How ‘One Sound State’ protects taxpayers

This week, the Nevada Policy Research Institute released a landmark study entitled "One Sound State, Once Again" that outlines a series of fiscal reforms intended to protect Silver State taxpayers. I interviewed the study's author, NPRI fiscal policy analyst Geoffrey Lawrence, about the plan.

Matthews:  Geoffrey, can you tell us very briefly what is included in this plan?

Lawrence:  Sure. The "One Sound State" proposal includes a series of reforms that are designed to limit the burden on taxpayers by controlling government spending. This includes a proposal to place hard limits on the growth in spending, limiting that growth to the rate of population growth plus inflation.

It also includes a major reform of the budgeting process itself that would force policymakers to establish clearly delineated priorities for spending. That way, policymakers cannot constantly promise to be all things to all people at the expense of the taxpayer. Instead, they must live within their budget and develop a systematized plan for controlling expenditures.

Matthews:  But this proposal appears to be about much more than just spending. In fact, you label it as a set of "comprehensive fiscal reforms" that includes changes to the revenue side. Can you tell us why this is important?

Lawrence:  This proposal includes several changes to the revenue side that are designed to be revenue neutral. In other words, while the proposal would restructure the tax base, it would do so without increasing the state tax burden by a single dollar.

A central purpose of these changes is to make the revenue structure more stable and predictable over time. While the Left frequently and disingenuously references tax-revenue volatility, the proposals they offer would actually only exacerbate volatility. In fact, the real purpose behind those proposals is simply to increase the burden on taxpayers in order to benefit our leftist politicians and their constituents in the narcissistic public employee unions.

But even though the Left is disingenuous on the subject, tax-revenue volatility should be a significant concern to taxpayers because it's an important factor in the tax-and-spend cycle. When the tax structure is relatively volatile, state coffers quickly become flush with cash during boom periods. Lawmakers then use those abnormally high revenues to create new government programs — programs that then become ongoing expenditures. 

When we enter a recessionary period, lawmakers then turn around and ask for new taxes in order to fund the new programs that should never have been created. Beneficiaries of those programs also become an organized constituency who push hard for higher taxes.  To stop this dynamic in its tracks, we're offering these revenue-structure reforms to temper both upward and downward volatility.

Matthews:  Right, but isn't it unusual for a so-called "conservative" think tank to talk about "revenue reform?"

Lawrence:  I think the key clarification is that we are a "free-market" think tank and that the reforms proposed in the ‘One Sound State' proposal are completely in accord with free-market principles. Personally, I have never appreciated the appellation of "conservative" because the term implies a strict defense of the status quo, even when the status quo is indefensible with regard to free-market values. I believe that NPRI and indeed the entire movement is much more intelligent than that.

What we want to see is a stable and predictable tax structure that will ensure investors that Nevada is a safe place to invest capital and create jobs. Currently the revenue structure encourages irrational spending increases during good times and repeated calls for new taxes during bad times. In such an environment, it becomes very difficult for business people to make long-term investment decisions, since no one knows what the rules will be five — or even two — years from now.

We'll know we have achieved success when state finances are no longer a front-page news item. When a state is well-run, its finances are supposed to be a boring topic.

Matthews:  Among your revenue-reform proposals is a broadening of the sales tax base combined with a simultaneous reduction in the rate to 3.5 percent. Presumably, this would achieve your stated goals of increasing the stability, efficiency and simplicity of the tax code. But isn't there a danger that, if this is enacted, big-government forces will simply continue to push to increase the tax rate — say, a step at a time?

Lawrence:  That's precisely why this reform package fixes that kind of runaway spending — it doesn't just reform the revenue side. The TASC-style spending constraints built into the package would make it impossible to grow government beyond the revenue structure outlined in the proposal.

I actually find it curious that anyone would have that concern regarding this proposal, since that's exactly the danger that exists today. Just last year, lawmakers increased the sales tax and payroll tax rates. The full "One Sound State" proposal is the only thing put forward that would put a brake on the legislature's ability to do this.

Matthews:  You just mentioned the payroll tax, otherwise known as the modified business tax. Your plan calls for an elimination of that tax as well as the insurance premium tax. Why have you chosen to eliminate those two?

Lawrence:  Our analysis shows that the payroll tax is the single most volatile tax instrument used in Nevada. It is also a direct financial penalty for hiring new workers — something that makes little sense during boom years but is especially egregious at a time when Silver State unemployment is approaching 14 percent. It's really baffling that we tax employment and subsidize unemployment through the federal stimulus package's expansion of unemployment benefits and then wonder why unemployment rates are so high. An elimination of the payroll tax will lead to lower unemployment and higher wages.

Regarding the insurance premium tax, it would be eliminated as a corollary to the sales-tax expansion. An equitable and efficient tax structure should not impose a specific excise tax on one industry. Instead, it should be subject to the same, lower tax rate as everyone else — which in this case would be the 3.5 percent sales tax. That, of course, would mean more affordable health- and car-insurance policies in Nevada.

Matthews:  So, under this proposal, the 3.5 percent sales tax would be the primary revenue source for state government. However, as you point out, sales taxes tend to have a regressive impact because lower-income individuals tend to consume a higher percentage of their income. Explain how you addressed that issue.

Lawrence:  The proposal calls for something that's in recent proposals for a federal FAIR tax. Every state resident would receive a rebate for an amount of presumed expenditures on necessities. The federal poverty line could provide the benchmark for these rebates. 

So, for a family of four, the federal poverty line is $22,050. Under this proposal, every family of four in Nevada would get a rebate check for 3.5 percent of $22,050, or $771.75.  Thus, residents would only be taxed on purchases beyond the first $22,050. This relief is the fairest way to ease the burden on those at the lower end of the income scale because it also extends the same level of relief to everyone else.

Matthews:  Would this require the creation of some new, costly bureaucracy to deal with the rebates?

Lawrence:  No, it wouldn't. In fact, one of the major selling points of the federal FAIR tax proposal is that it would allow for the elimination of the IRS. Since the rebates are universal, there is no need for the government to know your income level and, hence, there would be no need for any state corollary to the IRS.

What this proposal would require is a restructuring of the state Department of Taxation, away from administration of the payroll tax and insurance premium tax and toward managing the rebate program.

Matthews:  OK, I want to thank you for speaking with me today, Geoffrey. Your proposal is already receiving positive responses, and I have no doubt it will continue to do so. I also want to remind our readers that the full proposal is available on NPRI's website at npri.org.

Andy Matthews is vice president for operations and communications at the Nevada Policy Research Institute. For more visit http://npri.org/.