One Sound Nevada Proposal: Pro and Con

(Patrick Gibbons/Nevada Policy Research Institute) – Geoff Lawrence’s recent tax study, “One Sound State, Once Again,” does an excellent job highlighting the true volatility of Nevada’s taxes and provides great recommendations on how to move forward.

Geoff’s revenue-neutral tax plan calls for the expansion of the sales tax to all goods and services but drops the rate from 6.85 percent to 3.5 percent. The punitive Modified Business Tax and the Insurance Premium Tax are also repealed.

Geoff also calls for tax rebates to help defray the cost of the sales tax on necessities.

Finally, the plan calls for an overhaul of the budgeting process so it is more realistic, focuses on priorities, and uses competitive bidding to get the best prices in order to provide essential state services.

The plan has garnered praise from the right and left – from Chuck Muth and Elizabeth Crum to Jon Ralston. The plan also has its critics from the right and left – from armchair pundits on the internet to Launce Rake of the Progressive Leadership Alliance of Nevada. Each group has its own concerns, which can be laid to rest with a deeper understanding of Geoff’s ideas.

Some complaints from the right:

1) Revenue-neutral plans aren’t good enough; we need tax cuts.
2) The government will just raise the sales tax later, and we will be worse off.
3) This plan does nothing to address out-of-control government spending.

True, tax cuts and smaller government would be good things, but we are in a political climate where the government just implemented one of the largest tax hikes in state history during the state’s worst recession. Going from record-shattering tax hikes to slashing taxes and cutting budgets overnight? Unless the legislature is turned upside down, don’t count on it.

As for raising the statewide sales tax in the future, what’s to stop legislators from raising other taxes again? They’ve already passed two record-breaking tax hikes in this decade alone. Changing the tax code to a more efficient and less volatile system still requires vigilance against big, greedy government. That will never change.

The final complaint, regarding controlling excessive government spending, shows that critics either missed the fact that Geoff recommends spending limits tied to population growth plus inflation, or they don’t believe such a policy would pass (and it might not). Geoff also proposes changing Nevada’s budgeting methodology. Current budgeting plans always assume we need more spending and make no differentiation on needs or priorities. Changing the budgeting process to be more realistic and efficient, and to focus on priorities and use competitive bidding will go a long way toward reducing government expenditures over time.

Opposing a revenue-neutral tax policy that would avoid the extremely volatile corporate income tax hike (which will just encourage the government to call for more taxes later) just because spending limits and budgeting plans might not pass is about as smart as shooting yourself in the foot. Without some kind of reform, you are guaranteed a tax hike!

Politics is like trench warfare, or football – it is a game of inches. Battles of ideas are fought and won over long periods of time as the evidence continues to mount and the public begins to understand.

The Nevada Legislature and many Nevadans still stubbornly believe we need a corporate income tax to decrease the volatility of the tax structure. As Geoff’s quantitative analysis demonstrates, the corporate income tax would actually increase tax volatility. We would be worse off if we had a tax structure like that of California or Arizona. It will take time for some to understand these facts (and others never will because their end-goal is always more taxes).

If you truly want limited and more efficient government, attacking a plan that provides the facts and alternatives necessary to dismantle Big Government’s latest tax fantasy isn’t very bright. Finally, conservatives and libertarians have to be realistic and remember not to make the perfect the enemy of the good.

Left-wing complaints:

1) A broader sales tax would hurt the working poor.
2) Corporations don’t pay their fair share.

Left-of-center pundits like Launce Rake of the Progressive Leadership Alliance of Nevada believe Geoff’s plan will hit low-income people the hardest. While it is true that sales taxes are regressive because low-income people spend a disproportionate amount of their income, Geoff accounts for this by offering a tax rebate to defray the cost of the sales tax.

Geoff also takes into account the need for a simple tax code that doesn’t treat goods and services differently. Tax codes with different rates for different products are complex and often distort consumer preferences. Government has no business trying to influence people as to what goods and services they should and should not buy. Furthermore, over time, government tends to exempt more and more things for highly connected and privileged citizens – this is why the federal income tax has exemptions for people who bought certain stocks between one year and the next.

Next, the oft-repeated claim that corporations don’t pay their fair share (what is a fair share, anyway?) stems from ignorance about how corporate taxes actually work.

With corporate taxes, corporations merely serve as middle men, collecting revenue from consumers and giving a portion of the revenues to their workers, shareholders and the government. When the government raises corporate taxes, the corporation can pay the tax in one of four ways (or a combination). It can a) raise prices, b) decrease wages, c) decrease employment or d) decrease dividends for shareholders.

Corporations are most likely to raise prices, decrease wages and reduce the amount of employees when faced with higher income taxes. Thus corporate taxes are merely a hidden and regressive tax on the people. The left seems eager to ignore this fact, perhaps due to an overriding distrust of the private sector – thus faith in government replaces facts and reality.

Geoff also notes that a value-added tax (or VAT – a disgustingly complicated and regressive tax that the Left loves because it is hidden in the price of goods) or gross-receipts tax (a tax instrument created in the mind of some sinister politician) would exacerbate Nevada’s unemployment problems. Both are favored by the political Left.

Additionally, as Geoff’s study points out, the corporate income tax would result in more tax volatility. The only reason you would advocate a corporate income tax is because you just want the government to have more money. Any other excuse is pure hogwash.

The political left needs to remember that the end goal of politics is not simply more government and higher taxes. If you are the “party of government,” at the very least you should advocate government that functions properly. Introducing the best elements of the private sector – to replace some inefficient and unaccountable elements of government – is a smart way to ensure that quality services continue at a reasonable price taxpayers can afford.