What should “revenue reform” look like?
Calls for “revenue reform” have long emanated from Carson City, where state lawmakers have complained that Nevada’s current tax code is outdated and no longer capable of supporting critical public services. Most often, these calls for “revenue reform” have served as little more than a euphemism for tax increases on Nevada households and businesses.
In 2003, for instance, Gov. Kenny Guinn and a majority of lawmakers sought to impose a new tax against the gross receipts of all Nevada businesses under the guise of “revenue reform.” A controversial legislative battle ensued that passed through the Nevada Supreme Court and culminated in the creation of the state’s current excise tax on private-sector payroll — the Modified Business Tax. Recent advocacy from the state teacher union in favor of a modified version of the original gross-receipts tax proposal—this time called the margin tax — is only the latest manifestation of this trend.
While many previous calls for “revenue reform” have been little more than disingenuous attempts to raise new taxes, however, informed observers should recognize that no tax system is perfect. Every tax instrument imposes a unique set of economic distortions, compliance costs and other impacts and each one has a unique potential for creating public revenues.
The question of which services a state is to provide and how those services shall be provided will likely be debated into perpetuity. By contrast, an objective analysis of how best to raise revenues for whatever level of public spending might exist should be far easier to accomplish, if that is truly an objective of Nevada’s political class.
For this reason, any discussion about reforming the structure of Nevada’s tax code should be divorced from the debate over how much in total revenue state officials would like to receive. In other words, for tax reform to have legs politically, it must be done on a revenue-neutral basis. Only afterwards should lawmakers debate whether or not to raise tax rates in order to expand Medicaid eligibility to single, childless adults, or to continue offering pension benefits to public-sector workers that are unheard of in the private sector or for whatever is the proposed new spending item du jour.
The Nevada Policy Research Institute has sought to inform this debate with an objective analysis of every tax instrument levied in Nevada and a series of recommendations for how to improve the state tax code. At the core of this analysis are five major policy objectives that should inform any debate over genuine tax reform:
First, minimize revenue volatility so that officials can more predictably plan state finances. While all tax instruments are sensitive to changes in the business cycle, some — such as corporate income taxes — are far more volatile than others.
Second, minimize distortions in economic behavior. Tax instruments that penalize specific behaviors more than others push individuals away from welfare-maximizing behavior and toward second-best alternatives. Capital gains taxes, for instance, punish savings relative to immediate consumption and limit the capital available for investment.
Third, reform should minimize compliance costs. A major problem with complicated tax instruments such as the margin tax or the federal income tax is that they include complex arrays of deductions or stratified income brackets that make it difficult for people to comply without professional assistance. When compliance costs are high, burdens fall disproportionately on individuals and small businesses that lack in-house accounting departments.
Fourth, reform should protect tax equity. That means that individuals in similar economic circumstance should face roughly equal tax bills. Likewise, individuals in different circumstance should still face tax bills that are roughly proportional, as a share of income.
Finally, a good tax system should reflect the character of its economy. Nevada’s current tax code, however, reflects an economic structure that existed decades ago. Today it targets only a narrow and shrinking segment of the state’s economic activity.
NPRI’s tax reform plan would expand the number of transactions subject to the sales tax to include many services such as dry cleaning or hair care, but would lower the sales-tax rate across the board. In essence, individuals would pay less for every transaction, but would pay on more transactions.
This plan would accomplish every stated goal of tax reformers on both the left and right without endangering Nevada’s future growth prospects.
For those who are sincere, it’s just the kind of “reform” that could work.
A version of this article was first published in the Nevada Business magazine.
Geoffrey Lawrence is director of research at the Nevada Policy Research Institute, a non-partisan, free-market think tank. For more, visit NPRI.org