Feature Stories - October 2008

State Lawmakers Prepare for Next Budget

Shortfalls Prompt Anxiety and Creativity

by Jeanne Lauf Walpole

Still smarting from the current state budget’s $1.2 billion revenue shortfall, Nevada’s legislators and financial gurus are hunkering down to prepare for more challenges when the Nevada Legislature convenes in 2009. With Nevada ranking the third highest in the country in percentage of decreased revenues for the fiscal year ending June 30, according to the National Conference of State Legislatures, political and economic movers and shakers worry that a continued shortfall will worsen what is already a perilous economic situation. Fueled by the housing slump along with significant drops in gaming and sales tax collections, the state coffers suffered a loss of seven percent in tax revenues in the last fiscal year, causing lawmakers to slash spending across the board and tap the rainy day fund for $267 million in a bid to keep the state out of red ink. While the loss was halted in part by a one-time infusion of cash, still, lawmakers can only hope that the projected biennium shortfall is not more than what has already been planned for.

As they make preparations for the future, those who are in Nevada’s economic trenches acknowledge that they are facing tough times. “Economic forecasting this year will be the most difficult it’s ever been,” says Carole Vilardo, president of the Nevada Taxpayers Association (NTA). As a member of the National Taxpayers Conference, the NTA is a non-profit organization that provides nonpartisan research and analysis of Nevada’s pressing fiscal issues. Although the current economic situation has proven to be extremely problematic, lawmakers admit that the budget process is never easy. “It has always been a matter of chance knowing how much to budget for,” explains State Senator Bob Beers, R-Las Vegas. “We cannot see the future and the government can’t control the economy.”

If it is any consolation, Nevada is not alone in its plight, California, Arizona, Rhode Island, Alabama, Maryland and New York are some of the other states suffering significant general fund budget gaps. More than 30 states are in the red, projecting a total of around $40 billion in deficits. As they struggle to make ends meet, lawmakers across the nation are being forced to make tough choices, such as terminating services, raising taxes, eliminating employees, dipping into emergency funds and borrowing money. “I’m very happy I’m not serving in the Legislature,” says David Turner, managing member of Turner Loy & Co., LLC CPAs in Reno and treasurer of NTA.

Gaming and Mining Potential Targets

As might be expected, a number of ideas are being explored to increase revenues, with both gaming and mining mentioned as the usual targets. “People are looking at mining for some kind of gross receipts tax,” said Turner. With mining enjoying healthy profits in recent months, it is logical to assume that lawmakers will at least take a precursory look in their direction. In spite of the overall embattled state of gaming, due to decreased profits in recent quarters, the industry will probably not escape scrutiny for its ability to step up to the plate even more. “I think there will be a run on gaming,” Turner speculates.

Having successfully beaten back an initiative attempt by the Nevada State Education Association (NSEA) to increase gaming taxes 44 percent, gamers will nonetheless be affected by the compromise effort of raising room taxes up to 13 percent in Washoe and Clark counties. The current room tax in Reno/Sparks is 13.5 percent, in outlying Washoe County, 12 percent, on the Las Vegas Strip, 9 percent and in downtown Las Vegas it is 10 percent. NSEA is taking a two-pronged approach to this issue including an advisory question placed on ballots by county commissioners and a legislative initiative which would require the collection of voters’ signatures. If successful, either prong would place the matter before the 2009 Legislature for consideration.

While it is unclear at this time how much appetite the legislators have for tapping gaming and mining again, many business folks believe that taxes need to be broad-based rather than targeting a single industry. “There are conversations regarding more businesses stepping up to the line,” Turner explains. “Gaming wants every business to step up. It will be a political game.”

Other Taxes

Another tax increase will be decided by voters in Washoe County when they vote on raising the sales tax by a quarter cent and the motor vehicle registration tax by one-half cent per $1 of the value of the vehicle. The ballot question was the result of work by the Washoe County Construction and Revitalization Advisory Committee, commissioned by the 2007 Legislature. If passed, the estimated $23.5 million raised annually from these increases will go towards repairing aging schools in the Washoe County School District.

Other potential sources of revenue by way of increased taxes include raising the costs of setting up a business in the state and also collecting sales tax on Internet purchases. “We could increase the fees we charge on businesses to come here,” Turner says. “A lot of money goes through here that doesn’t stay here.” Vilardo is a strong proponent of congressional legislation that would facilitate the states’ ability to collect sales tax on remote purchases, particularly online. With Internet sales volume increasing approximately 20 percent every year, it is estimated that Nevada is now losing more than $100 million each year in uncollected taxes. “This would help stabilize the collection of sales taxes,” she says. Although two bills are pending in Congress via the Streamlined Sales Tax Project (SSTP), Vilardo fears that action will be delayed while Congress concentrates on energy matters.

Few people have been as adamant in their opposition to tax increases as Governor Jim Gibbons. “I have been very clear, and remain steadfast in my position, that I will not support raising taxes on the hardworking people of Nevada who are already struggling to make ends meet in their own lives while coping with high food costs, energy costs and every other expense they face,” he says. “It is not fiscally responsible to ask more of them at this difficult time. Ultimately, however, the people are the true owners of this government. And if there is a clear mandate, by a vote of the people to increase a particular tax for a particular reason, I will not stand in the way of it, even if I disagree with it. The ultimate authority of government lies with the people, not the elected officials, so I believe it’s important to respect the will of the people on this matter.”

Cutting Spending

While it is necessary to explore ways to increase revenues, those who are involved in the budgeting process agree that it is vital to look at the spending side of the equation as well. “There’s a new attitude that it may be time to look at how we’re spending money,” said Beers. “There’s going to be a new focus on whether all the things we do are necessary.” He suggests that some services taxpayers are paying for that might not make sense, such as approximately $500,000 for diversity officers for the state university system. Vilardo agrees that hammering out the next budget will not be business as usual. “I’m hopeful that this time we can take the opportunity to fine-tune both our revenue and expenditures,” she says.

Fine-tuning, however, typically results in reductions on the spending side which causes many to circle the wagons in protection of programs and services that are close to their hearts. “Everyone has to tighten their belts to a certain extent, but it would be difficult for public safety, health services and education. That would mean larger classrooms, prison closures and the loss of some kinds of services,” says Assembly Speaker Barbara Buckley, D-Las Vegas. Because of the critical nature of the state’s economy, however, lawmakers are being forced to scrutinize the budget with renewed acuteness. “There’s bipartisan interest in looking at spending”, Beers explains. “In times of exorbitant excess there’s been no need to look in that direction.”

Governor Gibbons weighs in on the role the spending cap has played in state spending, “we need to get control over our spending. We have a spending problem in Nevada. We have an existing spending cap in the state law that allowed us to increase our biennial budget by 17 percent in 2007. That’s not much of a cap. The first thing we need to do, and I will be proposing legislation to do so, is amend that cap to get tighter control over our spending. One of the most important components of this will be to save more when times are good. We have gotten into the habit of spending every penny we project we’ll have. We can’t do that. If we force ourselves to set aside a reasonable percentage of our projected revenues, we’ll be in a much better position to weather the economic turbulence every economy experiences from time to time,” he explains.

Buckley agrees on the importance of setting aside monies for leaner times. She is studying the merits of a stabilization fund which would be funded on a regular basis with some type of triggers or percentages. The rainy day fund, which Nevada currently has, is funded through periodic appropriations. “This [stabilization fund] would avoid cyclical volatility,” she says.

One area that appears to be under bipartisan review is that of tax exemptions and rebates, which have historically been legislated on both a statewide and national basis as tools of social reform and economic change. “One of the things we need to do is to stop giving exemptions, like to build green buildings, until the revenue recovers,” Turner says. The list of exemptions is long and varied, such as property tax exemptions as a “thank you” for veterans and as an inducement for new businesses. The questions lawmakers need to pose in reviewing the exemptions is whether they continue to be appropriate and whether they serve the purpose for which they were initially intended. “We need to make sure they sunset,” Buckley says. Because they can languish on the books long after they are needed or are timely, perhaps some of the exemptions can be gracefully retired or modified to more accurately reflect the current circumstances of the state.

Further complicating what promises to be a very tenuous budget process is the successful ruling John Ascuaga’s Nugget obtained regarding taxation on complimentary meals that are served in its restaurants. Although the Department of Taxation has been collecting a use tax on these comps for years, the Nevada State Supreme Court recently ruled that these meals were not subject to the tax, thus clearing the way for the Nugget to obtain refunds. The ripple effect of this ruling and subsequent refunds to casinos throughout the state is expected to equal more than $100 million. The Department of Taxation has placed the following statement on the state Web site: “Taxpayers who believe they are similarly situated to the facts contained in the Sparks Nugget decision and who previously remitted use taxes on complimentary meals, may preserve their claim for a credit/refund by submitting a request in writing to the Department of Taxation.” Although the bad news is that the potential $100 million in tax credits have not been accounted for in the current budget, the good news is that perhaps a negotiated settlement might be reached to pay the money back over time rather than all at once.

Renewable Energy

As economic planners around the state band together, the consensus seems to be on the importance of strategic solutions rather than finger-in-the dike tactical plans. “Our focus needs to be long-term. We have to get away from the boom/bust cycle,” Buckley explains. In looking at the long term future for the state, it encourages discussion of Nevada’s role as a potential energy exporter. Senator Harry Reid has long advocated that Nevada should lead the way in producing renewable sources of energy. Much as mining, gaming and tourism have been the underpinnings of the state’s economy over the years, alternative energy, such as solar, wind and geothermal, could become a major component of the state’s financial future.

Governor Gibbons cites the value of renewable energy in the overall economic health of the state, “renewable energy is critical to the future of Nevada. Not only will our abundant renewable resources help clean our environment and make us energy independent, it will also provide strong economic development for Nevada. What we need to do, and my energy office is working on, is attract not just renewable energy developers, but also the manufacturers of the equipment needed for renewable energy. I don’t believe it makes sense to build wind turbines overseas, then ship them to the coast and truck then into Nevada, when it’s just as affordable to build them right here in the Silver State, where they’ll ultimately be put to use. So what we need to do is entice these manufacturers to come to Nevada, and part of the way we can best do that is to continue with the promotion of renewable energy development,” he says.

With “energy” topping the list these days, almost everyone has an opinion about it. Although few people can deny the potential that exists in Nevada, not all are convinced that it can be developed in a major way anytime soon. Vilardo believes the state is well positioned, but that the development and delivery is somewhere down the road. Beers says one of the major problems is the lack of technology to deliver the power where it is needed. “[In] getting geothermal power where we want it to be, the technology is not yet feasible,” he said. Beers says power rates have been raised to support inefficient technologies over the years, but encouraging the private sector and power companies to provide grants for research into more efficient technologies could speed up development.

Despite today’s gloomy outlook, Vilardo remembers how the state survived past economic downturns, such as in 1978-1983, a period of high inflation and high interest rates. “It’s how we go through it that’s important,” she says. “It’s an opportunity to make sure we don’t have this again.” With politics such an integral part of the process, however, many people worry that political wrangling will damage the decision making. Recalling the recent special legislative session when both parties worked together to balance the budget in a matter of hours, Buckley says it indicates that lawmakers are capable of a bipartisan effort. She hopes those involved in the budget cycle can put the state’s interests first. “We want to live in a state we can be proud of,” she says.

Jeanne Lauf Walpole
Jeanne Lauf Walpole is a freelance writer based in Northern Nevada.