For anyone who hasn’t heard about it yet, below is my testimony to the Assembly Ways and Means Committee tonight as they met to debate whether to extend the sunsetting taxes from 2009:
My name, for the record, is Geoffrey Lawrence and I am deputy director of policy at the Nevada Policy Research Institute. Thank you, Madame Chair, for the opportunity to testify today.
As I’m sure you’re aware, every tax instrument impacts economic behavior in unique ways and these distortions are generally wealth-reducing because they alter human action away from the welfare-maximizing behaviors that occur within open markets. However, since governments are compelled to levy taxes in order to provide for certain “public goods,” such as the rule of law, sober consideration should be given to the relative merits and drawbacks of alternative taxing mechanisms.
The Modified Business Tax is ultimately a tax on labor, which artificially increases labor costs – suppressing the demand for labor. As a result, the tax is a negative incentive for employers to retain existing workers or to hire new ones. It also can lead to an over-mechanization of industry, beyond the point of optimal production, because the cost of capital relative to labor is artificially skewed. In economics, there’s a very boring-sounding term for this trade-off between hiring workers or investing in machines to do the work called the “marginal rate of substitution.” Taxes on labor, as with taxes that specifically target capital, distort this delicate balance and lead to sub-optimal levels of production.
The Local School Support Tax, as you know, is a tax on consumption. Consumption taxes artificially elevate the final price facing consumers and, therefore, suppress consumer demand for the taxed goods. This means that, while consumer welfare is injured, retailers see fewer revenues as a result of the decline in consumer demand. This fall in business revenue is translated backwards to factor inputs like capital and labor – further exerting downward pressure on wages. As I often say, business is like a jelly doughnut: if you squeeze it, the jelly has to come out somewhere. With regard to consumption taxes, this is generally some combination of higher prices on consumers or reduced wages for workers.
I bring up these points because the adverse impacts of taxation are directly proportional to the size of the tax burden imposed. Since an extension of the Modified Business Tax and Local School Support Tax increases from 2009 would effectively increase the total tax burden beyond what is scheduled to exist, this bill would only magnify the distortions caused by these particular tax instruments.
I have heard a lot about the ability to fund public education today, with the implication that current revenues would be insufficient to accomplish this task. But far more important than how much money is spent, is how well it is spent and the educational system in Nevada is not structured to deliver cost-effective results in terms of student performance.
The body of evidence is immense and irrefutable regarding the effectiveness of specific and substantive educational reforms on improving student performance and, consequently, those students’ chance at success in life. These reforms include: alternative teacher certification, open enrollment, evaluating and grading public schools and teachers based on student achievement, and, most importantly, expanding the universe of school choice. School choice does not have to mean vouchers – it can mean the expansion of charter schools, including virtual schools, and a tuition tax credit program along the lines of one modeled by NPRI.
These truths have been known for a long time and, yet, the Nevada Legislature has failed for years to implement meaningful reform in the interest of our children. I apologize for letting emotion enter into my testimony, but I personally find it reprehensible that after years of failing to act in the interest of children, that anyone would now use children as political leverage for raising the tax burden on Nevada’s families. If this body was genuine in its concern for educational quality, we would have implemented the reforms I’ve mentioned years ago.