Devilish details remain in new tax proposal

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