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Executive Summary
By a vote of 79 percent to 21 percent, Nevada voters on November 4, 2014 rejected a ballot initiative that would have established a 2 percent margin tax on business gross receipts. That debate was only the most recent example of an important state 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. discussion that comes up in nearly every recent Nevada legislative session.
Why do taxes keep coming up? One reason is the volatility of the current system’s tax collections. Another is the difficulty of understanding and complying with sales taxes and property taxes. Yet another is the simultaneous double taxation and complete exemption that exist in the Live Entertainment Tax. Revenue adequacy is also frequently cited.
This book is meant to continue this conversation by providing a framework for potential changes. In 2014, the Las Vegas Metro Chamber of Commerce commissioned the Tax Foundation to prepare a review of the Nevada tax system and recommend possible improvements. While they commissioned this report, neither the Las Vegas Metro Chamber of Commerce nor any of its sponsors directed this analysis or any of the recommendations.
We undertook this project as a national organization familiar with tax developments in many states, with the view that tax systems should adhere to sound economic principles, and in the spirit of providing useful information and observations for Nevada policymakers, journalists, and citizens as they evaluate their state’s tax system.
Over the course of five months, we met with stakeholders from all walks of Nevada life, including small business owners, local government officials, trade associations, industry representatives, state officials, and ordinary taxpayers. We reviewed the history of the tax system, including previous tax reform studies, and available revenue and economic trends.
Broadly:
- Nevada should consider fixing what is broken with the current tax system instead of pursuing a brand new tax to layer on top of the narrowly based, complex existing taxes. A number of elements of the tax system exist only in Nevada, and those in particular should be scrutinized.
- Changes should address state revenue volatility, be fair, and reduce carve-outs that plague the system.
- The tax system should retain elements that ensure Nevada economic and tax competitiveness.
In the following pages, we provide background on Nevada’s economy (Chapter 1) and on the overall tax system (Chapter 2). We then review each major tax, outline concerns, and propose reforms for consideration (Chapters 3, 4, and 5). Chapters 6, 7, and 8 conclude with discussions of several related issues relevant to policymakers but are outside the scope of our recommendations.
Summary of Tax Reform Options
Option A is a comprehensive tax reform proposal that includes the components of the other three tax reform options outlined hereafter (Options B, C, and D). It simplifies, broadens, and stabilizes the 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. , Live Entertainment Tax, Modified Business Tax, Bank Branch Excise Tax, Business License Fee, and the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. .
Option B stabilizes and modernizes Nevada’s sales tax system and the Live Entertainment Tax, applying it evenly to all final retail transactions without special carve-outs. It would:
- Eliminate the current sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for the service industry. As services grow to be an ever larger share of the economy, the sales tax becomes increasingly volatile and inadequate as it applies primarily to goods. We present three different scenarios of sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. expansion to services: small, medium, and large.
- Lower the 6.85 percent state sales tax rate, subject to revenue triggers.
- Exempt manufacturing machinery from the sales tax base. Nevada is one of just nine states that have this tax on capital investment, which double taxes final products.
- Exempt business inputs from the sales tax by issuing an identification number, registered with the Department of Taxation, to all businesses that pay the Modified Business Tax or the Business License Fee, which would exclude their business purchases from the sales tax base.
- Subsume the Live Entertainment Tax into the sales tax by repealing the current LET but applying the regular sales tax to all admissions charges and food, beverages, and merchandise sold at all venues that charge admission.
Option C further improves Nevada’s already competitive business tax structure by applying the existing Modified Business Tax to all businesses and eliminating both special carve-outs and industry-specific rates. It would:
- Roll back the higher Modified Business Tax rate for financial institutions while adjusting the Modified Business Tax rate for general businesses.
- Repeal the $85,000 Modified Business Tax carve-out, applying the tax to all businesses.
- Repeal the Bank Branch 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. , which raises little revenue and has no public policy rationale.
- Increase Business License Fees while instituting a graduated fee structure.
Option D proposes changes that add stability to Nevada’s property tax system and bring it in line with best practices from other states. It would:
- Change the assessment method from replacement cost to market value and eliminate the depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. factor.
- Adjust and reform tax caps, preserving predictability for homeowners and restrain local government spending growth while eliminating the unexpected downward “ratchet” that materialized in the most recent recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. .
- Present an option for a circuit breaker for low-income homeowners as an alternative way to target more meaningful property tax relief for specific individuals.
We hope these options continue the tax conversation in Nevada by providing a framework upon which legislators and citizens can make further decisions. The menu of choices we present all ensure that the state builds a tax system for a diversified economy and positions itself as a destination for investment, entrepreneurs, and talented individuals in the years ahead.
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