Broad-based business taxes haven’t prevented other states from running budget deficits

Victor Joecks

“Shhh … don’t let those pesky citizens find out we want to take more of their money.”

Right now Nevada’s legislators are engaged in secret meetings to decide how much more money Nevada should spend â’€ money, mind you, that it doesn’t have. Once they’ve come to an agreement, they’ll immediately start debating – in secret, of course – a tax package rumored to be worth about $800 million or more. There will be many arguments made to support this record or near-record tax increase.

One of the loudest will be that Nevada needs a broad-based business tax, because right now the state is too dependent on sales and gaming taxes. The implication is that if Nevada just added another leg to its tax “stool,” revenues would even out over the years and Nevada wouldn’t have these budget problems in the future.

The great thing about this argument is that it’s easy to test. As big-government types like to point out, Nevada is one of only a handful of states without a broad-based business tax. Let’s look at other states and see if having such a tax prevented them from running budget deficits.

The answer: Nope. And it’s not even close. In fact, 47 states are running budget deficits this year.

Let’s use California as a case study. Right now California is teetering on the edge of bankruptcy and losing hundreds of thousands of jobs to lower-tax states like Nevada.

What’s California’s problem? Let’s look more closely.

California, like Nevada, has a sales tax. Would adding a broad-based business tax solve the Golden State’s dilemma? No, it already has the ninth-highest corporate income tax in the nation. Maybe its stool just needs another leg. What about adding an income tax? Nope, California already has one of the most progressive income tax structures in the country.

The problem is that higher taxes lead to higher spending levels, which lead to deficits when the economy goes south (like Nevada’s is now), which lead to higher taxes, which lead to higher spending levels when the economy improves, which lead to deficits when the economy goes south again … and on and on.

This is exactly what California has done over the last 20 years and what Nevada is starting to do. Here’s a pictorial illustration of Nevada’s recent overspending.

Nevada doesn’t have to end up like California though. There is still time for Nevada’s politicians and its people to reject the secret tax increases.