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Margin Tax Would Drive Nevada Business Tax Rate to Nearly Double California’s

The battle for votes over Question 3 on this November’s statewide ballot — known as The Education Initiative by its proponents, but as the Margin Tax Initiative by its opponents — is escalating.

The Nevada State Education Association managed to gather enough signatures and survive enough court challenges to put before the voters a 2 percent margin tax on all Nevada businesses that gross more than $1 million a year. The union has estimated the tax would bring in $800 million a year in additional funding for K-12 education.

The Coalition to Defeat the Margin Tax Initiative — which is made up of retailers, miners, manufacturers and assorted businesses and business groups — has published a report by noted numbers cruncher Jeremy Aguero of Applied Analysis showing that, if this tax is approved by the voters, Nevada would jump from a state with one of the lowest business tax burdens in the nation into the top five.

When added to the current Modified Business Tax, which is a 1 percent tax on businesses’ payrolls, the 2 percent tax on gross receipts, because of limited deductions for expenses, would give Nevada an effective corporate income tax rate on profits of 15 percent — the highest in the West and nearly double California’s business tax rate of 8.8 percent.

The way the tax works is that once a business exceeds $1 million in gross revenue, it must pay the tax. A business may take one of three deductions: A. A straight 30 percent of revenues, making the tax due on 70 percent of revenue. B. The cost of goods sold. C. Employee compensation up to $300,000 per employee.

Aguero found that on average the tax rate on Nevada businesses would increase 4.5 times, though the rate would vary widely depending on how a businesses is structured and what it can deduct. “With an effective tax rate approaching 15 percent, Nevada’s effective business tax rate would be materially higher than any other Western state, including, without limitation, California,” Aguero reports.

At a recent program put on by the Nevada Taxpayers Association to explain the margin tax ballot initiative, the association’s chairman of the board David Turner, also a CPA, said of the tax, “It’s very convoluted to start. The initiative itself is 31 pages. … Nobody can read the thing and understand what’s really going to be.”

He pointed out the inherent unfairness of the initiative. “This applies to businesses that have more than $1 million in gross revenue. If I had $999,999, I don’t owe this tax,” he explained. “If I get $2 more in revenue, a million and two dollars or one dollar, and I elect the 30 percent (deduction), 30 percent of a million dollars is $300,000 subtracted from a million and that leaves $700,000 subject to taxes. At 2 percent I owe $14,000 for $2 in gross revenue. That’s a big jump. There’s no requirement in the law that you have a net income to pay the taxes. … You may in fact have a loss going in. You’re still going to owe this tax. In that way it appears to me not to be fair. Taxes should be levied on the ability to pay.”

Dan Hart, a spokesman for The Education Initiative, likes to point out that 87 percent of Nevada businesses wouldn’t be subject to the margins tax, because their gross receipts are less than $1 million. What he fails to mention is that nearly 80 percent of Nevada’s small businesses have no employees whatsoever.

Those companies subject to the tax, however, as Aguero points out, “employ the majority of Nevada’s workers and … account for the majority of the state’s economic activity …”

The Taxpayers Association argues that many businesses are already struggling to survive the recession and “this tax may prove to be the proverbial straw that breaks the camel’s back.”

Another argument against the tax is there is nothing to prevent the Legislature and the governor from taking general fund tax money currently going to education and spending it elsewhere, leaving public education with the same or even less funding.

Anti-tax coalition spokesman Karen Griffin notes that “many businesses that sell goods and services in Nevada would pass on their increased costs from the tax to consumers, increasing the costs we pay for food, clothing, health care, electricity, phone bills, and other products and services.”

The tax would negatively affect every household in the state without assuring any improvement in education.

Aguero also found that the tax would cost Nevada consumers $60 million a year in higher premiums for insurance on automobiles, homes, life and health.

(A version of this column appeared recently in The Ely Times, Eureka Sentinel, Mineral County Independent-News, Lincoln County Record and the Elko Daily Free Press. Mitchell also blogs at 4TH ST8.)

Thomas Mitchell

Thomas Mitchell is a former newspaper editor who now writes conservative/libertarian columns for weekly papers in central Nevada and blogs at http://4thst8.wordpress.com/ Twitter: @thomasmnv

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