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Wanna Talk Tax Restructuring? OK, Let’s Talk

A recent editorial by the Reno Gazette-Journal maintained that “Nevada is in about the deepest (economic) hole in the country precisely because it has relied almost solely on a couple of industries that we now know are reliably unreliable to provide jobs for its citizens and support government at every level. Can’t we at least talk about the tax structure?”

The paper then noted that “a recession is no time to raise today’s taxes…but a recession is an excellent time to talk about tomorrow’s taxes,” concluding by asking, “If we can’t talk about the tax system now, when will we talk about it? This should be the year the Legislature begins the conversation.”

Reserving the right to disagree with the very proposition that our current tax system is inadequate and needs to be “broadened,” this is a conversation conservatives not only should be open to having, but eager to have. So let’s begin.

Jon Ralston, Nevada’s dean of political pundits, recently wrote that “to argue, as (Gov. Brian) Sandoval does, that solving the short-term (budget) math problem cannot occur coincident with a discussion of broadening the tax base and making Nevada an attractive place to live is myopic.”

First, I have to disagree with Jon that Nevada isn’t an attractive place to live. Plenty of us are perfectly content living in Nevada, while plenty others are still moving here. Seriously…if you don’t like the tax structure here, give the people’s paradise of California a try. They got taxes on just about everything under the sun over there!

That said, Jon is correct that discussing the current budget situation concurrently with discussions about broadening the base is certainly doable.

Although Gov. Sandoval is sticking to his campaign promise not to raise taxes or fees, that does NOT preclude him from considering some kind of tax restructuring of Nevada’s tax base as long as it’s done in a revenue neutral fashion.

And the revenue neutral idea with the best, perhaps only, chance of actually passing has been prominently proposed by the conservative Nevada Policy Research Institute (NPRI): Expanding the existing sales tax to certain services.

This idea has the benefit of applying to both tourists and locals, as opposed to, say, increasing room taxes where we’re only screwing the very people we need for an economic recovery.

And there probably is something to be said for the fact that Nevada’s new economy is, indeed, based on providing services more so than products. So maybe it does make sense to consider being a bit “flexible” as far as changing with the changing times. (Hat tip: Bill Raggio)

Another benefit of a sales tax expansion is that it’s simple to understand and collect. No new over-bearing, complicated IRS-like tax collection regime need be created.

On the down side, the NPRI proposal includes extending the sales tax to certain food items. Politically speaking, that idea is DOA. No way, no how, the Nevada Legislature is going to pass a tax on groceries, even with a rebate component, especially in this economic climate. Just ask Pete Goicoechea.

As for Nevada’s two primary industries, mining and gaming, they would prefer to screw other businesses (or each other) with a new business tax so as to spread the corporate pain rather than expand the sales tax. But with unemployment running around 20 percent, there should be no appetite to do anything that might discourage any business from expanding and hiring, especially small businesses.

In fact, now would be the perfect time to repeal completely the stupid “Modified Business Tax” which penalizes employers for hiring employees. (Who’s “brilliant” idea was that again? The Chamber of Commerce?)

The other down side to a new business tax – corporate income or gross receipts – is that it’d only be a hidden tax on consumers anyway. Businesses aren’t in the business of making less money. If the government takes money from them, they’ll just increase the cost of their goods or service to make up the difference.

Of course, there’s the argument that big chain retail stores such as WalMart, Target, CVS, Home Depot and Costco will be able to absorb the cost and spread it around the region or country so as not to charge more for a hammer in Reno than they charge in Riverside. But make no mistake; for purchases in retail stores other than the big chains, the back-door tax hike WILL be passed on to Nevada consumers as sure as night follows day.

So the only tax reform/broadening measure which would appear to have a ghost of a chance of passing would be an extension of the sales tax to certain services while simultaneously lowering the sales tax on products.

To keep this idea simple so that even a union boss can understand it, instead of taxing only products at, say, 8 percent, we’d lower the tax on products to, say, 4 percent while simultaneously extending the 4 percent tax to certain services. Comprende?

The key to making the proposal truly revenue neutral, and thereby not violating anyone’s pledge not to support a net increase in tax dollars going to the government, is to determine what the rate of taxation for the combination of products and services needs to be to generate the same amount of revenue as is currently being generated strictly from the sales tax on goods. That way there’d be no net tax hike on consumers.

Now here’s the down side, and legitimate beef, conservatives such as myself would have with this proposal: Down the road, once government wishes to grow again (and it will!), legislators will pass a sales tax hike which will then apply to both product purchases AND service purchases. And before you know it, we’ll be back at 8 percent for both products AND services.

Which is why any such tax reform measure to broaden the sales tax MUST be comprehensive – and by that I mean it MUST include serious spending and tax restraints that conservatives MUST insist on before signing off on any such “broadening” proposal, including….

1.) To minimize the need for future tax hikes, increases in future general fund spending must be limited to a hard cap of no more than the combined rate of inflation and population growth from one budget cycle to the next.

2.) All tax increases placed on the ballot by the initiative process must receive the same 2/3 super-majority vote of the people as is currently required to pass tax increases in the Legislature.

3.) Since education eats up over half the state’s budget while most of our public schools are mediocre at best – and because the tax hikers insist that improvements in education are necessary to attract new, diverse businesses to the state – a program of universal school vouchers given directly to parents must be adopted. That way, businesses considering a move to Nevada will know that their employees will have the ability to opt out of the public schools and place their kids in private schools if the public schools here still suck.

We should also throw in some serious PERS/PEBS reform, along with a repeal of collective bargaining for local government employees. Such reforms would make a vote to expand the sales tax to services much more palatable, and would benefit the citizens of Nevada, as well.

Now here’s the kicker….and the reason why NOW is the time to make this change if we’re ever going to.

Nevada’s economy isn’t likely to pick up significantly while the Legislature is in session over the next five-six months. But it will improve eventually. Things will get better. People will start to find jobs. People will start vacationing in Nevada again. People will start buying stuff and spending money again. On products and services.

So if the Legislature passes a revenue neutral tax reform bill that expands the sales tax to services effective July 1, 2011, when the economy inevitably picks up, sales of both products and services will increase, as will the tax revenue from the sales of both products and services, without raising the overall tax rate.

Our recovering economy will automatically result in more tax revenue going to the state. At which point the Left will demand that we spend it and the Right will demand that it be rebated. But that’s a discussion we can have another day. For now let’s stick with tax restructuring this legislative session.

But if that discussion is just a disguise and ruse for raising taxes to pay for more government, it’s gonna be a VERY short conversation.

Let me close with this thought and challenge.

Many on the Left are criticizing Gov. Sandoval for being “inflexible” and “painting himself in a corner” because he has taken tax and fee hikes off the table. Fair enough.

But in the interest of fairness, I urge those same critics to be just as critical of those who demonstrate similar inflexibility on this tax restructuring issue by painting themselves in a corner by insisting that any discussion of tax restructuring MUST include tax and fee hikes which are not revenue neutral.

After all, what’s good for the goose should be good for the gander, right?


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