Large tax increase traded for small reforms

Sandoval’s about-face on taxes defines legislative session

By Victor Joecks
  • Wednesday, July 6, 2011

For the first 108 days of the 2011 Nevada Legislative Session, Gov. Brian Sandoval defined the policy debate by being a strong advocate for Nevada's taxpayers and business owners. On May 26, 2011, however, the Nevada Supreme Court correctly ruled that state government couldn't take $62 million from the Clean Water Coalition and transfer that money to the state's general fund.

The implications of the ruling — that around $481 million of local money grabs couldn't be used to pump up state spending — led Sandoval to almost immediately break his long-standing, no-new-tax promise and support raising taxes by maintaining the "sunset" taxes.

This about-face allowed Sandoval to "negotiate" revenues for reforms, but he gave up much of his leverage to the Democratic majorities by revealing his support for tax increases so suddenly after the court's ruling.

In the end, Sandoval and the Legislature approved a general fund budget of over $6.2 billion. Although the general fund amount is similar to the past biennium's budget, it also doesn't represent the totality of state expenditures. That's because of how Nevada funds education through the Distributive School Account.

Contrary to the perception of some, the state's share of per-pupil K-12 education spending will actually increase in the next biennium from $5,192 to $5,374 in the fall of 2012 — while schools will receive thousands more per student in local and federal money. Unfortunately for students and parents, past spending increases have not increased student achievement. That's despite the fact that inflation-adjusted, per-pupil spending nearly tripled over the last 50 years.

To pay for these inflated spending levels, the governor and the Legislature raised taxes some $620 million. They maintained the higher sales and modified business tax (MBT) rates and the doubling of the business license fee — all of which were scheduled to sunset June 30. As part of the deal, businesses will not pay the MBT on the first $250,000 of payroll, which will exclude 70 percent of businesses. Barring another legislative change in 2013, like the one that just happened, these tax increases will now sunset June 30, 2013.

The impact of tax increases is obvious to almost every business owner. Taxes take dollars away from both business owners and consumers. With less money to spend, consumers purchase less. And increasing the cost of hiring workers — the error at the heart of the MBT — creates a disincentive for employers to add new jobs.

In itself, the tax increase won't guarantee Nevada's economic slump continues: Entrepreneurs regularly overcome many burdensome taxes and regulations. But tax increases are a significant depressant on overall economic activity. While some business owners will be able to overcome this additional burden, others will not.

Eliminating the MBT on the first $250,000 of payroll is a positive step. But even the need to eliminate it for small businesses only further highlights the tax's destructive nature.

In exchange for raising taxes by more than $600 million, Sandoval and legislative Republicans earned minor concessions from the Democrats:

Some elected officials did propose more substantive reform ideas — highlighted by Sandoval's education-reform package that included one-year contracts for teachers and school vouchers — but the compromise that raised taxes by $620 million didn't include anything more than minor improvements.

These reforms are a step in the right direction, but they are the equivalent of running the first quarter mile of a marathon. They're necessary and beneficial, but they're also nothing more than a nice start.

Victor Joecks is the communications director of the Nevada Policy Research Institute. For more information visit This article first appeared in the July edition of Nevada Business.

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