That so-called “gross receipts” tax being talked up by the Governor’s Task Force on Tax Policy would actually be a de facto income tax on Nevadans.
Legally, the measure could probably evade Nevada’s constitutional ban on personal income taxes. Practically speaking, however, it would definitely function as a tax on the actual incomes of Nevadans.
To see why, let’s look at what economists call tax incidence: Who really pays the tax? Considered from that perspective, it turns out the people who will pay a gross receipts tax, should it be passed into law, are 1) virtually every Nevadan who earns a wage or salary, 2) Nevadans who own land and rent it out, and 3) Nevadans who save and invest. All, by and large, will have their incomes reduced.
Many people assume the answer to “who pays?” is simply whoever the government says has to collect and send in the tax. The issue, however, is not who pays the tax immediately, but who pays it in the long run.
Other people think the immediate taxpayer can simply raise his selling price to cover the tax and shift the tax forward onto buyers. Commonly these people believe this is what happens with sales and excise taxes. Given the family resemblance between those taxes and the proposed gross receipts tax, these same people would probably assume the same about a gross receipts tax.
The fact is, however, that none of these taxes get passed forward to the consumer. True, Nevada consumers are economically damaged by all the taxes levied by the state, and true, consumers will be damaged additionally by the imposition of a brand new tax. But these economic damages come to Nevadans not as consumers but in their capacities as producers—as wage and salary earners, as landowners, and as investors.
The key to this whole process is the way prices actually get set. Non-business people often assume that the prices of goods and services are determined by the costs of production. Not true. What governs the price of a good or service is demand—how much of something is in existence and how much demand there is for it on the market.
Take, for example, the costs of feeding and raising to adulthood a young man born in 1935 in a working-class Mississippi home. It is easy to see that those costs have no relation at all to the prices his services soon commanded in the marketplace—once Elvis Presley began recording and performing.
It’s the same with the goods or services offered by any successful person or firm. Demand makes all the difference. Thus business people pay extremely close attention to how their market responds at different price points. Then they set their prices at the maximum net revenue point.
But what this means is that even before any new tax is imposed here in Nevada, prices are already at their point of maximum net revenue! And since any hike in prices would simply decrease their company’s net revenue, business people can’t simply slap the state’s new “gross receipts” tax on top of current prices and start charging the current price plus the new state tax.
The late University of Nevada at Las Vegas economics professor Murray Rothbard wrote about this years ago:
It should be quite evident that if businesses were able to pass tax increases along to the consumer in the form of higher prices, they would have raised these prices already without waiting for the spur of a tax increase. Businesses do not deliberately peg along at the lowest selling prices they can find.
So business people running Nevada firms will have no other choice but to eat the tax—in other words, accept it as a cost that immediately reduces the firm’s income.
Thus, all across Nevada, every business that is subject to the tax will immediately become less profitable. But profit is also buying power—i.e., demand. So effective demand, here in Nevada, will drop for all of the factors that businesses use to produce their goods and services. That means Nevada firms will be less able to pay wages and salaries to employees, less able to pay for office space and less able to pay for investment capital.
Everything else equal, the income of anyone who sells anything to any Nevada business will take a hit, because less effective demand will exist for whatever he or she sells.
That’s why a gross receipts tax is a stealth income tax.
Steven B. Miller is policy director for the Nevada Policy Research Institute.