The Governor's Task Force on Tax
Policy in Nevada will soon release a draft
of the final report it plans to submit to
state lawmakers next month.
In it, the primary recommendation will
be a tax on businesses' gross receipts with
a credit for the existing business license
tax and a base revenue exemption.
Some of the details of the tax still are
being determined, but the goal is to
establish a rate and an exemption that
would enable the state to raise at least
$250 million.
The gross receipts tax, coupled with
proposals to increase cigarette, liquor and
property taxes among other suggestions, is
designed to help Nevada generate an
additional $350 million in revenue.
At a meeting last week, the task force
presented six versions on a possible business
tax and weighed the pros and cons of
each. Those half dozen schemes included
four variations on a gross receipts tax as
well as a so-called margin tax and a net
profits tax.
The task force decided that a gross
receipts tax with a one-to-one credit
for the BLT plus an exemption for revenue
under a minimum threshold
would be the best trade-off between the
interests of the state and the interests of
the state's businesses.
The task force did concede that a gross
receipts tax is less equitable to start-up
businesses as well as businesses that operate
on low profit margins - an argument
made by the businesses that have testified
before the task force.
"A gross receipts tax favors low-volume,
high-profit business activities," said
a comparison chart prepared by the task
force's technical working group. "A corporation
with high sales volume but
lower profit margins would pay a considerably
higher share of its income
than would a low-revenue, high-margin
industry."
The same comparison chart said that
the most equitable business tax is a net
profits, or net income, tax. But it would
also be less predictable and more difficult
for the state to administer, said the
technical working group.
"The lack of predictability is a huge
issue with me," said Guy Hobbs, managing
partner, Hobbs, Ong &
Associates in Las Vegas and chairman
of the task force. "And the margin tax
may be a great in theory but the fact is
there is no model for it and that is a
concern."
The margin tax a tax on gross
receipts minus cost of goods sold is
not used by any state.
To mitigate the impact of a gross
receipts tax on small business, the task
force is proposing an exemption for a
certain amount of revenue that is still to
be determined. The continuing discussion
is whether that threshold should be
set at $200,000 or $350,000, so that the
first $200,000 or $350,000 of a business'
revenue is exempt from taxation.
The BLT credit would also help alleviate
a business' burden, according to
the technical working group.
"Combining the BLT and gross
receipts tax would limit the horizontal
inequities that would compound should
both of the taxes exist concurrently,"
said the chart.
The group is considering whether to
propose raising the BLT because it hasn't
been increased since it was established
in 1991. Businesses now pay $25
per employee on a quarterly basis.
Raising the BLT, however, would
actually reduce the amount of revenue a
gross receipts tax would generate if
businesses are allowed to use it as a
credit, according to Jeremy Aguero,
principal analyst, Applied Analysis in
Las Vegas, and part of the task force's
technical working group.
So the task force is considering proposing
the state raise the BLT to adjust
for inflation, but only allow the current
$100 per employee annually to be used
as a credit against a business's gross
receipts tax.
The task force will almost certainly
recommend a gross receipts tax rate of
.25 percent, although the group last
week discussed whether that would be a
high enough rate to meet the state's revenue
targets.
The other issue still on the table is
deductions from the tax. Hobbs rattled
off a list of a dozen possible deductions
and a few drew fire from other members
of the task force.
Those deductions were for improved
real estate and production of agricultural
products at wholesale, as well a possible
credit for certain high-technology
research and development.
Hobbs said he included the real
estate deduction in an effort to not drive
up home prices and exacerbate the
state's affordable housing problem.
"New construction and new homes
are driving the growth that is driving
demand for new services," countered
Mike Sloan, senior vice president,
Mandalay Resort Group and task force
member.
Sloan characterized the deduction,
which would save commercial and residential
real estate developers from the
tax, as a "shotgun" approach to the narrow
problem of affordable housing.
Hobbs said the agricultural deduction
was in response to ranchers who have
said they need protection because they
cannot control the price of cattle once it
reaches the market. Again Sloan argued
that many industries could claim the
same problem. He also nixed the
R&D credit.
"We said no industry-specific exemptions
and now we're trying to carve out
some," said Sloan.
The other proposed deductions,
though, received tacit endorsement
from the eight-member panel. They
include a deduction for pass-through
revenues, or revenues that a business
collects but doesn't keep, and for
bad debt.
In its final report, the task force also
plans to recommend that the state further
research broadening the sales tax
and lowering its rate. The issue, the
members agreed, warranted more study
than the task force could give it before
the Nov. 15 deadline to deliver
its report.
The resolution that created the task
force allowed it five bill draft requests,
but the group has decided to submit
only one BDR. That means it will submit
its tax plan as a single, all-encompassing
bill rather than several bills.
The group plans to meet twice more:
once in several weeks to review the draft
of its report and again to approve the
final report.
Gross receipts tax in detail
Description: Tax imposed on the gross receipts of all business activity and/or persons
employed in the State of Nevada as a measure of the privilege of engaging in business.
Procedure: Tax to be remitted quarterly, on or before the 30th day following the close of
each calendar quarter, based upon the actual prior quarter revenue. The 4th quarter report
shall include a "true-up," including the 4th quarter tax payment.
Legislative issues: Assuming no Constitutional challenges the Legislature has the authority
to implement the tax. Any levy would require a two-third majority in both houses of the
Legislature. Additionally, the legislature may with a simple majority (50 + 1 percent) put the
question to a vote of the people.
Stability: Gross receipts will fluctuate with the spending patterns of consumers. However,
the broad base of the tax, which would include necessities, would tend to make it among
the most stable source imaginable.
Vertical/horizontal equity: The base exemptions will tend to increase the vertical equity
within industries and will protect a number of small businesses. The BLT component of the
tax, however, will tend to cut the opposite direction. The base exemption ... does not
increase the levy's overall horizontal equity. Two firms both with $1 million on revenue both
would pay $1,900 even though one business may have profited nothing and the other
profited $500,000.
Source: Business Tax Comparison Matrix, Quantitative and Qualitative Elements, Governor's Task Force
on Tax Policy - Technical Working Group
