Taxation changes behavior
While state lawmakers were busy shaking down Nevadans for more money in 2009, they took little time to consider the adverse impacts that their new tax schemes might impose on the Silver State's growth prospects.
These potential pitfalls might have been highlighted for lawmakers had the debate on taxes been held in an open forum that allowed for informed public comment. Alas, lawmakers wasted more than three months of the 2009 legislative session negotiating taxes amongst themselves in the highly secretive "core group," to which the public was not invited.
Lawmakers' ill-conceived plan was finally unveiled to the public just six business days before lawmakers' self-imposed deadline for passage, meaning that the public would have minimal time to review the plan and anticipate its long-term impacts. What's more, this legislative maneuvering created an artificial atmosphere of urgency as lawmakers shortened to a week the time they would have to balance the state budget, limiting the possibility of developing an alternative approach.
Now, lawmakers are discovering that changes in the tax code can alter the incentive structure in perverse ways and drive businesses from the state.
Among the many tax increases approved by the 2009 legislature was a doubling of the licensing fee for businesses, supposedly to raise an additional $61 million. However, lawmakers ignored warnings that businesses are not captive entities and that doubling the cost of incorporation in Nevada could easily lead firms to move their incorporations elsewhere. For nonresident firms especially, the tradeoff involved in relocating their incorporation is minimal when incorporating elsewhere means lower costs.
In fact, recent data from the Secretary of State's office shows that the total number of incorporations filed in Nevada has fallen by 31,760 since the higher licensing fees took effect. This exodus of filers means a loss of direct revenue to the state through the annual $200 business license fee. But it also translates into an untold sum of lost economic activity generated by affluent nonresident business owners who had previously visited the state to hold annual meetings and spend generously on gaming, lodging and retail. The loss of these visits contributes to the state's worsening unemployment figures and prevents the state from collecting gaming, sales and room-tax revenues that would otherwise exist.
Lawmakers in the Silver State must realize that not only can taxes distort the economic incentive structure, but that Nevada must compete in a global marketplace to attract investment. States that offer lower-priced and more convenient incorporation filings have a strong advantage in luring nonresident firms to incorporate in their state.
Registered agents in Wyoming, for instance, have developed a website specifically touting the advantages of filing in Wyoming over Nevada. According to the website, "Wyoming charges about 40 percent less than Nevada when setting up any company. There are also no ‘hidden fees' to be paid to the state for filing officer lists." The website also boasts faster processing times and the fact that business licenses are not required in Wyoming.
Clearly, policymakers in Wyoming understand that the way to encourage economic growth and generate state revenues is to welcome business to their state. Silver State lawmakers have responded to the current recession by taking an adversarial approach toward the business community — levying new financial penalties against firms that wish to do business here.
Lawmakers in Nevada could learn much from their counterparts in Wyoming. Taxation changes behavior, often in negative ways for the tax-hungry.
There is a real competition between the states in regard to their tax and regulatory structures. Nevada could benefit if it took a different tack and lowered its barriers to business within the state. It could lure new resident and nonresident firms alike to incorporate here, bringing with them new conventions, sales and other activity. Nevada could become — as it has professed it desires — the "Delaware of the West."
But then, lawmakers might already have known this if they conducted tax debates in the open.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. For more visit http://www.npri.org/.