Taxes are on a lot of people’s minds this time of year. Taxes mean grumbling and money out of pockets and coffers, whether an individual’s or a business’. But taxes also mean services, at all levels of government, from federal to local. In the stressed and struggling Nevada economy, as tax season threatens on the horizon, there are inevitable questions.
Is Nevada still considered a business friendly, low tax state?
Did the 2011 Nevada Legislature institute new taxes?
Should businesses expect new taxes, or increases in rates?
What’s happening with payroll tax, both federally and in Nevada?
And by the way, just what are the taxes in Nevada, and where do their revenues end up?
Welcome to Nevada
We’re still not only a business friendly but a people friendly state. According to the 2012 State Income Tax Climate Index report prepared by the Tax Foundation, Nevada ranks third of the top 10 states for business because we have no state income tax and no corporate tax. Even after we’ve led the rest of the nation for more than 60 months in foreclosures, and have consistently had the highest unemployment rates, with the state rainy day fund not well-stocked, Nevada can still boast to new businesses that we have:
- no corporate tax
- no personal income tax
- no franchise tax
- no estate tax
- no unitary tax
- no inheritance or gift tax.
According to Bill Chisel, executive director, Nevada Department of Taxation, there were no tax increases in the 2011 legislative session.
No increases doesn’t mean Nevada doesn’t have an impressive list of taxes. What Nevada does have are some of these:
- Sales and Use
- Local School Support
- City/County Relief
- Estate Tax
- Lodging Tax
- Live Entertainment Tax
- Real Property Transfer Tax
There are taxes on tires, an insurance premium tax, taxes on intoxicating beverages and on tobacco products and there’s a government services fee as well as an industry specific tax on mining, the Net Minerals Proceeds Tax. Businesses also pay into the unemployment fund, there’s an annual business license fee, sales and use tax, and property taxes.
According to the 2011 Annual Report for the Nevada Department of Taxation, revenues from the 20 classifications of taxes increased in 13 classifications and decreased in seven. The biggest percent change was in business license fees, which fell by 92.41 percent between 2009-2010 and 2010-2011. The largest increases came from business tax (63.59 percent) and the mining sector (43.81 percent).
So just where does all the money go? Distributions of taxes are divided between the State General Fund, State Distributive School Fund, local governments, the Estate Tax Reserve, Endowment and Trust Funds, the State Debt Service Fund and other distributions. In 2011, the percent change into each of these categories was positive.
Out of Pocket
The impact on individuals and businesses doesn’t always feel positive. Business friendly tax environment or not, paying taxes can hurt.
“In this economy, any tax that you’ve got is going to have an impact, whether you’re an individual or a business,” said Carole Vilardo, president, Nevada Taxpayer’s Association, an organization that monitors taxes to see the impact on businesses. “Businesses got hit with an unexpected tax in the form of a $21 per person hit because of how much we had to borrow from the federal government to make unemployment payments. And the Modified Business Tax, while it is a nonintrusive tax, and when the economy is at least stable there have been no problems with it, now obviously that presents a challenge in putting on new people in this economy if your business is not good.”
The sales tax rate can be an impediment to individuals, Vilardo maintains, standing in the way of larger tangible goods purchases. “Anything that takes money out of your pocket whether you’re an individual or a business when you don’t have the same level of money that you previously had coming in is an impediment.”
The balancing act, Vilardo adds, is that governmental services are paid for by taxes and tend to increase in bad economic times. Those services rely on the revenue, one reason Nevada Taxpayer’s Association pays close attention to government expenditures (better to save for a rainy day than to go looking for funds once the storm is pouring). “We’ve had some very, very good and productive years relative to tax revenue and we have managed to spend most of it while doing very little saving for a rainy day fund,” said Vilardo.
The fact that we are still perceived as business friendly is important. Businesses mean jobs, jobs mean individuals with spending power, spending power means tax revenues.
“The best tax generator you have is business,” said Vilardo. “Having individuals employed. Because then they do generate sales tax revenue, they’re able to purchase, they’re able to stay in homes, they generate property tax revenue, businesses generate more tax revenue and are able to hire more people who in turn purchase more goods, provide more services and it becomes a very positive thing. Employment, in order to keep Nevadans economy healthy and tax coffers healthy, has got to be a number one priority.”
Not a comforting thought in a recovering economy where Department of Employment, Rehabilitation and Training predicts job growth at 1 to 2 percent in 2012.
By the Numbers
The Nevada Department of Taxation Taxable Sales Summary for October 2011 presents a snapshot of the Nevada economy as recovery inches upward.
The statewide taxable sales for the month were 12 percent higher than in 2010, with the largest increases in food services and drinking places, up 11.7 percent, and the construction industry classification was up 44.5 percent. In addition, the summary notes only one county, Lincoln, reported a decrease in taxable sales. The Local School Support Tax component of the sales tax rate was increased by AB 552 in 2009 from 2.25 to 2.6 percent and was set to expire June 30, 2011. The 2011 Legislature extended the change through June 30, 2013.
Another extension by the 2011 Legislature affects the Modified Business Tax, Nevada’s relatively low payroll tax enacted in 2003 (it replaced the Business Tax that was in effect, and concern at the time was it would make Nevada appear less business friendly).
The current change to the Modified Business Tax means any “general business” reporting under $62,500 in employee wages for the calendar quarter, after healthcare benefits deduction, doesn’t owe the tax, though a return must be filed (and marked $0). For businesses with more than the $62,500 figure, the tax rate is $312.50 plus 1.17 percent of the amount the wage exceeding $62,500. The provision, meant to help small businesses in tough times, was slated to expire June 30, 2011, and has been extended through June 30, 2013.
A different payroll tax issue is set to affect Nevadans from federal sources. One of the so-called Bush tax cuts is set to expire, this one a temporary payroll tax cut meant to put more money in people’s pockets. The measure dropped the FICA tax to 4.2 percent through 2011 but will expire March 1, with the rate returning to 6.2 percent on the first $110,000 of income, unless extended through 2012 by Congress.
The 2011 Nevada Legislature extended a few sunset provisions slated to expire. One of the sunset provisions extended by the 2011 Legislature to run through June 30, 2013, is the increased business license fee. The increase of the fee, enacted in 2003, was approved by the 2009 Legislature, which raised the state business license fee in one fell swoop from $100 to $200, a temporary measure meant to expire June 30, 2011. Possibly June 2013 will see the rate drop back to $100.
Also extended was the requirement that the Net Proceeds of Minerals Tax, a 5 percent tax assessed on mining company’s estimated earnings for a year, continue to be paid in advance through June 30, 2013. The Net Proceeds Tax is an industry specific tax levied against an industry that pays all other required taxes in addition.
Another industry specific tax is the bank excise tax which requires every bank in Nevada with more than one branch per county to pay the bank excise tax for each additional branch (per county) at the rate of $1,750 per branch, a tax whose total collections dropped 9.02 percent from fiscal year 2009-10 to 2010-11.
New taxes are proposed on an ongoing basis, as the need to fund services continues, but not every tax conceived of makes it in front of a Legislative session. As the economy continues to recover very slowly – job growth is only anticipated in Nevada at 1 to 2 percent in 2012, and building permits may grow by 3.8 percent, according to the Center for Business & Economic Research (CBER), UNLV, both indicators of slow, if positive, change – should Nevadans worry more taxes are looming on the horizon?
Possibly, and with an eye toward federal taxes rather than state. With Nevada’s light tax structure, it’s the federal taxes that present the greatest burden.
“The only thing happening in the state is a proposal to raise taxes on businesses by charging a gross receipts tax,” said Jason Thomas, tax partner, Fair, Anderson & Langerman, a public accounting firm geared toward comprehensive tax services. “It would be a burden if that happened. But otherwise, on a federal basis, taxes are extraordinarily low.”
That said, the Bush tax cuts are set to expire at the end of this year, and January 1, 2013 will see married couples with joint incomes over $250,000 and single people with incomes over $200,000 facing what could be 3.8 percent on investments and .9 percent on wages in addition to an increase on regular tax rate, so taxes could theoretically rise to 25 percent. In addition, if the federal payroll tax cut isn’t extended, that paycheck percentage would rise from 4.2 to 6.2 percent March first. In addition, there’s one more bill being considered that would force online businesses to pay (and therefore charge) sales tax.
One ongoing tax Nevadans sometimes fear will be implemented to help the economy is a state income tax. While a state income tax on business – the corporate tax – is possible, though not currently proposed, a state personal income tax would require amending the Nevada Constitution, which prohibits such a tax.
With regard to the corporate tax, it’s not that likely either. “It used to be viewed as a panacea, but not after this economic downturn and the history of other states,” said Vilardo. “There are a number of governors looking to reduce income tax rates and two who want to phase it out completely.”
Taxes and regulatory fees aren’t just about charging money. There are policies in place to support businesses and supplement the creation of new growth. With Nevada working overtime to diversify the economy and create new jobs and new industries, there are efforts underway to change regulations related to raising money, trying to tailor those to a more accessible process in order to induce investment and create new industries and new companies here.
“Nevada has a catalyst fund, and they also have Nevada first private industry fund tailored to invest in startups and businesses that could create new jobs and industries in Nevada,” said Thomas. In conjunction with the Brookings UNLV and SRI International report commissioned by the Governor’s Office of Economic Development to target industries, the hope is to propose rules that will induce startups to form and receive tax and regulatory breaks so it’s easier to invest in the targeted industries in Nevada.
Catalyst funds and government services are putting funds back to work for Nevada. If there must be taxes, at least the lack of increases, the tax friendly climate and the funding of business incentive programs help ensure Nevadans taxes are used for Nevadans.