Tourism districts to drive industry in state

Recent legislation supporting Nevada's main industry welcomes tourist-related developments. In exchange for building tourist attractions, developers receive a tax incentive to assist them in constructing the project, including the required infrastructure such as roads, parking, landscaping, water rights, and other services associated with the development. The Tourism Improvement District law, passed in 2005, allows up to 75 percent of all retail sales tax revenue generated within the district to be retained to pay for infrastructure and project costs. The tax incentive's purpose is to attract large commercial developments to Nevada that would not otherwise be built in the state. The Cabela's store under construction west of Reno is an example; another is the Sparks Marina in Sparks.

However, qualifying for this tax incentive is no easy task. The legislation requires that certain determinations be made before a project can qualify for the tax incentive. Here are a few of the "determinations" that must be shown by the project in order to receive the sales tax funding incentive.

Determination 1: Residents or visitors Who will frequent the project?

In order to qualify for TID financing, developers must meet three major requirements. First, the development must bring new retail and entertainment businesses into the area. Second, these new businesses must increase the amount of sales and use tax revenue collected within the county in which the development is located. Finally, the development must also show that a "preponderance" of its sales will come from out-of-state visitors. Though the word "preponderance" is not defined in the legislation, previous projects assumed this to mean over 50 percent. Preponderance is critical as the entire purpose of the legislation is to attract tourism to the area. It is assumed that a development that generates its sales revenue from local residents and in-state visitors only shifts sales tax revenue from one location or retail outlet to another with limited additional financial benefit to the state. However, tourism spending contributes and adds to the overall economic health of the region.

Analysis is required to estimate the number of out-of-state visitors to a proposed project and to project the retail sales generated by these visitors. Meridian Business Advisors conducted this analysis on Cabela's, a nationally known outdoor equipment store. Using information from Cabela's other comparable stores in the U.S., MBA estimated approximately 2.5 million annual visitors to its proposed 125,000-square-foot Reno store.

Determination 2: What's the impact on existing stores?

The legislation also requires a finding of the impact of the proposed development on existing retail sales in the area. Not only is the "displacement" or reduction of sales at competitive area stores estimated but the overall increase in the region's retail sales is examined to determine the positive impact of these tourists on the economy as a whole.

When conducting the displacement analysis for the Cabela's development, MBA found that some displacement would occur. Though it was impossible to predict the exact amount of displacement, it was believed that a minimum of 20 percent of outdoor equipment sales in existing stores would be diverted or displaced to the Cabela's store. This analysis was aided by physical inspections of existing businesses, conversations with business owners, and cooperation with the University of Nevada, Reno Bureau of Business and Economic Research. Countering the displacement sales was MBA's estimate that the project would have a regional economic impact through the construction phase and the first full year of operation of over $320 million.

Determination 3: What's the fiscal impact on governments that will no longer get the sales tax?

Because up to 75 percent of sales tax revenue can be dedicated to the development rather than be distributed to the cities, county and state, the legislation requires a fiscal analysis to compare the estimated revenue generated by the development to the estimated costs associated with the provision of public services to the development. While the legislation does not require a positive fiscal impact, the analysis is one of the key findings used by governmental decision makers in approving the project for TID financing. In the fiscal impact analysis conducted for the Cabela's development, MBA found that even with the reduced sales tax and property tax revenue due to the development's location within a redevelopment district, the city would receive a surplus of revenue over the estimated life of the TID. Other local entities are also expected to receive funding surpluses.

Determination 4: The review and approval process.

The legislation calls for an extensive review, approval and comment process by local and state governmental agencies. If the project is situated within an incorporated area of a city, the county reviews the fiscal, economic, and preponderance analyses in a public hearing and prepares comments for the city's consideration.

The proposed project, associated data and analyses then are reviewed by the Nevada Commission on Tourism which determines that the preponderance of retail sales will be generated by out-of-state visitors. Finally, the governor must determine that the project will "contribute significantly to economic development and tourism" and not have an adverse effect on educational funding. The governor may call on reviews to be conducted by the Department of Education and Department of Taxation regarding to determine the impact on educational funding.

The benefits of the TID legislation

The purpose of this legislation is to increase tourism in the State of Nevada. Some may argue that the state and local entities are hurt by the development's retention of such a large portion of its sales tax revenue. However, as the legislation is designed to attract large-scale retail and entertainment venues that would not otherwise locate in Nevada, these venues generate "new" or incremental sales tax revenue for local governments. In addition, these developments are likely to generate higher property tax, building permit and other value-based revenues.

TIDs have a finite life span (usually 20 years) at the end of which the district will be dissolved and all sales tax revenues will flow back to the original governmental entities. Finally, these developments will attract supporting businesses, which, in turn, will generate sales and other tax revenue and provide jobs in the area. Increased sales, employment and local purchases by supporting businesses will benefit the community through a continued cycle of spending.

Potential amendments to TID legislation

New legislation is often amended to improve the law, account for contingencies not previously considered, or clarify language. Reno's City Council has made it clear that Nevada contractors should take priority over out-of-state builders and that local residents be hired for both the construction and operating phases of the development whenever feasible and possible. Likewise, purchases of goods and services for the construction and operating phases should be made locally whenever possible. These are potential amendments that may be considered in the evolution of this legislation to ensure the development provides maximum value to local governments and to the regional economy.

Eugenia Kokunina is a senior analyst with Meridian Business Advisors in Reno.