Feature Stories - January 2005

Brave New Legislative World

A Preview of the 73rd Session

by Sam McMullen, George Ross and Joe Cain

The typical consensus model of Nevada political discourse did not apply to the battle over taxes during the 2003 legislative sessions. In a state typically characterized by legislators, interest groups and lobbyists working together to achieve amicable solutions, 2003 was marked by lines drawn in the sand that led to two special sessions and a challenge to the legislative process in the state Supreme Court.

A Recap of the 2003 Legislature

It was evident months before the 2003 legislative sessions – there were one regular and two special sessions – that a powerful storm was brewing in the legislative arena. Governor Guinn was adamant that the state’s long-term budgetary health was in jeopardy as a result of what he and many financial analysts deemed a structural deficit, and a tax task force was created to crunch numbers and lay out the case for significant revenue needs. In order to forestall a fiscal crisis, many felt a major boost was needed to the state’s revenue streams. The Governor’s Task Force suggested a package of several new and increased taxes, including a gross receipts tax, which they felt would provide fiscal stability to the state and spread more of the state’s financial burden to non-gaming businesses. Add to this the economic downturn brought on by the events of September 11, 2001, and the scene was set for a nasty tax and revenue battle.

Battles over taxation, particularly ones that involve a dramatic and fundamental change to the state’s tax and revenue structure, are never easy, and no one familiar with the legislative process believed the 2003 session would be devoid of significant battles. After all, taxes impact the business environment, the ability of the state to diversify its economy and – most important of all – people’s pocketbooks. Therefore, they raise passions and expose core philosophical beliefs about the role of government in our society. Nevertheless, few expected 2003 to be as hard-fought and bitter as it turned out to be, with reverberations that are likely to be felt for several years into the future.

In a session that was constitutionally mandated to last just 120 days, a floor vote was not even held on the major tax issues until 125 days into the legislative process. The fact that a vote was not even held during the regularly-scheduled session shows how contentious things were. When it was all over, there was no shortage of legislative post-mortems by the media, pundits and legislative insiders. In one way or another, most members of the media appeared to blame the gridlock on what they saw as the strong beliefs of the legislators on either side of the battle – one side favoring greater revenues to meet the needs of a rapidly growing state – including taxes based on business revenues – and the other side favoring less government spending and generally opposing these types of business taxes in order to preserve what they saw as Nevada’s uniquely favorable economic environment. And these were only two of the myriad viewpoints that surfaced during the session.

The debate surrounding what type of tax should be enacted, and how much additional funds were needed, dominated the 2003 session. When the dust settled, no one was entirely happy with the result, and a compilation of several tax and fee increases totaling $836 million was enacted. Among the taxes created or increased were: a gross payroll tax of 0.65 percent (0.7 percent in 2004); a $100 annual fee for all businesses; increased cigarette and liquor taxes; and a 2.0 percent gross payroll tax and branch tax on financial institutions.

Looking forward to 2005, there is a certain degree of apprehension among people involved in the legislative process about whether the difficulties of last session will continue to strain relationships at this sesion, or whether things will return to the more collegial tone of years past.

The Budget Looking Forward

The economic forecast looking forward to the 2005 legislative session is vastly different from the one legislators faced prior to the 2003 session. On December 1, 2004, the Economic Forum – a five-member appointed body charged with forecasting state revenues for use in preparing the state budget and making general fund appropriations – issued numbers predicting that state revenues in the 2005-07 biennium will be approximately $5.8 billion, a 14 percent increase from the current biennium. These numbers represent expectations for continued robust economic activity in the coming years.

The Economic Forum numbers do not necessarily mean the state is flush with extra money; Nevada’s rapid growth means there will be corresponding growth in the state’s needs. These additional revenues will be used to fund increased expenditures to fulfill these needs. However, the prevailing sense is that there will be no need for any additional taxes. This is buttressed by a near-unanimous sentiment among legislators that they will not be voting for any taxes or increases this coming session. Perhaps the best confirmation of this is that the Assembly has constituted itself without a Committee on Taxation. While cleanup and corrections will be necessary to cure issues with the 2003 tax package that have surfaced over the past months, they will be handled as a secondary purpose of a newly-created Growth and Infrastructure Committee.

Impacts of the 2004 Elections

The bitter tax wars of 2003 left everyone in the political community wondering how these events would translate at the ballot box. Some pundits thought there would be a public outcry against the Legislature for enacting an $836 million tax package, while others believed there would be punitive actions taken against certain legislators thought to be too resolute in their anti-tax positions.

In general, the vast majority of legislative races turned out the way most insiders predicted. A few open seats were toss-ups that had the potential to go to either candidate, but there were few surprises, and the great majority of incumbents were re-elected.

When the dust settled from the 2004 elections, the composition of the Legislature was not radically different from what it has been in the past several sessions. The Republicans retained a 12-to-nine majority in the Senate, and the Democrats retained a majority, although strengthened, in the Assembly at 26 to 16 (up from 23 to 19).

The election resulted in essentially no change in the state Senate, although the Senate will have one fewer Republican than last session. This is because former State Senator Ray Schaffer changed parties from Democrat to Republican after his district elected him as a Democrat in 2000. This district once again elected a Democrat by electing new State Senator and former Assemblyman John Lee. Two other Senate incumbents lost their seats to members of their own party in the primary. These two new Republican state Senators are Bob Beers, who formerly served in the Assembly, and Dr. Joe Heck.

In the lower house, Democrats were able to strengthen their majority by picking up three seats, so they now hold 26 of 42 seats. Pundits attribute these gains largely to the Democrats’ ability to recruit an impressive roster of qualified candidates and the inability of Republicans to retain a couple seats in districts where they enjoyed a registration advantage, but were out-campaigned by Democrats. Some campaign experts speculate that aggressive Democratic get-out-the-vote efforts linked to the highly competitive presidential election resulted in strong turnout for the Democrats that carried the day in local races.

While Democrats clearly strengthened their position, Republicans did succeed in keeping their ability to muster the one-third minority they need to block new tax increases, a victory that could prove moot if additional taxes are not sought.

Another noteworthy aspect of the 2004 elections – albeit with a less direct impact on the legislative process – were several questions that appeared on this year’s ballot. Three ballot questions to amend the Nevada Constitution that were rejected by voters would have had an impact on the legislative process had they passed.

Questions Four and Five on this year’s ballot were backed by trial lawyers. These questions, while ostensibly on the ballot to lower insurance rates and curb frivolous lawsuits, were actually an attempt to prevent or erase certain tort reform measures. Despite the deceptive language of these measures, which was designed to ensure voter passage, the ballot questions failed. Their failure obviated the need for business interests to take some type of legislative action to counter these measures and has brought some peace in the initiative valley for this session and at least the next season for gathering signatures.

Question Two on this year’s ballot would have, if approved by voters this year and again in 2006, required Nevada to raise per pupil K-12 education funding to the national average. Most people familiar with the state budget agree this measure would have been a disaster for the state’s financial health – as did the majority of voters in November – as it would have required a massive financial expenditure without a plan for how to pay for it. Costs were estimated at the equivalent of 30 percent of our state budget. Had this measure passed, it could have caused another major tax battle to find the monies to pay for this mandate. Some have speculated the teachers hoped to use the approval of this measure as a tool for more funding for salaries during the 2005 session, or later in advance of the 2012 date in their initiative. Nevada voters, however, failed to approve the initiative, removing the possibility that it could be used as a bargaining chip or lever for tax confrontations in the future.

Question Three on this year’s ballot strengthened medical malpractice tort reform measures previously enacted by the Legislature in an attempt to stem the exodus of doctors from the state caused by prohibitive malpractice insurance rates. With this measure passed by the voters and becoming law, tort reform for healthcare will not be on the legislative agenda for the first time in five years.

Ballot Initiative Reform

Legislative reforms to the process by which questions are placed on the ballot may be proposed during the 2005 session. Calls for such measures are in large part due to fears about what could have happened had one or more of the failed questions described above passed. The deceptive nature of Questions Four and Five – i.e., the wording of the questions making it appear they were about frivolous lawsuits and insurance rates, when in reality they were intended to achieve a different purpose – has churned up support for such reforms.

Potential reform measures would likely be designed to tighten up qualifications for how a matter is added to the ballot, or prohibit deceptive or misleading positioning of ballot questions, requiring the proponents to adequately and accurately explain the true contents of the proposition and limit each to only one subject, not multiple hidden goals. It is quite possible that any such measures, if supported within the Legislature, would themselves have to be approved by a vote of the people, as the ballot initiative process is a right provided to the people in the state Constitution, and it cannot be overridden by statute.

Initiative reform measures are also being considered due to recent court decisions making it easier to qualify these various measures for the ballot. These decisions have increased concern among many that Nevada could become like California, where a number of initiatives promoting the agendas of special interest groups have been enacted through the ballot and not through the deliberative and more thorough process of the Legislature. The passage of numerous initiatives, especially when they are changeable only by public vote, can make it difficult for state government to function efficiently and react to changing circumstances, and presents a real threat to sound government. The challenge is to keep this meaningful right of the public to enact policy reforms, while ensuring maximum integrity and thoughtfulness in the initiative process.

Taxes Redux

Conventional wisdom, in large part due to the revenue projections discussed above, is that taxes will not be anywhere near the focus they were in 2003. The fact that the Assembly leadership has dismantled the Assembly Taxation Committee appears to support this notion. Nevertheless, a few tax issues are likely to be the subject of some discussion in 2005.

Capping property taxes will likely occupy a fair amount of the Legislature’s time in 2005, centering on the best way to control spiraling increases in assessed valuation and stabilize increases to a 6 percent maximum a year. Skyrocketing home values, particularly in Southern Nevada, Reno and Lake Tahoe, are driving this issue. The spike in assessed values means some homeowners could potentially see their tax bills double in the course of a year, and elected officials are already hearing anticipatory cries of protest from constituents. One rumored solution to the problem is the possible differentiation of classes of property, with different tax rates for each classification. This is something that could potentially shift more of a tax burden to businesses. This would likely require a constitutional amendment, since the Nevada Constitution requires a "uniform and equal" rate of taxation.

The intense conflict surrounding the tax package in 2003 meant it was passed without adequate public hearings to define problems in implementation and design, many of which were handled by regulations of the Nevada Tax Commission through the interim. An omnibus cleanup bill will have to be processed to fix issues in definitions, application of taxes, practical and cost issues in compliance and enforcement. This bill will no doubt have the full focus and attention of taxpayers in Nevada to ensure its effects are merely to clarify process and solve problems from last year. These include looking at the $100 business registration fee to see if its governmental costs can be reduced and still retain its information-gathering and tax fairness attributes.

In addition, however, there is speculation that certain tax "fixes" may be proposed to correct alleged inequities resulting from hastily passed tax legislation in 2003. Such rumors include tweaks to taxes imposed specifically on financial institutions, which banks believe unfairly single them out, as well as potential modifications to the live entertainment tax which has under-performed its expectations based on being broadened to include non-casino venues. To the extent that any of these "fixes" require dollars to keep the budget even, the requirement of a two-thirds vote in both houses of the Legislature makes the chances of such makeup revenues remote, if not impossible, this coming session.

Growth & Infrastructure Issues

The Assembly leadership has created a new committee named Growth & Infrastructure. The creation of this committee clearly suggests leaders in the Assembly intend to place significant focus on issues relating to growth arising out of our state’s continuing increases in population and infrastructure needs. This committee’s focus matches that of a growth task force formed by Clark County. It will focus its attention on multiple issues such as how to manage and direct growth, meet infrastructure needs, and discuss the availability and usage of land and water. Legislators will face the daunting task of trying to preserve and enhance quality of life without detrimentally impacting the revenues necessary to solve the problems caused by Nevada’s growth-dependent economy.

One growth-related issue that manifests itself as a rural-urban conflict is water. Four years of drought in the Colorado Rockies have strained the Colorado River and Lake Mead resources Southern Nevada depends on and crystallized the need for additional water from other resources to guarantee its future. The quest to aggressively look for additional water resources in the deep-water aquifers of rural Nevada has gained support as a priority solution for water shortages and future independence in water needs. Whether rural interests will attempt to stop attempts to secure additional water resources for the South, and whether they would be able to succeed against the economic and political might arrayed against them, will be questions that may have to be answered this session.

Other Business Issues

The Legislature will of course tackle a wide variety of other issues important to Nevada businesses. Among the more noteworthy are various measures relating to the escalating costs of healthcare coverage, the availability and affordability of insurance, and possible efforts to continue to stem the costs of construction defect litigation cases, which threaten the health of the construction industry and further contribute to the rising costs of housing.

Important Decisions Ahead

Many people involved with the Nevada Legislature have expressed their hope that the bitterness of the 2003 sessions will not be resurrected when the gavel strikes on February 7, 2004, marking the beginning of the 2005 regular session. Even if the tax battle is over for now, this does not mean important decisions will not be made during the 2005 session. Even in years where revenues appear to be strong, decisions made about the funding of certain programs have repercussions on future budgets that have the potential to set the scene for future tax battles. As always, it is important for Nevada’s business community to keep apprised of developments in Carson City and to make its many voices heard.

One thing is for certain, however. We won’t be kept in suspense too long about these issues. They all have to be answered by the Nevada State Legislature within the constitutionally-mandated deadline of 120 days.

Sam McMullen, George Ross and Joe Cain
Authors Sam McMullen, George Ross and Joe Cain are lobbyists with the McMullen Strategic Group, a statewide government affairs and strategic positioning firm representing several business clients. Sam McMullen & Joe Cain are also attorneys in the law firm of McMullen & Cain, a general-practice law firm based in Southern Nevada.