Jim Clark: State teacher tax could have devastating impact
July 15, 2013
With the legislature adjourned, the political winds are shifting to the upcoming battle over the "teacher tax," an initiative proposition by the Nevada State Education Association (teacher union) to impose a type of gross receipts tax on every kind of business entity and trust in the Silver State as well as out of state businesses based on their gross revenues derived in Nevada.
It will appear on the November, 2014 general election ballot
Introductory economics courses in college teach that if government wants to curtail an activity it should tax it. Works every time (priced cigarettes lately?).
With Gov. Sandoval and leading legislators from both political parties agreed on an aggressive (and successful) program to attract new businesses to our state what would motivate any group to push this suicidal measure?
Answer: greed. The proposal is estimated to raise about $800 million per year in new tax revenues which, pursuant to the "teacher tax" proposal, would go directly into the state's distributive school account. But at what cost to Nevada's economy?
If approved by voters the measure would levy a 2 percent tax on the "tax base" of every form of business entity that grosses $1 million or more per year.
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The "tax base" is derived by deducting from gross receipts, at the option of the taxpayer: 1. Seventy percent of gross receipts, 2. gross receipts less personnel costs or 3. gross receipts less cost of goods sold.
This formula is applied whether or not the business is earning a net profit. Obviously this will impact businesses many different ways depending on their profit margins.
How does the scheme work in practice? To find out we have to look at Texas, the only state that currently imposes a business gross margins tax.
It was adopted in 2006 to replace a state corporate income tax that had too many loopholes. It was so complex that businesses were given a two year test run in which they had to file state returns but not pay the tax. The tax was actually imposed in 2008.
The proposed Nevada "teacher tax" follows the Texas model except in the Lone Star State the tax rate is only a half percent for retailers and 1 percent for all other businesses, recognizing that retailers generally have narrower profit margins than other concerns.
The picture in Texas is not pretty. At the outset some 18,000 businesses that paid taxes under the old state corporate income tax law ended up owing nothing under the new margin tax.
As a result, revenues have been much less than forecast. The law's definition of "cost of goods sold" differs from the Internal Revenue Service's definition so substantial confusion and even litigation has resulted.
The Tax Foundation has concluded after a 5 years of implementation that the Texas business margins tax has resulted in: "revenue shortfalls and resulting budget problems, severe taxpayer inequity, extremely complex and confusing rules, the creation of a huge bureaucratic state revenue department, penalization of unsuccessful businesses, excessive compliance and administration costs and undesirable incentive impacts."
The proposed Nevada "teacher tax" would impose twice the rate of taxation and offers no concessions to high volume, low margin concerns such as retailers.
The measure is supposed to bring additional revenues to K-12 education but nowhere does it prevent the legislature from deducting the amount of revenues the "teacher tax" raises from its normal allocation to schools and spending that money elsewhere.
I realize that November 2014 is a long way off, but this measure could reverse Nevada business growth and cause devastating job loss. It's never too early to learn.
Jim Clark is president of Republican Advocates, and has served on the Washoe County and Nevada state GOP Central Committees. He can be reached at firstname.lastname@example.org.
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