Speaking for Nevada - December 2008

The State’s Tax Structure

Current climate provides opportunity for review

by Carole Vilardo

There can be no question that the current economic downturn - now labeled a crisis - will present obstacles to Nevada Legislators when they convene on February 5, 2009. They are facing challenges not seen since the early 1980’s, which will require difficult decisions and delicate compromise, particularly when it comes to budget reductions. And yet, the necessity for a hard look at budget priorities could be a silver lining inside the recession cloud.

Some legislators and recipients of state largesse will decry the proposed budget cuts and put forth proposals to enhance revenue instead of pursuing cutbacks. Already, rumors have been circulating that proposals to raise taxes and fees might come from those characters. There might also be changes proposed to the existing tax and fee structure, such as broadening revenue bases and eliminating exemptions.

Nevada, along with more than 20 states and countless local jurisdictions, find themselves in deficit positions, some of record proportions. It is well known that Nevada’s current economic position is largely due to foreclosures, which contributed to the construction slowdown. Concurrently, a tightening of the credit markets and increases in unemployment all contributed to the magnitude of the crisis. Record fuel prices have created a domino effect of price increases on other commodities, resulting in reductions to or the elimination of disposable income. Additionally, sales tax on automobile sales and purchases by tourists, including restaurant meals, have taken a major hit.

Review prior economic downturns and it becomes evident that when revenues do not meet budgeted expectations, the demand for government services is greater than normal, particularly in the arena of human services. Conversely, when the government collects greater-than-anticipated revenue, there is pressure to increase services and programs without considering future sustainability. In the first scenario, as we are currently in, taxpayers are often asked to contribute more at the very time their income is reduced or stagnant.

There is no perfect tax or tax system that can insulate governments from the cyclical ups and downs of the economy. If there were, all governments would impose the same taxes and fees in the same manner. Increasing tax rates, expanding tax bases or adding new taxes in a depressed economy does not guarantee more revenue or sustainable revenue.

There is, however, the opportunity to review whether we in Nevada are maximizing existing revenues to minimize the need for new or increased taxes and/or fees. To that end, policy makers need to understand the current fiscal structure thoroughly so they are able to identify changes that will create a balance between revenues and expenditures. That balance is critical for the economic wellbeing of Nevadans – citizens and businesses alike.

It is important that the revenue side reflect the way business is conducted as well as the peculiarities of the state’s economy. If done appropriately, it should assure that in the long run, Nevada will be minimally affected by cyclical downturns in the economy. A balanced fiscal system will also require expenditure reforms.

To maximize revenue, a number of questions need to be asked and answered. For instance, are duplicate functions being performed by different agencies or levels of government? Does the governmental function or mission still serve a needed purpose, or has it grown in direct proportion to the revenue available? Is there a more efficient way in which to perform the service or provide the program? When unanticipated revenue is received, is it spent on ongoing operational expenses that then must be maintained year over year? Or is that revenue put into a rainy day fund or even spent on infrastructure? When grants are accepted, is the full impact of the “strings” attached understood? Do budgets reflect the spending of each dollar received or do they spend only 95 cents in acknowledgment that each dollar may not be received?

Identifying answers to these queries is an important part of the solution process that our elected officials should be embarking on during the 2009 Legislature.

It will not be easy for our elected officials to achieve a fiscal balance in this economy. In fact, it will probably take a couple of years. Yet, it is an opportunity that cannot afford to be passed up if we are going to minimize the effects of future economic downturns. We have been dealt a situation that should push decision makers to find that balance and reap the benefits in the future.