Jim Clark: Business margin tax proposal deeply flawed
What’s in store politically for Nevada in 2014? Incumbents and would-be candidates are fundraising, testing the waters and will continue to do so until the deadline for filing in March of next year.
It’s pretty certain Gov. Sandoval will run for reelection. So far there has not even been a hint of whom the Democrats plan to run against him. Two Washoe County commissioners are termed out so we will have some new blood in county governance.
Perhaps the most interesting and potentially game-changing political struggle is not a candidate for office at all but an initiative measure which will be on the November 2014 ballot.
The so-called Education Initiative is a proposal by the Nevada State Education Association (teacher union) to enact a 2 percent modified gross receipts tax on Nevada businesses (note: not on net earnings but on an arbitrary measure of gross income).
How it works: Gross business revenues earned in Nevada, if $1 million or more, are first converted to a taxable margin by subtracting the greater of: cost of goods, personnel costs or 30 percent of gross receipts (the last option is euphemistically referred to as the “standard deduction”).
The remainder is subject to a 2 percent tax. A credit is allowed for any payroll business taxes paid. The initiative provides that taxes raised under this proposal will be deposited to the State Distributive School Account to be spent on education. Unfortunately, the plan is deeply flawed.
Will all the money raised help fund education? Not likely. There is no requirement that all present sources of K-12 revenues remain constant so it is likely that legislators will simply divert an amount equal to funds raised by the margin tax to other needs (Medicaid for example) leaving education funded at historic levels.
How about the tax itself? First of all the formula is unfair. The measure will tax some industries much more than others because of the cost of goods/personnel costs/30 percent exemption choices.
In Texas, the only state where this tax is imposed, agriculture pays twice as much as construction and wholesale/retail trade because of the arbitrary choices of exemptions. After agriculture the next most severe impacts are on mining, utilities, transportation and information technology.
Other problems: The tax is complicated and would require creation of a Nevada IRS; it compounds in the manufacturing process increasing costs at each stage of manufacture and marketing; it is punitive to businesses approaching the $1 million threshold in gross revenues by penalizing expansion; the tax could be imposed on firms that are losing money; although gaming winnings are exempted casino income from room rentals, restaurants, entertainment and all other sources would be subjected to the margin tax; out of state firms would have their Nevada earnings taxed; and, moreover, gross revenues of separate businesses with common ownership or management would be cumulated for purposes of assessing the tax.
This measure would be certain to cost Nevadans jobs at a time when our unemployment rate is among the highest in the US. According to one study it would make Nevada the fifth highest tax state in the union. It would discourage new businesses from locating in Nevada. Finally mobile firms such as Microsoft and Apple would be packing and moving to Wyoming.
So if, on balance, the proposal will not increase education funding in Nevada and will have all of the adverse business results listed above, why would the teacher union be sponsoring this measure?
Maybe they need to recalculate.
Jim Clark is president of Republican Advocates and has served on the Washoe County & Nevada State GOP Central Committees; he can be reached at firstname.lastname@example.org.
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