This fourth column on the Controller’s Annual Report (CAR) analyzes state taxes. Nevada collected $5.523 billion in taxes in fiscal year 2017, which was 41 percent of total state revenues. As discussed in our previous column, program revenues made up 56 percent, with miscellaneous items at three percent.
The largest tax sources were sales and use taxes ($1.285 billion or 23 percent of general revenues of $5.895 billion), gaming taxes ($897 million or 16 percent) and unemployment assessments ($825 million, or ten percent). All other taxes totaled $2.516 billion, or 43 percent).
There is no definitive right level of taxes relative to incomes and the economy. However, as discussed in the CAR, the overall level of state and local spending in the U.S. has long been well above public-interest levels, yet still rising. In Nevada, local-government taxes are the really big problem (due to high spending and pay), and state taxes a somewhat lesser problem.
Regarding trends, the CAR shows the following.
The burdens on consumption and on persons of state taxes declined in the last decade. Revenues from the following key taxes fell significantly relative to the growth in incomes: sales and use, gaming, property, motor and special fuels, and other minor items. The incidence of these declining tax revenues lies greatly with consumption, not with savings, investment and employment; and on persons, not businesses.
To compensate for this decline, the state added new levies and increased taxes mainly on savings, investment and employment and on business. It did so via the modified business tax (MBT, which mainly taxes employment) and unemployment assessments; also, partly via the commerce tax, levies on auto leasing, lodging and insurance premium taxes. The large hike for unemployment assessments, was driven mostly by federal mandate.
So, the growth of total tax burden is trending down, but that trend masks a shift of burden from consumption to savings, investment and employment; and from persons to business.
Claims have been made that repealing the commerce tax, as we and others have proposed, would cause significant harm to K-12 education. Also, that people seeking repeal should state what spending they will cut if the tax is repealed. These claims are wholly false and misleading.
There’s no direct connection between commerce tax revenues and state K-12 spending. Commerce tax revenues flow into the general fund, not an education account.
Also, the Legislative Counsel Bureau has determined repealing the commerce tax, considering that it reduces MBT revenues, would cut revenues by $161 million in the first year and $97 million in the second year. These figures are one-fourth and one-seventh, respectively, of the annual growth in state revenues, which are growing faster than the Nevada economy.
Hence, eliminating the commerce tax would only require that state total spending grow at about the rate of the incomes of Nevada families and businesses. It would not require any cuts at all in current spending for education or otherwise.
The shift in tax burden from consumption to investment and employment and from persons to business diminishes tax neutrality. Neutrality is important because maximizing economic growth and fairness requires that taxes influence as little as possible the spending-versus-savings, investment and employment choices people and firms would make without them.
The choices people would make in markets without taxes would maximize economic growth and also maximize aggregate human wellbeing and fairness, the fundamental public policy goals. Since individuals overwhelmingly use their dollars for consumption versus savings and investment, and businesses spend much of their revenue on goods and services, taxes should fall mainly on consumption of goods and services, and less on savings, investment and employment.
The shift in tax burden from consumption to investment and employment and from persons to business also diminishes transparency. Transparency is fostered by taxing people, not business; as economists note, businesses don’t so much pay taxes in the sense of actually absorbing their economic burden as they collect them for the government from consumers via increased prices and from employees by lower employment and compensation.
With ten taxes accounting for four percent to 23 percent each of general revenues, and considering their incidence mainly on persons and consumption, Nevada’s tax base can be called reasonably well diversified.