NPRI: Margin tax proposal remains severely flawed

By Geoffrey Lawrence
  • Thursday, January 31, 2013

LAS VEGAS — Responding to news that the Nevada Supreme Court today reversed a district court decision and allowed a 2 percent margin-tax initiative to go forward, Geoffrey Lawrence, deputy policy director at the Nevada Policy Research Institute, issued the following comments:

Regardless of whether the Supreme Court believes that the union bosses who want Nevadans to pay a margin tax complied with the technical requirements for an initiative petition, the margin tax remains one of the most hare-brained schemes ever to come before state lawmakers.

A business margin tax would be a disaster for Nevadans of every stripe. Despite misleading claims from its sponsors, the margin tax would apply to most small businesses and even to businesses operating at a financial loss. For those struggling firms, this new state levy would push them further in the red, forcing many to declare bankruptcy or, at best, downsize. Not only would this scheme smash the dreams of many small-business owners, but — should the initiative’s union sponsors get their way — the employees of those small businesses will find themselves out of work.

The initiative’s sponsors also like to claim that large businesses pay higher taxes in neighboring states without raising consumer prices. However, no state but Texas imposes a margin tax, which is just a tax on gross receipts with some convoluted and complex deductions. Comparing this tax idea to a corporate income tax — which only taxes profits and not total revenues — is entirely disingenuous. On this point, the proposal’s union sponsors are either woefully ignorant, willfully misleading or both.

In fact, the Texas margin tax — levied at only half the rate proposed for Nevada — has been widely recognized as a failure in tax policy. Small businesses complain that the tax is too complicated and that it discriminates in favor of certain industries with greater political influence. Law firms, for instance, can deduct almost all of their liability away, but farmers and information-technology firms wind up shouldering a disproportionate share of the burden.

The Tax Foundation has noted that gross-receipts taxes, including the margin tax, are “distortive and destructive,” because they “pyramid,” being assessed at every level of production. Thus, highly complex goods that require multiple stages of production are repeatedly hit with the tax — bearing, therefore, a significantly higher effective tax rate and distorting consumer behavior. If you want to greatly hinder diversification of the Nevada economy, this is precisely the tax system you want.

In 2009, Texas lawmakers heard more than 100 bills to change or repeal the tax — just three years after it was put in place. Now, public-sector unions want to impose the same tax on those who work in Nevada’s private sector, but at twice the rate!

The coalition of government unions seeking to increase the burden on Silver State families do so simply to fatten their own pocketbooks. Once again they offer the by-now-laughable claim that they’ll deliver a higher quality of education if Nevada families will just fork over the extra dough — even though Nevada taxpayers, in the last 50 years, have nearly tripled inflation-adjusted, per-pupil education spending.

And what did taxpayers get in return? Just more stagnation in educational quality, as these very union bosses twisted arms in the Legislature to protect the status quo and block the reforms that Nevada’s children need.

Given these union bosses’ prolonged efforts to prevent parents from being able to select better educational opportunities for their children, coupled with the unions’ work to keep ineffective teachers in the classroom, their claims about educational quality ring especially hollow.

Listening to union bosses, one would never know U.S. Department of Education data shows that Nevada now spends more on a per-pupil basis than most of its neighbor states, while getting lower test scores and graduation rates.

Lawrence also cited Tax Foundation research, which shows how a margin tax is more destructive than alternative tax instruments yielding the same amount of revenue. The Tax Foundation concluded that: “There is no sensible case for gross receipts taxation, or modified gross receipts taxes such as a Texas-style margin tax.”

Lawrence continued:

Research shows that there is little to no correlation between spending and student achievement. Indeed, for the last 50 years, Nevada has tried to spend its way to better student achievement and has nearly tripled inflation-adjusted, per-pupil spending while results have stagnated.

If union bosses were serious about improving education and not just fattening their own wallets, they would whole-heartedly support an agenda of proven education reforms, like the ones proposed by Governor Brian Sandoval.

Lawrence noted that a Las Vegas Review-Journal investigation revealed that in 2009, the Clark County Education Association teacher union spent more than a third of its $4.1 million budget on just nine of its employees. John Jasonek, then-executive director of CCEA, took home over $625,000 — $205,745 for running the union and $423,863 for simultaneously running two union-affiliated organizations. Each of the nine employees took in more than $139,000 from the coffers of CCEA and related organizations.

“This margin-tax proposal isn’t a fix for Nevada’s education system,” said Lawrence. “It would only entrench the failing status quo, enrich the union bosses and hurt struggling businesses and men and women looking for work.”

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