Elliot Parker, Chair of Economics at UNR, testimony in support of SB 491 (revenue reform bill)

16 May 2011 8:43 AM | Anonymous
Editor's note: On May 13, the NFA's Elliott Parker, of University of Nevada, Reno, made the following statement before the Senate Committee on Revenue in support of SB491, the revenue reform bill.

I came to Nevada from the University of Washington 19 years ago, and have become a proud transplant Nevadan. One thing I always appreciated about Nevada was the non-ideological pragmatism of its state government. The state motto is Omnia Pro Patria, to give all for the state. I thought you could vote for the person, not the party, since legislators and the Governor worked together for the best interest of the state.

Lately, I must admit to being disappointed. We have become infected by the national infection of excess partisanship. The motto seems to have been misread by many people, as Omnia Pro PARTY.

I am here to speak about the Margin Tax, but first want to discuss the context.

All governments need tax revenue. Those without state revenue don’t turn into a capitalist paradise, they turn into Somalia. It is no accident that Nevada is always mentioned alongside Mississippi and West Virginia.

Most taxes have negative consequences, but you have to consider also what those taxes are used to fund. All government agencies need to be well managed, to make sure they spend these tax revenues wisely, and there are certainly reforms we should be looking at to do that. Always.

But nonetheless, in general, what the state spends money on has both positive short-term and long-term effects that outweigh the negative effects of taxes.

In the long-term, the state provides public goods that benefit the economy. The state builds roads and schools, maintains law and order, provides an education and a public university to create a better educated workforce, and provides social services – since intervention generally costs less than crime and prison, and some people cannot fully take care of themselves.

Public education in particular is what creates an economic climate that attracts business. Good universities really matter. It is no accident that we are losing ground as a state to other states, and losing ground as a nation to other nations that are investing heavily in public education, while we dis-invest. How can we attract new firms to Nevada if they don’t trust us to educate their children, or to provide them an educated workforce? What kind of companies would come to Nevada otherwise?
In the short-term, both taxes and spending affect spending. Yes, raising taxes can reduce what people have to spend on goods from the private sector, but cutting state expenditures can reduce it even more.

My own research finds that even when you consider the negative effects of taxes, cutting public spending in a recession hurts the private sector more than a comparable tax increase. When the economy is booming, this is not a problem. But in a recession, cutting public expenditures affects private incomes, hurting the private sector even more.  People who lose their jobs no longer pay rent, a mortgage, eat out, et cetera.  We enter a downward spiral.

My estimates are that cutting state and local government expenditures by 10 percent, in a recession like the present one, could reduce Gross State Product by as much as 5 percent relative to where we could have been. We are bleeding the patient, and wonder why he is not recovering.

I heard a speaker recently arguing against these taxes, but I think he works for a major construction company. As a thought experiment, how would his testimony differ if he was told the state would no longer fund road construction or repair? We cannot be NIMBYs. We can’t count on always exporting our taxes to other people. We need to find taxes that we all pay, to provide what we need to provide for the good of the state.

As Bill Raggio keeps saying, first figure out what we need to provide, then find the revenues to provide it. Why are we doing this backwards?

Recessions are hard on states without mechanisms for significant savings. Revenues drop, needs rise, and in a long recession like this – the Nevada depression – all the state’s resources are slowly drained. But Nevada also has a structural problem that goes beyond this recession, and we never fixed it when times were good. Now that times are bad, we must fix it.

For many decades, we have been overly dependent on a narrow tax base. Gaming is no longer a Nevada monopoly, and as a share of our revenue it has been in long-run decline. The gaming tax rate may be low compared to other states, but we are so overbuilt and have so many casinos on the edge that we cannot afford to raise that tax again.

We also have a sales and use tax with many, many exemptions. We implemented this tax when gaming was dominant, and when other services were not such a significant part of our economy. It is also at a relatively high rate, when you add in all the county and city components. We need to end many of those those exclusions, and we should also reduce that rate.

But we first need to replace the revenue we have lost, and build back up our reserves before we do so. We need to create a broad-based tax, with a more stable source of revenue, that better reflects our economy. Low rates applied to many things are better than high rates applied to a few things.

No tax is perfect, but some are less imperfect than others.

The current Modified Business Tax applies to payroll, not other expenses, and exempts many types of businesses, big and small. While the rate is not burdensome, and the sunsetting increase from the last session was not a big deal, nonetheless we might not want to have a tax that increases the relative cost of labor.

Now, regarding the business margin tax.

Relative to a profits tax, which the vast majority of states have, it is a more stable source of revenue that would not decline as much in a recession. Anyway, some think a profits tax may be constitutionally difficult as a tax on income. I disagree, but I am an economist, not a lawyer.

It does not apply to firms with revenues of less than $1,000,000, so it won’t be a burden on little Mom & Pop shops. It does apply to more than just corporations, however. I am not sure why sole proprietorships are specifically excluded, since most of them would already be excluded by the $1,000,000 threshold anyway.

The rate is low, at 0.8 percent. That is a good thing in theory, though I worry that it won’t provide enough revenue. Some worry that this is the camel’s nose under the tent, but I would remind everybody that NRS limits general fund expenditures to the late 1970s amount, adjusted for population and inflation, so no tax can get too out of control. Anyway, that argument could be used against any tax, current or proposed.

Relative to a gross receipts tax, it provides firms three alternative ways to reduce their tax. They can deduct a fixed share of 30%, they can deduct their total employee compensation, or they can deduct their cost of goods sold. As best I can tell from the bill, the definitions are reasonable. Thus, the administrative burden for the firm will not be less than the savings from using one of the alternative methods.

Finally, I like the idea that this tax will replace the MBT after this biennium. It is not a perfect tax, but it is a better tax.

In sum, we should not hide our head in the sand and pretend that our state revenues are adequate for our public needs. This recession has stripped away our ability to kick the can down the road. We need replacement revenues, and we need a better tax structure than the one we have now.