Leaders in the legislative majority celebrated Cinco de Mayo this year by announcing their intention to seize an additional $1.2 billion from Nevada families over the next two years.
The plan is not all negative, to be sure. Democratic leaders have finally acknowledged the perverse incentives created through Nevada's current Modified Business Tax — the centerpiece of their last two major tax hikes in 2003 and 2009. Because the MBT is assessed as a percentage of a firm's payroll, it penalizes firms for hiring new workers or granting pay raises to existing workers. Senate Majority Leader Steven Horsford wrote recently that the MBT "hurts small business and hampers job creation." Empirical analysis also demonstrates that the MBT is the state's most volatile revenue source and, as such, exacerbates Nevada's boom-and-bust, tax-and-spend cycle.
The good news is that Horsford and Assembly Speaker John Oceguera are proposing to eliminate this disastrous tax. The bad news is they plan to replace it with something even worse. The "margin tax" being proposed by Democratic leadership is structurally very similar to the gross-receipts-tax proposal that was defeated in 2003. The tax would be assessed against the least of: (a) 70 percent of total revenue, (b) total revenue minus wages or (c) total revenue minus the cost of goods sold.
It is worth highlighting that no tax system is perfect and that every tax instrument distorts economic behavior in unique ways. However, because governments are compelled to levy taxes in order to finance their operations, sober consideration should be given to the relative merits and drawbacks of alternative tax instruments.
The proposed margin tax would target firms throughout the supply chain, levying a tax at every stage of production. This means that highly complex goods with many stages of production would be subject to the tax many times over — a concept known as tax "pyramiding." Consumers would see the cumulative impact of multiple margin-tax liabilities factored into the final price of these complex goods — artificially biasing their behavior away from the consumption of complex goods and toward relatively simple goods.
Hence, high-tech industries — like, say, photovoltaic solar energy production and similar industries the majority party claims it wants to see expand in Nevada — would be uniquely penalized by the majority's new margin tax. In fact, the proposed margin tax is likely to work at direct odds with the purported goal of "economic diversification" by rendering Nevada a less competitive destination for new, high-tech industries while further consolidating Nevada's status as a one-industry state.
The Democratic tax plan also recognizes the destructive impact of the state's high sales-tax rates on tangible consumer goods. Horsford and Oceguera have proposed to lower this rate while simultaneously broadening the sales-tax base to include some services. As NPRI and others have highlighted, broad bases with low rates and few exemptions are among the basics of sound tax policy.
However, the majority's plan overlooks lesson number one when it comes to sound tax policy: The economically distorting and destructive impacts of taxes are in direct proportion to the size of the tax burden imposed. The best means of limiting the wealth-destroying impact of taxation is to limit the overall tax burden through spending restraint.
Not only does the Democrats' new tax proposal fail to limit the financial burden placed on taxpayers in the private sector, its explicit purpose is to increase that burden, subsidizing well-documented inefficiencies in the public sector. Indeed, the primary intent here is not to objectively address structural weaknesses within the state tax system; it is simply to wring more money — $1.2 billion — out of the taxpaying public. Thus, rhetoric from the majority's leadership about "stabilizing" the tax structure has to be recognized as disingenuous.
This leadership has already demonstrated a willful hostility toward spending restraint by failing to give genuine consideration to meaningful reform in the areas of K-12 and higher education, Medicaid, collective bargaining and prevailing wage. NPRI has highlighted very specific reforms that could yield $3.5 billion in savings during the 2011-13 budget cycle while maintaining or improving the quality of services. Many of these ideas were embodied in legislative bills this session that have met with opposition from majority lawmakers.
If majority lawmakers were sincere about developing solutions, they would first exploit every dollar of conceivable savings before considering passing the largest tax increase in state history on struggling Nevada families.
Their actions belie their rhetoric.
Geoffrey Lawrence is deputy director of policy at the Nevada Policy Research Institute. For more visit http://npri.org.