New tax a wrong turn for Nevada

Lawmakers fail to anticipate unintended consequences

By Geoffrey Lawrence
  • Tuesday, June 9, 2009

Have you, like many Nevadans in the past few years, bought a house that was significantly overvalued when you purchased it? 

Imagine what the consequences would be if the state legislature tried to prop up the value of your home by declaring, through legislation, that your home is worth at least 95 percent of what you paid for it. Would this attempt at price fixing have any effect on what others are actually willing to pay for the house should you try and sell it? In Las Vegas, the market price of housing has fallen 57 percent since peaking in April 2006. Hence, anyone who insisted on receiving 95 percent of a Las Vegas home's 2006 value would likely face extreme difficulty finding a willing buyer.

In fact, the legislature's attempt at price fixing would have very little impact on the market value of a home. Yet, it would allow state and local governments to extract more property taxes from homeowners. By raising the taxable value of a home well above the market price, state and local governments would be able to tax individuals for wealth that they do not even own.

This, of course, would be unscrupulous and outrageous. However, it is not far off from what the legislature did at the end of the 2009 session.

As a component of the $1 billion tax-hike package that lawmakers approved this session, they voted to adjust the state-determined depreciation rates on motor vehicles in order to bring in more revenue from the governmental services tax. This tax is charged annually to individuals who register their vehicles in Nevada. It is assessed at 4 percent of the vehicle's value. However, it now seems clear that Nevadans will be assessed this tax based upon a value that exceeds the true value of their vehicle.

According to the new depreciation schedule, a one-year-old vehicle would be assessed at 95 percent of the original value while a three-year-old vehicle would be assessed at 75 percent of the original value. This politician-stipulated rate of depreciation completely falsifies the actual market rates. Most knowledgeable observers claim that motor vehicles lose between 15 and 20 percent of their value each year. The American Automobile Association (AAA) estimates that the annual depreciation of vehicles on an industry average is about $3,400. Hence, realistic analysis makes clear that this tax grab by the legislature is based on premises that cannot be justified.

Despite their predatory attempt to seize Nevadans' wealth, however, lawmakers may be disappointed when revenues from this particular tax hike fail to meet their projections. Just days before voting to change automotive depreciation rates, lawmakers from both parties were whining publicly that many Nevadans already do not register their vehicles with the DMV because of the governmental services tax.

Complaining that the ruling class has not plundered as much wealth as it feels entitled to, Assemblywoman Ellen Spiegel said, "The state is struggling. People lived across from me for four years and never registered their cars. It's one of those things that just angers me." 

Echoed Senator Dennis Nolan: "There are six cars on my street, and they're still not registering their cars, no matter what I tell them." 

Sen. Mike Schneider acknowledged what appears the big reason that individuals choose to not register their vehicles: that the governmental services tax is already too cost-prohibitive. "If car registration costs $1,000," he said, "and you get by for two years, you're going to save $1,800."

Lawmakers are expecting the higher tax rates on motor vehicles to bring them an additional $94 million in revenue this biennium. However, that prospect appears highly unlikely, since more and more individuals find themselves either unable or unwilling to pay the state's levies against wealth that doesn't even exist. Indeed, it appears quite possible that the governmental services tax has moved to the right of the famed "Laffer Curve" - meaning that higher tax rates could actually result in lower tax revenues.

Perhaps if legislators had taken a more reasoned approach toward the tax debate they would have realized that each new tax brings with it a series of market distortions and unintended consequences. As a result, individuals will inevitably change their behavior and economic growth will slow. 

However, in the blood-lust to get more of other people's money as quickly as possible, legislators failed to see even the most obvious impacts their new taxes would produce.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute.

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