(Michael Chamberlain/Nevada Business Coalition) – A major pillar of the Democrats’ Reconstructing Nevada budget proposal is the imposition of a Margin Tax, or Modified Gross Receipts Tax (MGT). Their stated intent is to create a business tax that is more fair, is broad-based and will stabilize revenues through ups and downs of the business cycle.
The Tax Foundation today issued a report ravaging the MGT. According to this document, evidence from other states that have enacted similar legislation indicate the MGT will accomplish precisely the opposite of what its proponents intend.
As Senate Majority Leader Steven Horsford wrote recently in the Las Vegas Sun,
Our approach updates Nevada’s outdated tax code, creating a fair and stable system.
Except that it won’t. History, as the Tax Foundation reveals, has shown the MGT-style taxes to be anything but fair and stable.
In recent congressional testimony, we commented that the tax is “dying,” “killed off by thousands of credits, deductions, abatements, and incentive packages.” By our most recent count, 29 states offer resident businesses credits from state corporate income tax if the resident business engages in research and development, new job creation, or new investment. Many states also adopt a calculation to divide up interstate income that ignores in-state payroll and property.
These trends suggest that if Nevada were to adopt a corporate income tax, policymakers would immediately face enormous pressure to reduce its burdens with targeted tax incentives, pressure that in other states has led to a hollowing-out of the tax. Nevada would gain the administrative and compliance costs with a new major tax, the political wrangling over targeted tax incentives that plagues other state legislatures, and a tax notoriously volatile and subject to tax avoidance planning.
The potential for manipulation of rates by politicians, of which the report documents many, is something that is quite harmful to the economy but is quite attractive to the politicians themselves. This provides myriad opportunities to reward favored businesses and industries.
The ability to offer incentives grants politicians the power to intervene in the economy and have a hand in selecting winners and losers. Powerful politicians are able to grant more favorable terms to particular businesses and industries that provide them with advantages over competitors or substitutes.
The more complicated the tax code the more it will distort the market. The more complex the tax code, the more susceptible it is to exploitation. It will also create incentives to businesses to engage in less-productive but more tax-advantageous activities. One company’s incentive is another company’s loophole.
The Tax Foundation report also pours cold water on the claims that such a tax will stabilize revenues.
The volatility of corporate income taxes cannot be overstated. As the table below shows, corporate income taxes have proven to be the most volatile of the major taxes, as measured by year-over-year revenue changes (see Table 5). [Table in linked report – ed.] Additionally, an important study released in 2008 by the Organization for Economic Cooperation and Development (OECD) found that of the various taxes a country can impose, “Corporate taxes are the most harmful tax for economic growth.”
The Tax Foundation unequivocally warns of the dangers of the MGT.
There is no sensible case for gross receipts taxation, or modified gross receipts taxes such as a Texas-style margin tax. The old turnover taxes—typically adopted as desperation measures in fiscal crisis—were replaced with taxes that created fewer economic problems. Gross receipts taxes do not belong in any program of tax reform.
Far from solving the problems of the previous corporate franchise tax, the margin tax seems to have only aggravated them.[Emphasis mine.]
The report discusses problems with pyramiding – the tax compounds itself at every level as goods move through production. It also points out that the MGT in Texas has failed to produce revenues in line with projections. It concludes,
As the economy improves, the state is well positioned for capital investment and job creation.
This is an advantage that Nevada should be careful not to jeopardize. A corporate income tax and, in particular, a gross receipts tax, would do significant harm to the state’s tax climate. As Nevada policymakers consider fiscal options through 2011, they should keep this in mind.
Eliminating Nevada’s Modified Business Tax (MBT) is a worthy goal. But replacing the MBT with the MGT, as the Reconstructing Nevada proposal does, is a case of replacing one extremely bad idea with one very bad idea. As this study reveals, the MGT will perform exactly the opposite as intended.
(Michael Chamberlain is Executive Director of Nevada Business Coalition.)