Taxes & Government Spending

The end-game, Part I

Geoffrey Lawrence

Mystery and intrigue surrounds the Nevada Legislature as it heads into the final weeks of the 2011 regular session. The big question on everyone's mind: Will lawmakers agree to raise taxes on Nevada families in order to substantially increase state spending?

As amended, Governor Brian Sandoval's Executive Budget proposal would spend roughly the same amount in the next budget cycle as in the current one. Critics in the legislative majority, however, would like to see general fund spending increase by nearly $2 billion to reflect the amount requested from state agencies according to the state's baseline budgeting requirements.

The baseline budgeting process continues spending on all programs from the previous biennium and then adds in "roll-up costs," composed of automatic, across-the-board pay raises, caseload adjustment and inflation. As such, the process fails to exact accountability over the use of tax dollars because programs are not evaluated on the basis of need or performance. Instead, all state offices are presumed to merit a free ride into perpetuity, with workers in those offices receiving automatic pay raises, irrespective of whether a particular office is even accomplishing its objective.

As a result, the baseline budgeting process has resulted in state agency requests that amount to $8.35 billion — about $2 billion more than the $6.4 billion that is currently being spent. Governor Sandoval has produced the first official state document that systematically prioritizes expenditures and that ties funding to performance. This prioritization has allowed the governor's staff to identify areas of relatively low-priority spending, including spending on non-performing programs.

The governor's budget is not perfect, however, and contains several highly questionable gimmicks. In order to prop up spending, Sandoval proposes to take out a loan against future insurance premium tax revenues and transfers school districts' debt service reserve funds into operations.

Thus far in the legislative session, Republican lawmakers have stood firmly behind Sandoval's budget proposals while Democratic lawmakers have clamored for new taxes in order to finance a budget closer to that requested by state agencies under the flawed baseline budgeting process. Democratic leaders have proposed $1.2 billion in new taxes, including a continuation of the temporary tax hikes approved in 2009, a revenue-enhancing expansion of the sales tax base and a new business "margins" tax that supposedly would eventually replace the current modified business tax. Sandoval and the legislative Republican caucuses have remained adamant that additional taxes would stymie economic recovery and exacerbate Nevada's unemployment problems.

The stark divide between Democratic and Republican lawmakers has created a legislative stalemate. The Democratic majority has passed funding bills, including for K-12 education, that exceed the governor's spending recommendations. However, while the majority can vote spending beyond the governor's recommendations, it would need the help of lawmakers in the minority party to actually impose the tax increases it desires. Nevada's constitutional requirement that two-thirds of each chamber must approve tax increases means all Democratic lawmakers would need to consent while also getting the support of two Republican assemblymen and three Republican senators.

Sandoval's recent veto of the majority's K-12 spending plan and his expected veto of other bills that would spend beyond his recommendations further underscores Republican lawmakers' leverage over the state's biggest decisions. The majority cannot pass the higher budget it wants without Republican support.

So what might a potential legislative "end game" look like? Earlier in the session, Assembly Minority Leader Pete Goicoechea intimated he could deliver Republican votes in support of some tax package if Democratic lawmakers agreed to substantial reform of (1) collective bargaining, (2) prevailing wage, (3) K-12 education, (4) public employees' retirement benefits, and (5) construction defect laws. However, majority lawmakers have shown extreme reluctance to meet any of these demands to Republicans' satisfaction.

Meanwhile, Senate Republicans have unanimously pledged support for Sandoval's budget proposals.

Many observers now see some kind of replay of 2003, when lawmakers failed to reach agreement on a budget and then-attorney general Brian Sandoval, at the behest of then-governor Kenny Guinn, sued the legislature for failing to pass a budget. That disastrous lawsuit resulted in a decision by the Nevada Supreme Court that — before it was later repudiated by new justices — made Nevada's high court infamous. As for lawmakers, nearly all left Carson City emotionally bruised and battered.

The long-term impact of the 2003 fiasco will be detailed in Part II of this series, as we further explore the possibilities for 2011's end-game.

Geoffrey Lawrence is deputy director of policy at the Nevada Policy Research Institute. For more information visit http://npri.org.

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Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.