Northern Nevada Used to be a Boomtown – It Can Be Again

Commentary

In early June, one of my clients asked me if it were safe to invest in real estate in northern Nevada. My response: Only if you are sure of two things: 1) If the margins tax on the November ballot would be defeated; 2) If northern Nevada would get the Tesla battery gigafactory.

Then, on June 9th, the Reno Gazette Journal (RGJ) posted a story entitled David vs. Goliath: NV, Texas square off for Tesla.  In that story, the RGJ reported that “Tesla says it likely won’t announce a final site for the Gigafactory before the end of the year.”

Please understand that what I am about to say is just based on my own intuition and is speculation on my part.  But I am pretty good at reading between the lines and seeing things that others don’t.  It seems more than plausible that Tesla is waiting to see the fate of the margins tax before deciding to heavily invest in northern Nevada.

The Margins Tax

The margins tax is a tax on the gross revenue (sales) of a business. The November ballot initiative calls for a 2% tax on all revenues if the business produces $1 million or more in revenue. In today’s world, it is really difficult for viable businesses to survive unless they make significantly more than $1 million in revenue. Because of its regressive nature, this type of tax is usually devastating for small businesses.

Texas has a similar tax, but it is only .8%. In a recent visit to our state, Texas State Senator Ben Estes said the Texas .8% tax “quadrupled the tax burden on certain mom and pop businesses,” and it deters businesses from coming to the state – which is the point I made earlier regarding Tesla and its pending decision on the location of its gigafactory.

According to a release by the Nevada Policy Research Institute (NPRI), the .8% tax in Texas “forced 20% of small businesses in Texas to lay off employees and 3% to close their doors entirely.” This tax is likely to have a dramatic negative impact on the business environment, jobs, and opportunity in the state.

Top States for Business

In its recently released 2014 poll of America’s Top States for Business, Nevada ranked 29th out of 50, significantly higher than the 45-47 rankings the state has held for the past 5 years. Its best score was 14th in workforce (educational level and availability of workforce), counter to the conventional wisdom, and it was 22nd in business friendliness (regulatory framework with attention to legal and liability issues).

We often think that we are lucky to live next door to California, a state that is so business unfriendly that it drives successful businesses out. The belief is that because we are right next door, we are the major beneficiaries. While that might have been true in the past, it isn’t today. Our neighbor to the east, Utah, ranks 3rd, and Arizona to the south ranks 13th. Meanwhile, our ranking isn’t significantly different from that of California (32).

In the all important “Cost of Doing Business” category, Nevada ranked 25th, up 5 places from its 2013 rank. Utah ranked 16th, Arizona’s rank was 28th, and California’s was 48th.  Only New York and Hawaii have higher business costs than California. One of the largest contributors to the “Cost of Doing Business” category is business taxes. California has a corporate income tax of 8.84%, and, this contributes significantly to their overall low rank in this category.

The Margins Tax: Regressive

Let’s now look at the taxes that a small Nevada business with $2 million in revenues will have to pay under this ballot initiative. Let’s assume various profit margins for such a business (profit margin = net profit/revenue). Most small businesses have profit margins that are less than 10%. But, for argument sake, let’s start off high. On $2 million in revenue, the margins tax would be $28,000.  If the net profit margin is 15.8% (profit = $316,000), the margins tax is equivalent to California’s 8.84% corporate profits tax.  At a profit margin of 10% ($200,000 profit) on the $2 million in revenue, the $28,000 tax is equivalent to a 14% business profits tax. A 5% profit margin ($100,000 profit) yields a 28% business profits tax, and the tax rate explodes upward from there as the profit margin falls.  In effect, this tax devastates small businesses. And for most of them, Nevada would become a higher taxing state than California! Think about the harm this would do to northern Nevada’s economy. The good news is that the business climate in the state has significantly improved. However, if we actually pass this tax, I suspect next year Nevada will rank much lower in the CNBC’s 2015 poll.

Conclusions

Many voters will vote for a tax that they think someone else besides themselves will have to pay, especially if they think that they or their families will somehow benefit. In this case, the margins tax is being touted as a tax that will increase spending on education in the state. On the November ballot, it is called “Question 3: The Education Initiative.”

This column says nothing about whether or not education in Nevada does or does not need additional funding. What it says is that this tax is so poorly conceived and so poorly written that it will do irreparable harm to the state’s economy, especially in the north where most businesses are small or medium sized. As we have witnessed for the past 5 years in northern Nevada, in a struggling economy, jobs are hard to get and opportunity dries up. Now, the economy is showing signs of recovery, and we have great hope that Tesla will pick us. Only, it is my opinion that they won’t if the margins tax initiative passes. So, if you think this tax won’t impact you, think again!

Robert Barone, Ph.D.

Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor.  Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.  Robert is available to discuss client investment needs. Call him at (775) 284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV  89521.  Ph: (775) 284-7778.