Budget cuts? Tax increases? Or Both? The 75th Nevada Legislature will have major tasks to tackle this session. With the state’s budget deficit at an all time high and a revenue shortfall of more than $340 million, many business owners hope the next session will bring answers to budget and tax woes. There is a new balance of power this session, and depending on who you talk to, it could be a good thing or a bad thing. One thing is sure, it will definitely have an impact on the solutions generated by the Legislature.
The 2009 session must identify avenues that can lead the state out of its worst deficit in the past 30 years. Gaming and sales tax comprise more than 60 percent of the tax revenue going to the state government and both have suffered steep declines. Gaming taxes saw an 11 percent decline for 2008. Sales tax revenues were down 8.6 percent to $901 million and that decline will increase by 0.5 percent to $905 million for 2009-2010 and by three percent to $933 million in 2010-2011 fiscal years.
Government Investment Pool
Brenda Erdoes, with the Legislative Counsel Bureau, approved the state for a $160 million line of credit from the Local Government Investment Pool. “The line of credit will be used as needed, with notes being sold to the pool and repaid as other obligations of the state are repaid,” said Lorne Malkiewich, director of the Legislative Counsel Bureau (LCB), the central, nonpartisan staff for the Legislature.
The Local Government Investment Pool (LGIP) allows local governments to combine or pool their reserve funds in order to earn a higher interest rate than the local entities could earn if individually invested. The money borrowed from the fund must be repaid in periodic installments so that the entire principal amount borrowed is repaid no later than August 31, 2013. The Nevada Office of the State Treasurer will control the money borrowing by issuing a general obligation note from the state to the pool. Borrowing will only occur if there is a need and will be limited to the amount necessary to allow the state to meet its current obligations, according to Assembly Majority Leader John Oceguera (D-Las Vegas).
Potential Funding Sources
The national economic condition has hit the Silver State harder than ever before. The multi-million dollar question is where will the money come from to cover the shortfall? Nevadans voted last November to increase room taxes – indicating they believe the state’s largest industry should pay more taxes to recoup some of the shortfall. Others question the validity of increasing the gaming industry’s taxes when casinos have lost millions on Wall Street and have seen less activity in visitor numbers. In addition to the increased room tax, businesses worry the Legislature will implement a business tax that would strain financially fragile businesses to the point of closure. There have also been rumors about a tax increase hitting the mining industry, which already has a model tax structure in Nevada.
An increase in the room tax, which was overwhelmingly endorsed by voters in Clark and Washoe counties, would provide additional funding for education that would help lawmakers avoid devastating cuts to social programs like schools, said Assemblyman Oceguera. More revenue means smaller budget cuts. “Passing a room tax means your budget is cut by $900 million instead of $1.15 billion,” said Malkiewich. “The amount raised by a tax, however, is difficult to project in this economy, with room rates and occupancy declining.”
State Senator Terry Care, (D-Las Vegas), has been in Nevada since the 1970s and has never seen a recession hit this state so acutely. “We’ve always been known as the land of unlimited opportunity,” Care said. “People drink, gamble, spend money when they’re happy and when their sad. But, this past year, the amount of visitors to McCarran Airport has decreased each month and gaming stocks have gone from more than $100 a share to $5 a share. Nobody knows how and when we are going to get out of this without raising taxes.”
As lawmakers are searching for both short- and long-term solutions to help mitigate boom and bust cycles in the future, they agree it is critical to identify a balanced approach that does not overly impact any segment of the business community. This, however, is much easier said than done.
“The mining tax structure is written in the state constitution, so in order to increase mining tax we would need to rewrite the constitution,” said Sen. Care. Mining is similar to gaming – when its stock is up, people want to increase the tax. However, the industry’s stock is similar to a rollercoaster and if taxes were increased and prices went down, profits plummet and the state is left with yet another failing industry.
In December, Governor Gibbons called a special session hoping to generate a plan of action to ease the budget shortfall before the regular session starts this month.” At this special session, the mining industry was impacted, with Senate Bill 2 requiring an accelerated payment of the net proceeds tax,” said Malkiewich. “The state and all counties with mines that pay the net proceeds tax will receive a benefit from this additional payment.”
It is evident that the Silver State is in trouble, leaving many worried about what budgets the Legislature will go after to get the funds needed to ease this deficit. Gov. Gibbons has said that the state will drain any money remaining in state budget accounts first. The major fight will be the cities and counties versus the state government; as the state will attempt to take necessary monies to help with its severe deficit. “We need to set spending priorities and examine the ability of our revenue sources to adequately fund those priorities at every level of government,” said Assemblyman Oceguera. “This should not be an adversarial process, but a real opportunity to improve our state’s financial structure so we never find ourselves in this situation again.”
Yet, the state models itself after the federal government, whereby it looks to local governments just as the federal government looks to the states when monies are short. “If shifting costs to a local level will help to balance the state budget, it is likely to be considered,” said Malkiewich. “This is particularly true when the local level of government is performing better. In this economy, however, all levels of government are experiencing revenue shortfalls.” City leaders across the state are gearing up for the intense battle that is expected to unfold in order to retain their monies.
State employees’ benefits are also rumored to be headed for the chopping block. Currently, some state retirees earn nearly 80 percent of their salaries for the rest of their lives. With times as they are, various agencies are urging state leaders to cut benefits for state employees.
The governor is not expected to raise taxes and democrats, who finally have control in the Silver State, do not want to raise taxes in this poor economic time, possibly hurting their chances of keeping control in two years. But longtime political operative Sig Rogich said a tax increase would not necessarily kill Gibbons’ political career if it includes major budget cuts. “The governor has a lot of latitude,” said Rogich, a Gibbons political adviser. “In times like this, people understand no one chooses to do this kind of thing.” After he began negotiating with lawmakers over a solution, he renewed his opposition to a tax increase. Rogich said Gibbons’ “everything’s on the table” statement was significant, which implies he could be more open-minded to solving the problems. “There is simply no way to cut that kind of spending out of the state budget as a practical matter,” said Rogich. Gibbons signed legislation, which was passed in the December special session, to raise revenue from the car rental industry and businesses that will collect sales, cigarette and liquor taxes which will raise $4.2 million, but also represented a tax increase on the governor’s part.
Senator Bill Raggio (R-Reno), who is used to running the senate floor as majority leader, will be second in command this time around. As Senate minority leader he will be working closely with Assembly Minority Leader Heidi Gansert (R-Reno) to fight a tax increase to ease the deficit. Meanwhile, the Democratic Party is celebrating its huge gains, but also planning their 2011 winning strategy. It is expected that the Democrat-run Legislature will increase taxes as they now have the votes, but they must be careful in order to keep their power in the 2011 race. Senator Steven Horseford is in the majority leader in the State Senate while John Oceguera takes the Assembly majority leader seat.
To say that the state is facing unprecedented challenges is an understatement. The conditions make it vital for lawmakers to come together and solve the issues at hand and they face an intense set of pressures to formulate an appropriate package. “We are trying to weather the storm – hoping that the economy rebounds enough so further cuts aren’t needed,” said Malkiewich.
Many feel that all that can be done is wait for the light at the end of the tunnel. But others hope to tap into some much needed optimism which may come in the form of unparalleled political cooperation. It appears that both sides of the political aisle and their constituents have realized that the resolution will not come easily and with that realization comes the type of collaboration that breeds creativity. “I think we must look at this economic crisis as an opportunity to make badly needed structural changes in our state,” said Oceguera. “What we have now is not working and must be fixed.”