Tax: It’s typically that “dirty three letter word” that the powers that be inside the Nevada Legislature shudder to think about, let alone act to change. But this time around, the Legislature has multiple tax initiatives on its agenda: two that legislators passed last year, and two that a local teachers union put on the agenda thanks to its petition drives.
Today we’re pulling out our economic microscope to not just assess the tax reform ideas being debated this session, but also the underlying economic realities that may yet complicate the “no-brainer” mythology surrounding certain tax proposals.
First, what the hell are these tax initiatives that the Legislature is considering this year?
As we discussed last week, the Nevada Legislature may consider at least five tax initiatives this session. AJR 1, AJR 2, and SJR 1 seek to change the mining tax provisions of the Nevada Constitution. Currently, Nevada’s mining tax amounts to a constitutionally capped 5% on net proceeds. If AJR 1 becomes law, the Nevada Constitution will include a 7.75% gross receipts mining tax, and 25% of the revenue will be specifically reserved for public education and health care needs. If AJR 2 becomes law, the Nevada Constitution will continue to mandate a net proceeds tax, but the net proceeds rate will rise from 5% to 12%. If SJR 1 becomes law, the Nevada Constitution will include a 7.75% gross receipts mining tax, and 50% of the revenue will go directly to Nevada residents via dividend checks a la the Alaska Permanent Fund.
Next, let’s move to the Clark County Education Association (CCEA) and their two tax initiatives. One seeks to raise the casino gaming tax rate from 6.75% to 9.75%, effectively shifting Nevada from having the nation’s lowest casino gaming tax to merely the nation’s third-lowest. The other seeks to raise the Local School Support Tax (LSST), which is part of the overall sales tax structure, from 2.6% to 4.1%. If CCEA’s sales tax initiative becomes law, Clark County’s sales tax rate will jump to 9.9% and Washoe County’s to 9.8%, effectively pushing Nevada towards the very top of the “nation’s highest sales tax” list.
It’s pretty obvious why these taxes are the ones being considered this year. The mining tax initiatives and the gaming tax initiative target multi-billion-dollar, multinational corporations that have historically benefited the most from Nevada’s “low tax way of life”, and the sales tax initiative can easily be spun as “less than two cents on every dollar” to send to public schools that badly need more investment. But as always, we scour the fine print for any devils in the details, so let’s dive right in for all the juicy deets.
Here’s the problem with a sales tax increase: It hurts the very people we claim we want to help.
According to a 2020 report from the Guinn Center, about 39% of total funding for K-12 schools comes from the LSST component of the sales tax. Just looking at this statistic, we can see why CCEA is reaching for this lowest of low-hanging fruit. However, a closer examination of this shows how a sales tax hike may hurt the very people CCEA officials say they want to help.
According to a 2018 report from the Institute on Taxation and Economic Policy (ITEP), Nevada has the fifth least equitable tax structure in the U.S., and a huge reason for this is our heavy reliance on sales tax for revenue. Looking deeper into ITEP’s report, the State of Nevada effectively taxes the top 1% of income earners at 1.9%, the middle 60% at 7.4%, and the poorest 20% at 10.2%. In contrast the states with the most equitable tax systems, such as California, Vermont, Minnesota, and Montana, utilize broad-based income taxes, target earned income tax credits (EITC’s) to people who actually need them, and include other taxes on their books so they’re not heavily reliant on the sales tax or any other one specific tax for revenue.
Though Nevada civic and business leaders have often hailed our “low tax, pro-business environment”, poor and middle-class Nevadans don’t benefit as much from this myth precisely because it is a myth: Over 60% of our tax revenue comes from the sales tax and other consumption taxes. The sales tax, excise taxes, and the property tax fill the void from our lack of income tax, so it hits hardest the people who have to use most of their income to buy goods and services. In contrast, wealthier Nevadans who can afford to park more of their money into tax-free investments benefit the most from this status quo.
What about the gaming tax? Here’s where we need to venture far beyond the state line.
As we discussed last week, one of the most common beliefs among Nevadans, especially those of us down here in Clark County, is, “The casinos take care of us.” Considering how gambling has played such an oversized role in powering Southern Nevada’s economy for so long, I get why raising the gaming tax seems like such a “no-brainer”. However, the COVID-19 pandemic has served as a particularly painful reminder of what happens when we become complacent in depending on one industry to prop up nearly our entire economy.
When Nevada legalized gambling in 1931, we were the first and the only state in the U.S. to do so. But in 2021, some form of gambling is legal in all but two states (Utah and Hawaii), and only six other states (Vermont, Virginia, Kentucky, Tennessee, South Carolina, and Georgia) impose severe restrictions on casino-style gambling. Even for these East Coast and Southern gambling enthusiasts whose home states restrict their nearest options, driving to Atlantic City, National Harbor, Tunica, Biloxi, and/or the nearest Native American tribal casino is much easier than booking a flight to Las Vegas.
From here, let’s zoom out and assess the rest of the world. As of 2016, Macau’s casino gaming market was 700% larger than Las Vegas’. Only 15 countries now explicitly ban nearly all forms of gambling, and casinos can be found on every continent except Antarctica (for obvious reasons). And of course, online gambling is becoming increasingly available throughout the world.
When Nevada first legalized casino gaming in 1931, and even when legislators developed “The Nevada Plan” for public education funding in 1967, Nevada effectively had a monopoly on the legal gambling market. That is clearly no longer the case in 2021. Even when the COVID-19 pandemic comes under control and international travel becomes readily available again, the growth of traditional casino gambling and online gambling means that at most, a hike in Nevada’s gaming tax will provide a temporary boost in tax revenue that will gradually be offset by the continuing globalization and digitalization of gambling.
How about the mining tax? Here’s a more attractive option, but this is not a panacea either.
At first glance, mining tax reform appears to be the easiest sell. In 2019, 14 of the 30 operating gold mines paid $0 in taxes. The Nevada Constitution currently includes a 5% tax cap on net proceeds that deliberately shortchanges state coffers, and we have an additional 13 statutory deductions on our books as well.
Nevada produced $9.14 billion worth of mineral commodities last year. The price of gold stands at $1,775 per ounce as of mid-day today, and gold continues to serve as a “safe haven” for investors during recessions and other periods of market volatility. Nevada’s own Esmeralda County houses America’s only operating lithium mine, and lithium is another metal that may become more of a precious commodity due to the proliferation of electric cars and other electronic devices using lithium-ion batteries.
Again, considering how little the State of Nevada actually makes off our own natural resources, raising our mining tax feels like even more of a “no-brainer” than raising the gaming tax. However, there are some catches: the environmental damage from mining (yes, even for “clean energy friendly” lithium) and the simple fact that these are finite resources should probably have us think of the mining tax as more of an excise tax rather than some budgetary El Dorado.
If we look at 2019 mining gross receipts, Nevada would have collected $607 million under AJR 1 or SJR 1, or $260 million under AJR 2. All are higher than the actual $119 million in mining net proceeds tax revenue that the state collected in 2019, but all still fall short of the $700 million+ in budget cuts that the Legislature agreed to last summer. Also keep in mind that these metals remain traded commodities with at least somewhat volatile prices, and that gold actually underperformed the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite over the last five years, so don’t count on a higher mining tax to be some golden goose laying Faberge eggs in perpetuity.
Once more, with extra feeling: President Joe Biden may yet come to our rescue this time, but we can’t expect the White House and Congress to save us all the time.
As both The Washington Post and The American Prospect have pointed out this week, and as we have repeatedly explained on these very pages for months, the falsely labeled “blue state bailout” that Congressional Republicans have attacked President Joe Biden for including in his American Rescue Plan is actually a critical lifeline for Nevada and several other states (both red and blue!) that lack diversified economies and stable tax bases. As we’ve said before, the only way out of another bloody budget this year appears to lie with Congress’ potential passage of Biden’s Rescue Plan. Some more good news for the Legislature and Governor Steve Sisolak (D) is that Biden and Congressional Democratic leaders have stood firm on $350 billion for state and local governments, even as House Democrats have only agreed to extend expanded unemployment aid through August, and as Senate Democrats debate whether to keep the $15 per hour minimum wage in the final bill.
But as we discussed last week, it’s unlikely that Congress will agree to another major “stimulus” bill with this much flexible state and local government aid any time soon. Even if Sisolak and the Legislature end up with at least $500 million in extra federally supplied dollars this year to reverse past budget cuts, we’ll still return to Square One in 2023 with the same unstable and inadequate tax structure.
I know we’ve covered a lot of ground today, so here are some key takeaways: Sales tax has been a Nevada mainstay for decades, but it’s one of the most regressive taxes around, meaning it hits the working poor and the middle class the hardest. The gaming tax looks attractive because casino gaming has played such a huge role in building Nevada’s economy, but the clock seems to be running out in our global gaming dominance. And while the mining tax looks set to deliver some real goods if we finally raise it, it’s not realistic to expect a higher mining tax alone to solve all our fiscal problems.
Ultimately, Nevada policymakers will have to address the core deficiencies in our tax laws: Our dependence on a handful of industries to prop up our budget and state government, and our failure to enact any personal or corporate income tax that could provide both stable revenue for our government and much more equity to our tax code. Of course, no income tax initiative looks likely to reach the Nevada Legislature any time soon, but that doesn’t mean we can’t delay such taxing matters indefinitely.