The word that will be buzzing through the halls of the Nevada Legislature like a swarm of bees from February until June will be “taxes” — whether to raise them, create new ones or fix the ones we have.
Our lawmakers would do well to heed the advice in a study by the Tax Foundation titled “Simplifying Nevada’s Taxes: A Framework for the Future.”
Commissioned by the Las Vegas Metro Chamber of Commerce, the 80-page report remains neutral on just how much tax revenue the state needs but rather concentrates on reforming the tax system so that it will ensure Nevada is economically competitive and fair.
“Nevada should consider fixing what is broken with the current tax system instead of pursuing a brand new tax to layer on top of the narrowly based, complex existing taxes,” the Tax Foundation suggests. “A number of elements of the tax system exist only in Nevada, and those in particular should be scrutinized. Changes should address state revenue volatility, be fair, and reduce carve-outs that plague the system.”
In a criticism that should be no surprise to most Nevadans, the study found the state relies too heavily on volatile tourism taxes and in general the tax structure is narrow, complex and inequitable. Its base should be broadened and rates lowered.
Though a number of Nevada’s panoply of taxes — from insurance taxes to car rental fees to real property transfer taxes — come in for criticism, the two that deserve the closest scrutiny are the ones that pick the pockets of every Nevadan — sales and property, which combined generate more than 65 percent of state and local tax revenue.
One of the main problems with Nevada’s sales tax system is that it has failed to fairly reflect Americans’ changing spending habits over the decades. While in the post-World War II era our personal consumer spending was about 60 percent on goods and 40 percent on services, today’s spending ratio is reversed with only about 35 percent going for goods and the rest on services — which Nevada mostly does not tax.
The study suggests that taxing services would be more equitable and stable and allow the overall statewide average sales tax rate of nearly 8 percent to be lowered. But since the sales tax is regressive — taking a bigger percentage bite out of the incomes of poorer families — some services should be exempted, such as medical and hospital care, just as food and medicine are exempt now.
In addition, the study suggests simply repealing the state’s Live Entertainment Tax, which has a labyrinth of exemptions and exclusions that make it expensive and nearly impossible to enforce, and applying the sales tax to such events. For example, some of Nevada’s biggest events are specifically and questionably exempted from the Live Entertainment Tax — Burning Man, minor league baseball, the Electric Daisy Carnival and NASCAR’s Nextel Cup series.
As for property taxes, the Tax Foundation found Nevada’s system to be unique in the nation. No other state assesses property values for tax purposes the way Nevada does.
“Unique features include a depreciation factor and a ‘ratchet’ effect in the property tax cap that has presented challenges for local governments,” the report says. “Although the concerns that prompted these features remain valid, the resulting system is cumbersome, convoluted, and unstable, especially in the wake of a recession.”
The “ratchet” referred to is the law that was enacted during the state’s boom years when property values were escalating exponentially every year. To curb the impact, lawmakers capped the annual increase in property taxes at 3 percent for residences and 8 percent for commercial property. Since prices fell during the recession, state and local governments are lagging in revenue recovery due to the caps.
But the biggest difference in Nevada is that the tax is based on replacement value rather than market value. In addition, Nevada is unique in applying a depreciation factor on property even though property seldom actually depreciates. The 1.5 percent annual depreciation for up to 50 years means a person living in a newer house than a neighbor with an older house of the same value may be paying considerably more in taxes.
The Tax Foundation’s analysis should be closely studied by our lawmakers, not as a way to increase taxes, but as a means of achieving fairness, stability and predictability.
In his State of the State speech Gov. Brian Sandoval ignored everything the study recommended and made some unequal taxes even more unequal.