The Fiscal and Economic Impact of a Margin Tax on Nevada
This November, Nevada voters will be asked to approve a ballot measure sponsored by the Nevada State Education Association, which would establish a corporate tax known as the “margin tax,” a variant of a gross receipts tax. The 2 percent tax would be levied against firms taking in more than $1 million in gross receipts during the taxable year, even if unprofitable, and is expected to raise approximately $800 million in annual revenue.1 As proposed, the 25-page statutory measure directs businesses to select from among three types of deductions. However, those deductions introduce complexity into what could be a simple and transparent state tax code. The cost of complying with the margin tax will disproportionately burden small business.
Standard economic theory holds that households and firms change their investment and consumption behavior in response to taxation. This change in behavior creates secondary effects that can increase the cost of taxation over and above the amount of taxes collected—changing the current economic equilibrium by altering the quantity and prices of goods and services being offered and, consequently, producing losses to general community welfare.
In an effort to better understand the effects of a margin tax on the Nevada economy, the Beacon Hill Institute at Suffolk University (BHI) was commissioned by the Nevada Policy Research Institute to develop a Nevada State Tax Analysis Modeling Program (NV-STAMP®) to identify exactly how tax law changes can be expected to alter the decision-making of economic actors. A dynamic general-equilibrium model, such as STAMP, accounts for these changes and their highly complex impact on key economic indicators.
Our major findings show that the margin tax will:
- lower private-sector employment by 3,610 full-time-equivalent positions;
- lower total employment by 1,640 full-time equivalent positions on net;
- reduce real disposable income by $240 million annually; and
- decrease investment by $7.1 million annually.
If voters adopt the measure, Nevada will join Texas as one of two states levying a margin tax on businesses. A margin tax is not an effective way to foster and sustain economic growth. Voters should be aware of the trade-offs that must be made in adopting a new tax, including the prospect of the tax endangering Nevada’s economic competitiveness.