New Tax Foundation report: ‘No sensible case’ for margins tax

Victor Joecks

The Tax Foundation released a new report today on the margins tax, and the report clearly lays out the harmful impacts a margins tax would have in Nevada. Replacing the modified business tax with a margins tax (an amendment to SB491) is one part of legislative Democrats $1.2 billion tax increase plan, which would be the largest tax increase in Nevada’s history.

While you really should read the entire report, which is only 11 pages, here are some highlights. I also presented these comments to the Senate Revenue Committe today.

First, instituting a Texas-style margins tax would drop Nevada’s business tax climate ranking from 4th to 11th and from 1st to 45th in the Corporate Income Tax Sub-Index Rank. At a time when Nevada’s private sector unemployment rate is over 13 percent and its real unemployment rate is around 24 percent, this tax would make Nevada less attractive to potential employers.

Second, as is clearly stated on page nine of the report, a margins tax is a modified version of a gross receipts tax.

Third, gross receipts and margin taxes both introduce significant economic distortions, ie… they impact some businesses much more than other ones. Some states have tried to limit these impacts by either varying rates for different industries or modifying the base, like the margins tax would do. These changes cannot limit the structural problems inherent in these types of taxes.

From the Tax Foundation:

All gross receipts taxes feature tax pyramiding, which distorts and interferes with business investment decisions.

Fourth, the margins tax in Texas has basically been a disaster.

[The Texas margins tax] is collecting far less in revenue than expected, causing significant confusion and compliance costs, resulting in significant litigation and controversy over “cost of goods sold” definitions, and facing calls for substantial overhaul and even repeal.

Noted tax academic John Mikesell has referred to the Texas margin tax as a:

[B]adly designed business profits tax…combin[ing] all the problems of minimum income taxation in general – excess compliance and administrative cost, penalization of the unsuccessful business, undesirable incentive impacts, doubtful equity basis – with those of taxation according to gross receipts.

To conclude, the problems with the margins tax are separate from the amount of tax dollars the legislature wants Nevada to collect. The margins tax is not good tax policy. To quote the Tax Foundation here:

There is no sensible case for gross receipts taxation, or modified gross receipts taxes such as a Texas-style margin tax. The old turnover taxes – typically adopted as desperation measures in fiscal crisis – were replaced with taxes that created fewer economic problems. Gross receipts taxes do not belong in any program of tax reform.