Whacking the Working Folks

Doug French

Governor Kenny Guinn got what he wanted when Assembly Democrats picked up that elusive fifth Republican for approval of the largest tax increase in Nevada history—$836 million. Now the question is: Who pays? Not who pays immediately, but who pays in the long run. The financial punishment has been spread out somewhat, with tax increases on cigarettes, liquor, real estate transfers, gaming, slot license fees and state incorporation fees. New taxes on live entertainment and bank branches were also approved.

But the legislature reserved most of its punishment for the working people of Nevada, especially bank employees. First, lawmakers imposed a .7 percent modified business payroll tax. Next, banks are to be hit with a 2 percent payroll tax. There is no official word on why bank payrolls were singled out to be taxed at almost three times the rate of other businesses—although it is clear that many legislators have considerable contempt for banks and their directors. Tom Collins, an assemblyman from North Las Vegas, coaxed a local television station news team into filming him while he cut up his Wells Fargo bank card. The crew then followed him to a Wells branch where he closed his account. Collins closed his account because a Well Fargo lobbyist was working to keep banks from paying taxes.

Dina Titus told the Las Vegas Review-Journal that banks in Nevada made $12 billion last year. However, since the assets of all the banks in Nevada total $40 billion, and the median return on equity for Nevada banks is .88 percent, the net profit number is more like $356 million, a bit short of Titus’ number. In fact, bank regulators at the Federal Deposit Insurance Corporation (FDIC) are concerned about the financial health of Nevada banks, calling the 2002 earnings for the state’s banks “weak.” The quarterly $1,750 per branch tax will not help bank earnings.

And when the ballot initiative was announced which would prohibit public employees from serving in the legislature, more than one legislator made comments to the effect that there would only be retired bank executives serving as legislators if public employees couldn’t be elected and that the banks already have too much influence.

The legislature may have been targeting banks and businesses, but what they hit are employees. Ordinary Nevadans are those who will pay the payroll tax. When business people decide whether they will hire someone, what is considered in the hiring decision is the total amount that the employee will cost the company. Salary is not the only thing considered. The cost of benefits is considered. The cost of the employer’s share of social security tax and unemployment compensation premiums are also considered.  Will the employee produce more than the amount that the company must pay to employ the person? If the expectation is yes, the person is hired.

Thus, it is not the employer who pays “employer” share of the social security tax. The employee pays it. The same is the case with Nevada’s new payroll tax. As economist Murray Rothbard wrote in Power and Market:

A tax on wages is an income tax that cannot be shifted away from the wage earner. There is no one to shift it to, especially not the employer, who always tends to earn a uniform interest rate. In fact, there are indirect taxes on wages that are shifted to the wage earner in the form of lower wage incomes. An example is that part of social security, or of unemployment compensation premiums, levied on the employer. Most employees believe that they completely escape this part of the tax, which the employer pays. They are wholly mistaken. The employer, as we have seen, cannot shift the tax forward to the consumer. In fact, since the tax is levied in proportion to wages paid, the tax is shifted backward wholly on the wage earners themselves. The employer’s part is simply a collected tax levied at the expense of a reduction of the net wages of the employees.

Of the $860 million in new taxes dished up by the legislature, $321.5 million will be paid by the employees of Nevada non-bank businesses. Bank employees will pay $36.9 million. Thus, over 40 percent of the governor’s budget increase will be balanced on the backs of the working men and women of Nevada.

Of course, there are employees in Nevada who won’t feel a thing. State and local government—one of the state’s largest employers—won’t be paying the payroll tax.

Doug French is executive vice-president with a Southern Nevada bank and a policy fellow with the Nevada Policy Research Institute.