Is Nevada’s tax structure regressive?
Leftist activists love to deride the Silver State's tax structure for purportedly placing too heavy a burden on individuals at the lower end of the income scale while taxing high-income earners relatively lightly.
These allegations merit sober examination because, as the Nevada Policy Research Institute highlighted in its "One Sound State" proposal, discriminatory tax burdens are not only unjust, they are also economically inefficient. Fortunately for those in the Silver State, however, these allegations are based largely on faulty assumptions and fallacious economic theories.
The left-leaning Institute on Taxation & Economic Policy (ITEP), a Washington, D.C.-based think tank that is frequently cited by activists at the Progressive Leadership Alliance of Nevada, asserts that Nevada's tax structure — notwithstanding its sales-tax exemption on groceries — is among the most regressive in the nation. However, ITEP's claim is undermined by the Institute's fundamental misunderstanding of the price mechanism.
Central to ITEP's misunderstanding is the belief that the burdens imposed by major tax instruments are simply passed forward. Thus, ITEP claims that the burden of property taxes within the Silver State falls, in part, on renters and that the burden of sales taxes falls primarily on consumers.
Statistically speaking, renters are more likely to fall at the lower end of the income scale and individuals at the lower end of the income scale are likely to consume, rather than invest, a larger proportion of their income. While these relationships are not necessarily true in every case, there is a statistical correlation — meaning that, assuming the burden of these taxes can, indeed, be passed forward, they would generally impose a regressive impact.
However, as Murray Rothbard makes clear in Power and Market, the central assumption made by ITEP is completely inaccurate. The burden of taxes cannot simply be passed forward to consumers when there has been no fundamental change to the consumer utility provided by the goods in question. As such, the demand schedule facing a specific good is unaltered by the imposition of a tax.
A sales tax, for instance, merely drives up the final price of a good by adding a state levy to the good's supply cost. As seen in the chart below, this means the good's supply schedule shifts upward along its unaltered demand schedule, implying fewer units sold and fewer revenues for suppliers.
Consumers are injured because product availability declines, but the true financial impact of a sales or property tax falls on the supplier, who suffers fewer revenues. Instead of being passed forward to consumers, this decreased profitability is transmitted backwards to productive factors — namely, the employees and investors whose returns are diminished as a result of the tax.
If analysts at ITEP began with this fundamental understanding of how taxes affect prices and markets, their conclusions about the distribution of the state's tax burden would look remarkably different.
Instead of ascribing a regressive characteristic to the state's property taxes, they would recognize that the burden of property taxes falls not on renters, but on landlords who are forced to accept lower returns to capital. Because renters are statistically more likely to fall at the lower end of the income scale and landlords at the higher end, a correct interpretation would be that property taxes in Nevada have a progressive impact — not a regressive one.
Similarly, they would recognize that the burden of state sales taxes primarily appears in reduced wages for workers who produce or sell tangible consumer goods. These workers may or may not fall on the lower end of the income scale, but it is not necessarily a straightforward conclusion that the sales tax has a regressive impact.
In fact, as Rothbard notes, the true impact of a sales tax is to reduce the disposable income of all consumers, leaving fewer resources available for savings and investment — a trend that is statistically more likely to affect those at the higher end of the income scale.
ITEP and its leftist allies in Nevada have repeatedly misrepresented the distribution of the Silver State's tax burden — apparently as part of their political agenda for imposing on Nevadans a new, progressive personal income tax.
Nevadans should not be duped.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. For more information visit http://npri.org.