Margin Tax On November Ballot Bad Policy, Bad For Business

(Carole Vilardo) – Nevada voters will be asked to decide in November whether they support the margin tax initiative, a gross revenue tax on businesses that, if passed, would leave the Silver State with one of the worst business tax burdens in the country.

Many Nevadans have yet to hear of the margin tax initiative, and plenty of supporters of the measure do not understand the effects of this poorly written ballot question. I have been involved in Nevada tax issues since the early 1970s, first as a business owner and then through the Nevada Taxpayers Association. For these reasons, I feel compelled to clear up some misinformation about the initiative.

First, the margin tax is not a tax on profits. It would levy a 2 percent tax on businesses with gross revenue of more than $1 million per year — even if none of that revenue is profit. Unlike business income taxes, which are based on profit, the margin tax would be levied even when businesses post no profit or operate at a loss. Many businesses with small profit margins would see their entire profits wiped out if the margin tax initiative were to pass.

Proponents of the initiative claim the measure’s $1 million gross revenue threshold protects small businesses. Not true. In reality, the initiative’s complex calculation of total revenue would put many smaller businesses over the $1 million threshold. These businesses include many franchise owners, independently owned gas stations, small retailers and service providers, medical clinics, ranches, farms and a host of other businesses.

Furthermore, a business that posts revenue of just $1 over $1 million would be liable for taxes on its entire revenue ($1,000,001), not just the $1. There is no exemption for a business’s first $1 million in revenue, thus creating a “fiscal cliff” for business owners where just one additional dollar in revenue would trigger $14,000 in tax liability (based on the 30 percent expense deduction). For businesses struggling to keep their doors open, this tax may prove to be the proverbial straw that breaks the camel’s back.

Proponents of the proposed tax titled it the “Education Initiative.” However, the language of the initiative never once uses the word “education.” By contrast, the word “margin” is used 32 times in the initiative language. The initiative provides no requirement for increased education funding. Even if revenue from the tax ended up going to education, there is no accountability in the measure as to how the money would be spent and no assurance that the money would get to Nevada classrooms, where it would benefit students.

Imposing this tax would result in Nevada businesses having one of the highest business tax burdens in the nation by any measure: per capita, per $1,000 of income or as a percentage of state gross product. This would have a chilling effect on our state’s fragile economy. It would be difficult, if not nearly impossible, for existing businesses to expand. The tax would stifle efforts to bring new businesses and jobs to Nevada.

The initiative would create a litany of problems, and Nevada law would prohibit the Legislature from making any changes to the measure for at least three years. For example, the lack of conformity with federal tax law would create additional compliance burdens and costs, particularly for small businesses. There is a lack of specificity for certain businesses, such as transportation and service providers, as to how they would calculate their Nevada margin tax liability when they also do business in other states.

To protect jobs, continue on the road to economic recovery and see success with our economic diversification and development efforts, it is important to vote no on this deeply flawed measure.

(Carole Vilardo is president of the Nevada Taxpayers Association. This column was originally published in the Las Vegas Review-Journal on February 16, 2014)