Killing Jobs to Pay for Education: Nevada’s Free Margin Tax Initiative… Won’t be Free

The Free Margin Tax initiative will be on the 2014 ballot in Nevada. If you’re not familiar with the initiative, you should be.

Lyle Brennan

Since Nevada’s legislature chose to take no action on the Free Margin Tax initiative by the March 15th deadline, this important state issue has been automatically passed on to the 2014 ballot. This means Nevada voters will decide whether or not we need a Free Margin Tax.

If you’re not familiar with the initiative, you should be. If passed, a 2 percent margins tax would be imposed on businesses in Nevada for education. The tax would apply to any business whose total gross revenue exceeds $1 million per year. That doesn’t take into account whether any of that revenue is profit for the company and the tax applies to the company’s entire revenue, including that first $1 million. Additionally, while this first version of the Margin Tax limits the threshold to $1 million and the percentage to two, it doesn’t prevent the legislature from increasing the tax after three years. No additional vote by the people would be required.

The initiative has had a rough road thus far. Viewed by some as an “income” tax, which is banned by Nevada’s constitution, the Carson City District Court originally prohibited the initiative. However, a unanimous opinion issued by Nevada’s Supreme Court at the end of January this year reversed that ruling and upheld the initiative. It could be debated for months whether or not this is an income tax or even a gross receipts tax. However, the unfortunate reality is, this tax will be on the ballot next November, whether it violates the constitution or not. The question now becomes, what can we do to stop it?

The Nevada State Education Association (NSEA) has hit the ground running with a $1 million donation to the Education Initiative (TEI) Political Action Committee whose sole purpose is to ensure this tax passes. In addition to NSEA’s support, the PAC is sponsored by the Nevada State AFL-CIO. TEI’s strongest selling point to the public on this tax is the importance of adequately funding education in Nevada. According to TEI, businesses aren’t paying their fair share for education and should be required to contribute more.

There are a few things that the PAC is conveniently not mentioning, of course. First, this is a revenue tax for Nevada’s already struggling businesses. Notice that word is “revenue” not “profit”; this tax doesn’t take into account whether or not a business is actually running in the black. There would only be three deductions allotted to business under this tax. A business could deduct only the highest of the following items from revenue: the cost of goods sold; or the cost of compensation to employees (up to $300,000 per employee); or 30 percent of total revenue. While the second two options are fairly simple, the first, the cost of goods sold, is a complicated matter involving several legalities and filings with the Internal Revenue Service. In order to declare an exemption under that option a business would have the added burden of implementing a complicated accounting system to keep track of, among other things, raw materials, investments, depreciation, storage and several other categories.

What exactly does it mean that the tax will fund Nevada’s education which, if you ask TEI, currently doesn’t have adequate funding? Well according to promoters of the tax, it is expected to generate an approximate $800 million per year in new taxes. That money would be put into a sub-account of the General Fund called the “Distributive School Account” which funds education. Nevada currently drops one-third of the state budget, or $2 billion, into that account every two years. TEI is obviously hoping that funding would continue in addition to the biennial $1.6 billion raised from the Margins Tax. However, that is by no means guaranteed. If we rely more on businesses funding education, it’s possible the state would begin budget cuts to education. This would mean less money for education, not more.

It has been apparent for some time that Nevada’s school system is in desperate need of something. Many say more funding, others say total overhaul. Whichever side you fall on, a tax that could hurt business, kill jobs and possibly end up decreasing funding for schools is obviously not the answer.

By Whose Authority?

For more information on my Commentary and to see some of the backup research, or if you wonder why I take the position I take, go to www.LyleBrennan.com.

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  • RB

    Wow, just moved from California, with roughly 15mm in revenue, but a 5% margin before considering federal tax expense. We are a business reinvesting in growth, and am looking to hire here in Reno. I’ve already contributed $50k to local charities and higher education, and was looking forward to long term commitments to help improve education in our area, but now I am now looking at slamming on the breaks and getting out.

    I am not opposed to a morally fair tax proposition where everyone pays – as with sales taxes, but a proposition where unions write ballots to tax only job creators, and to do so in such a foolish way as on revenue, well that is morally wrong. One should not do onto others what they are not willing to do unto themselves. On a practical sense, this would be twice my tax rate of California, it would result in me cutting jobs to pay the tax, not adding them. Any polls of likely voters to see where this is headed?

    Clearly we need more investment in education, because anyone dumb enough to produce a ballot like this clearly needs to go back to elementary school math… Okay, that was snarky, but man, this really won’t help.

  • http://rexcrouch.com/ Rex Crouch

    What this article fails to explain is that none of the Revenue collected from the Margins Tax is mandated to go to Education. The monies will go into the General Fund (Slush Fund) to be spent as the Legislature likes. Why did NSEA fail to address how the money will be used on the ballot measure? By law, you can only have one issue on a ballot measure. By addressing where the money will go would make it a multiple issue ballot measure which is not legal in Nevada. NSEA is hopeful that the Legislature will spend the money on education… What they really mean is an increase in teachers’ pay which they argue will increase the quality of the education. Be mindful that Nevada already spends more per child/capita than many other states who perform better than Nevada. More money is not the solution to our education crisis.