New Dynamic, General-Equilibrium Analysis Simulates Impact of Tax Proposal
Although much has been said about the proposed margin tax on businesses that will appear as Question 3 on November’s ballot, there is a shocking lack of clarity about the actual impact of the tax on Nevada’s economy.
There isn’t even agreement on an approximate amount of new tax dollars the tax would generate, much less its wider impact on broad economic indicators such as employment, investment or gross state product. Initially, advocates claimed the levy would raise $800 million annually in tax revenue. Other observers have estimated that revenues could range anywhere from $460 million to $750 million. Meanwhile, the Nevada Legislative Counsel Bureau simply says it can’t come up with a revenue estimate.
That’s a lot of uncertainty for one of the most basic numbers associated with a tax proposal. To be fair, the tax is extremely complicated. Being a gross receipts tax with a choice of deductions, its impact on each business will vary greatly, depending on the firm’s margin of profit (or loss), structure of production and selection of tax deduction. This reality means that while it’s possible to — laboriously — calculate the tax for a single firm, it’s nearly impossible to extrapolate those results to the state economy more broadly.
Previous estimates have seen this obstacle as a major stumbling block. Applied Analysis, for instance, provides a useful analysis of aggregated tax returns by industry to show how the tax would impact the “average” firm within each economic sector. The problem, however, is that there is no such thing as an “average” firm. Recognizing the severe limitations of their approach, the analysts reviewed financials for a handful of selected businesses, spotlighting the unique impact on each of those firms. Of course, the results could not be extrapolated upward to yield the total impact on the state.
Perhaps even more problematic is that these approaches use information about the past behavior of firms, without accounting for different ways that firms might, in response to this tax, change their behavior — such as by relocating or laying off workers.
The nascent Guinn Center for Public Policy suggests that the tax could produce fewer tax dollars than suggested by advocates and that it could lead to substantial job losses. But these observations are rather loosely extrapolated from historical experience with Nevada’s Modified Business Tax and with the margin tax in Texas. Both of those histories are of questionable value for comparison.
The entire margin tax debate has been clouded by a shocking dearth of quality numbers about the tax’s impact.
To fill this void, the Nevada Policy Research Institute turned to the Beacon Hill Institute at Suffolk University for its highly complex model of the Nevada economy, the Nevada State Tax Analysis Modeling Program (NV-STAMP®). Its thousands of lines of data allow NPRI to provide the public with a dynamic analysis of the tax’s impact across the entire Nevada economy and, thus, reasonable estimates of the tax’s true impact.
This new analysis shows that revenues associated with the margin tax would actually be higher than previously anticipated, as the tax would draw $862.5 million out of the private economy beginning in 2015 and this amount would balloon to $938.0 million by 2018.
However, individuals and firms would change their behavior in response to the new tax, and these changes would result in the loss of 3,610 private-sector jobs during the first year of implementation. This job loss would be only partially offset by an increase in public-sector employment. The net job loss would result in less money circulating within the economy and reduce disposable income within the state by $240 million, on net. The largest job losses would come in the hotel and entertainment industry, followed by retail trade, real estate and banking and finance.
In addition, because of the shrinking private economy, existing tax instruments would generate less revenue. In total, state government would lose $10.6 million from other tax instruments, while local governments would lose $8.5 million. This would be a total loss for Nevada’s cities and counties because they will receive none of the margin tax proceeds.
This dynamic, general-equilibrium analysis sheds important light on the consequences, for Nevadans, if the proposed margin tax passes.
Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute.