Key Facts on Nevada State Taxes

Guest column gracefully written by former Nevada Controller Ron Knecht.

This is the second in a series of columns summarizing my Controller’s Annual Report (CAR) for fiscal year 2018 (FY18). Based on the state’s official books and records, the CAR provides Nevada citizens, officials and others summaries of key facts, data, analysis, and issues addressing Nevada’s fiscal condition and policy challenges.

Last week’s column reviewed state spending, concluding: Since FY06, state spending has grown faster than Nevada’s economy, thus imposing an ever-larger real burden on Nevada families and businesses, whose real incomes are lower than in FY06. Health and Social Services (HSS) and K-12 spending have grown rapidly while total other spending, except that for transportation, declined.

So, how did our state fund its spending?

Non-tax revenues – grants and contributions to the state, charges for services and contract revenues – have grown very rapidly (59 percent faster than Nevada’s economy) to comprise 56 percent of total FY18 revenues of $13.63 billion. General fund revenues, comprised mainly of tax proceeds, grew at the same rate as the state economy, and they provide the other 44 percent.

Government operating and capital grants and contributions of $5.296 billion accounted for 39 percent of total revenues and for 59 percent of the total revenue growth since FY06. These revenues consist mainly of federal government spending for Medicaid, Supplemental Nutritional Assistance Program (SNAP, or food stamps) and Temporary Assistance for Needy Families (TANF). They are the revenue support for much of the huge increase in HSS spending required mainly by federal government regulations.

A notable risk in this area is that federal funding is sometimes reduced, but federal spending mandates rarely are. Now and in coming years, Nevada faces just such a problem with Medicaid revenues and spending.

In Nevada higher education, charges for services plus grants and contracts comprise $1.236 billion or nine percent of total state revenues, and they grew slightly slower than Nevadans’ incomes. Other program revenues of $1.164 billion or 8.5 percent of total revenues grew much slower than incomes.

Without restraint on state spending growth, Nevada families and businesses likely will face increasing taxes in coming years.

So, in FY06 most state revenues, 52 percent, came from taxes and the rest from program revenues. But over the last dozen years, program revenues grew 105 percent to $7.696 billion while general revenues rose only 46 percent to $5.934 billion. It is doubtful that federal funding will allow Nevada program revenues to grow as rapidly in the future as in the past. So, without restraint on state spending growth, Nevada families and businesses likely will face increasing taxes in coming years.

What are the facts and issues concerning taxes?

In sum, revenues from gaming, state property, and state sales and use taxes fell sharply in real terms while tax revenues from non-gaming businesses, including unemployment assessments, rose greatly. The burden carried by consumers and residents, not including the pass-through effects of business taxes, grew slower than their incomes.

The incidence of the declining tax revenues lies greatly with consumption, not with savings, investment and employment; and with persons, not businesses.

To compensate, Nevada added new levies mainly on savings, investment and employment, and on businesses. It did so mainly the modified business tax (MBT), which taxes employment and federally mandated unemployment assessments; and also via the new Commerce Tax (CT) and levies on auto leasing, lodging, and insurance premiums.

Some people claim repealing the CT would significantly harm K-12 education. This is false and misleading. There’s no direct connection between CT revenues, which flow into the general fund (not education accounts), and state K-12 spending. Further, because CT revenues decrease MBT revenues, the net effect of deleting the CT would be to reduce the overall revenue growth rate less than the growth rate of the Nevada economy. So, eliminating the Commerce Tax would still allow net total revenues to grow.

Conclusion

The shift in tax burden from consumption to investment and employment and from persons to businesses diminishes tax neutrality and transparency. Businesses don’t much absorb the economic burden of their increased taxes; instead, they increase prices to consumers and lower total employee hours and compensation rates.

The good news is that, with ten taxes accounting for two percent to 24 percent of general revenues, and considering their incidence mainly on persons and consumption, Nevada’s tax base is reasonably well diversified.

Ron Knecht has served as Nevada Controller, a higher education regent, a legislator, and economist. He can be reached at RonKnecht@aol.com.