showing of extremely volatile corporate income tax receipts nationwide is consistent with the Nevada Policy Research Institute’s calculations for Nevada, and it is consistent with other scholarly work on the topic. Such volatility can be problematic for state budgets, where predictability and year-over-year revenue smoothness is preferred to maintain annual spending commitments. This is especially troubling for a state that has a bi-annual budgeting procedure.

Corporate Income Taxes Are a Harmful Tax for Economic Growth

An important study released last year by the Organization for Economic Growth and Development (OECD) found that of the various taxes a country can impose, “Corporate taxes are the most harmful tax for economic growth.”[3] The administrative and compliance costs of corporate income taxes are also considerable, and scholars across the political spectrum have called for the abolition of state corporate income taxes.[4]

Increasingly, states are finding that corporate income taxes are hindrances to their economic development. The use of tax incentives, the abandonment of 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. uniformity, the proliferation of tax planning opportunities, and the rise of pass-through entities like LLCs have led to a long-term decline in state corporate income tax revenues. Nevada (and people who invest in the state) are currently able to avoid much of the complexity and political wrangling (exemptions, abatements, credits, incentive programs apportionment games, and nexus rules) that accompany the corporate income tax. This advantage is a key driver of the state’s staggering economic growth.

Gross Receipts Taxes Are Distortive and Destructive

At first glance, gross receipts taxes appear to satisfy economists’ prescription for taxes that have a broad base and low rate. Such taxes are imposed on all transactions, at a very low rate. However, the base of the tax is often broader than the entire economy, resulting in high effective tax rates that vary dramatically between industries. States with gross receipts taxes include Delaware (“Merchants’ License” Tax), Michigan (“MBT”), Ohio (“CAT”), Texas (“Margins” tax), Virginia (“Business/Professional/Occupational License Tax”), and Washington (“Business & Occupation” tax). Kentucky enacted a gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. in 2005 but repealed it within a year.

The chief economic problem with gross receipts taxes is the pyramiding nature of the tax.[5] That is, since the tax applies each time a business sells its goods or services, the tax “pyramids” on products as they move through the production process. The longer the production chain, the higher the effective tax rate on the final product. This produces major distortions in economic decision-making, with notably negative impacts on low-margin, high-volume businesses.

For example, the Washington State Business & Occupation (B&O) tax is the oldest gross receipts tax in the United States. First enacted in the 1930s, Washington has repeatedly amended it, resulting in an ever-changing blizzard of different rates and bases. Every business is assigned a B&O tax classification with different rates, exemptions and credits:

Table 3
Selected Washington Gross Receipts Tax Rates


B&O Tax Rate

Manufacturing (generally)


Manufacturing (semiconductors)


Manufacturing (flour, soybean oil, etc.)


Manufacturing (airplane components)


Manufacturing (aerospace product development)


Timber extraction, manufacturing, and processing




Real Estate

1.500 %

Horse Race Meets


Travel Agents & Tour Operators


Garbage Disposal






Source: Commerce Clearing House summary of Washington revenue code.

Delaware faces similar complexity with its Merchants’ License Tax (see Table 4):

Table 4
Selected Delaware Gross Receipts Tax Rates


Merchants’ License Tax Rate

Wholesalers (generally)


Food processors


Commercial Feed dealers




Retailers (generally)




Grocery Supermarkets


Source: Commerce Clearing House summary of Delaware revenue code.

This whole circus of separate rates for each industry comes from the nature of gross receipts taxation. It’s not based on profit, so each industry’s profitability and costs are constantly weighed by politicians who decide on rates and exemptions and credits.

Thus, a gross receipts tax badly distorts and interferes with business investment decisions, leading to lower economic growth and job growth. Sales, income and property taxes do not have the same tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. feature, making them more economically efficient taxes. An increase in any of those taxes would cause far less economic harm than a gross receipts tax that raises the same amount of revenue.

Sales Tax Broadening with Lower Rates Is Consistent with Sound Tax Reform

A properly structured sales tax applies to all consumer purchases of goods and services, but not to business purchases. The purpose of this exemption is not to promote business in general but rather to avoid the double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of some products. Taxing business-to-business activities not only adds to the cost of doing business and raises consumer prices, but it also distorts the allocation of capital as the sales tax cascades through some production lines but not others, in effect mimicking a gross receipts tax.

State tax codes are filled with many politically motivated special interest carve-outs, the result of which is that the government’s tax system induces consumers to favor certain industries, activities, or products over goods and services that they otherwise would prefer. Excessive carve-outs, particularly of widely purchased items like groceries and clothing, greatly increase the volatility of sales tax revenues. Each carve-out necessitates additional statutory definitions and regulations, increasing complexity.

If such tax preferences are few, substantial revenue can be raised with low tax rates. Professor John Mikesell estimated in 2004 that the median sales tax in the United States applies to only 43.8% of personal income.[6] A similar study by Professor William Fox in 2002 found a national median of 42.6%.[7] (Mikesell found that Nevada’s sales tax applied to 48.1% of personal income, while Fox found 51.42%. Thus, Nevada’s sales tax is currently slightly broader than the national median, but still only encompasses about half of personal income.)

In the 45 states with a general sales tax, proposals to broaden the base always face significant opposition, particularly when they are not revenue-neutral. Politically connected industries, such as housing or legal and medical services, will strongly resist being encompassed by the sales tax.

In 2007, Maryland sought an expansion of its sales tax base to “luxury” services but beneficiaries of the exemptions targeted for elimination resisted.[8] In the end the expansion included only one (lobbyist-less) group in Annapolis: computer services. They quickly hired lobbyists and that expansion was rescinded as well. In 2009, Maine enacted a tax reform that broadened its sales tax, using the revenue to reduce income taxes. Voters repealed the reform a year later, with resistance by current exemption beneficiaries being one of the reasons.[9] A Pennsylvania sales tax broadening proposal the same year that retained the exemptions for legal and medical services was declared politically “dead on arrival.”[10]

Nevertheless, sales tax broadening can eliminate many unjustified exemptions, and if done without favoritism for particular industries and in a way that reduces the overall sales tax rate, can improve the stability of the sales tax while generating new revenue or paying for tax reductions elsewhere.


With Washington, Oregon, California, and Arizona recently raising taxes, Nevada’s already enviable tax climate looks better and better. As the economy improves, the state is well-positioned for capital investment and job creation.

This is an advantage that Nevada should be careful not to jeopardize. A corporate income tax and, in particular, a gross receipts tax, would do significant harm to the state’s tax climate. As the state considers fiscal options through 2011, it should keep this in mind.


[1] Geoffrey Lawrence, “One Sound State, Once Again,” Nevada Policy Research Institute (Jun. 1, 2010),

[2] Kail Padgitt, “State Revenue Changes from 2008 to 2009,” Tax Foundation Fiscal Fact No. 225 (May 13, 2010),

[3] Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia, “Tax and Economic Growth,” Economics Department Working Paper No. 620. ECO/WKP(2008)28, Organization for Economic Cooperation and Development, July 11, 2008.

[4] See, e.g., David Brunori, “Stop Taxing Corporate Income,” State Tax Notes 47 (Jul. 1, 2002) (“We cannot fix the problems that plague the tax. So maybe its time to throw in the towel and stop taxing corporate profits, at least at the state level.”); Chris Edwards, “State Corporate Income Taxes Should Be Repealed,” (Cato Institute Tax & Budget Bulletin) (Apr. 2004), (“As the mobility of corporate profits continues to rise, the corporate tax will become more inefficient and tougher for states to enforce. The solution is to repeal them, with the modest revenue losses to state governments made up with cuts to business subsidies.”); Charles E. McLure, Jr., “The State Corporate Income Tax: Lamb in Wolves’ Clothing,” in The Economics of Taxation (Henry J. Aaron & Michael J. Boskin, eds.) 327-48, Brookings Institution (1980) (“Since accurate state taxation of corporate income is often a logical impossibility, it seems best to abandon this tax as a source of state revenue.”); Carolyn Joy Lee, “State Corporate Income Taxes No Longer Make Sense,” New York City Tax Forum Paper No. 587 (Jan. 3, 2006) (“The problem is not that state corporate income tax regimes are malevolently designed and therefore in need of a federal takeover. The problem instead is that those regimes are antiquated, in some cases overly parochial, and hobbled by practicalities and constitutional constraints that render those taxes ill-suited to our increasingly formless and multijurisdictional economy.”).

[5] See Andrew Chamberlain and Patrick Fleenor, “Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes,” Tax Foundation Special Report No. 147 (Dec. 2006),

[6] John L. Mikesell, “State Retail Sales Tax Burdens, Reliance, and Breadth in Fiscal 2003,” State Tax Notes 125, 129-30 (Jul. 12, 2004).

[7] William F. Fox, “Should the Hawaii General Excise TaxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. Look Like Other States’ Sales Taxes?” (Oct. 15, 2002).

[8] See Joseph Henchman, “Maryland Covertly Singles Out Computer Services for New Tax,” Tax Foundation Tax Policy Blog (Dec. 17, 2007),; John Wagner, “Computer Services Firms Want Sales Tax Repealed,” Washington Post (Dec. 9, 2007),

[9] See William Ahern, “Income Tax Reform Repealed by Referendum,” Tax Foundation Tax Policy Blog (Jun. 9, 2010),

[10] See Joseph Henchman, “Pennsylvania Governor Proposes Spending Boost, Broader Sales Tax, Heavier Business Taxes,” Tax Foundation Fiscal Fact No. 213 (Feb. 25, 2010),