On Jan. 31, the Nevada Supreme Court reversed a lower court decision and reinstated the “margins tax” petition sponsored by the state’s teachers’ union. As a result, the proposed tax likely is to be on the 2014 general election ballot.
The Texas experience
Texas adopted a margins tax in 2006 with its effective implementation in 2008. There were five goals of the Texas experiment: fairness, broad based, modern, understandable and competitive. None has been achieved. The tax falls disproportionately on different types of businesses, with businesses with high labor costs, like law firms, paying little, while those with low labor, like money managers, paying significantly more as a percentage of their revenue. The tax turned out to be extremely complex with high enforcement issues and complex tax forms to fill out. Finally, the tax discourages businesses from relocating to the state.
The 2011 Nevada Legislature
In the 2011 Nevada legislative session, a “margins tax” was proposed to take the place of the current “modified business tax,” a tax currently on payrolls. Because of the failure of this tax in Texas, the effort had so little traction that it never even was brought up for a committee vote.
In Texas, the tax rate is 1 percent on “taxable margins” with some select industries paying only 0.5 percent (they had better lobbyists). The first $1 million of revenue is exempted. In the 2011 Nevada legislative session, the proposed rate was 0.8 percent, with the first $1 million of revenue exempted. And, remember, it was supposed to replace the “modified business (payroll) tax.” But, as it likely will appear on the ballot, the tax rate suddenly has shot up to 2 percent and, unlike the original proposal, the “modified business tax” remains. The proposed Nevada tax, like the one in Texas, defines three options from which businesses can choose:
• Total revenue minus cost of goods sold (in Texas, there is a huge controversy as to what “cost of goods sold” includes); or
• 70 percent of total revenue.
Dangers to Nevada’s economy
It is important that voters understand this tax before they go to the polls. It is often the case that voters will vote for a tax that they don’t think will impact their own pocketbooks. And, the advertising for this tax is sure to position it as one needed for K-12 education. Unfortunately, there is no guarantee there will be more K-12 funding if the tax is passed as the Legislature will be able to reduce existing funding if it so chooses, spending that money elsewhere.
The “it won’t impact me” perception, however, is inaccurate, as the passage of the tax could significantly and negatively impact economic growth prospects for the state, something that impacts every citizen’s wages and benefits and job prospects. The passage of such a tax likely is to destroy any hope that Nevada can become a haven for high tech, other high margin or nationally recognized companies.
Braeburn Capital is a Reno-based subsidiary of Apple. It was created in 2006 to manage Apple’s considerable stash of cash (currently about $65 billion) to avoid California taxes. I have no direct knowledge of the size of the assets that Braeburn manages, but let’s just assume that it is $10 billion of Apple’s considerable stash. A 6 percent annual return would mean $600 million in revenue, which, using the 70 percent of revenue election and a 2 percent tax rate, translates into $8.4 million in taxes. Since it fled California due to taxes, there is a very real risk it also will flee Nevada.
Warehousing companies like Amazon.com and Barnes and Noble, already here, likely will look elsewhere. Microsoft has its licensing division in Reno. Intuit has a similar division, as does Oracle. And, think about the money managers and hedge funds on the Nevada side of Lake Tahoe. Licensing, money management and hedge funds are businesses with small staffs and no cost of goods sold component. With 70 percent of the revenue subject to a 2 percent tax, management likely is to take notice.
Conclusion
The “margins tax” has been an abject failure in Texas. The same tax proposed for Nevada is more than twice as high, and more than double what was proposed in the 2011 Legislature. It is likely to drive out high-margin businesses. The tax burden will fall upon the middle class via lower pay and benefits and reduced job opportunities. Worse, for the next two years, because the tax is on the ballot, businesses that might have considered Nevada as a situs now will be looking elsewhere.
No doubt the tax regime in the state needs an overhaul. The margins tax will just make the current tax system worse. How about a broad-based consumption tax? That would satisfy all of the five broad and desirable goals that Texas originally sought. The Legislature should think about that.
Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs. Call them at 775-284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.