Questions cloud proposed taxes

September 30, 2002 - A broad, gross receipts tax appears to be gaining the support of Gov. Kenny Guinn's Task Force on Tax Policy.

But questions still loom about exemptions, varying tax rates for different industries, the impact on existing businesses, and the future economic development efforts.

The task force's gave tentative approval for taxes on tobacco, liquor and entertainment that would raise roughly $250 million a year for the state. The next step for the tax panel will be deciding how to implement a gross receipts tax across a broader range of businesses.

The issue of exemptions seems to be a common ground for the panel, while giving varying rates to different industries, a format embraced by Delaware and Washington, is becoming less popular, according to Guy Hobbs, head of the task force.

But to some, different industries need to be taken into account.

Virginia Valentine, senior vice president of government affairs for the Las Vegas Chamber of Commerce, said it will take time to weigh the benefits and consequences of implementing a gross receipts tax. The issue of exemptions and/or industry-specific tax structures could be at the heart of future conversations.

"I think any adjustments you make will start to make it more fair (to all businesses)," she said.

Hobbs is leery of implementing different rates by industry because it "opens the door to every industry telling a story of why it is unique."

In Delaware, the gross receipts tax varies by industry between 0.096 and 1.92 percent. In Washington, singled out as a good example of a workable gross-receipts tax despite the state's $2 billion deficit, has gross receipts taxes ranging between 0.1 and 1.5 percent, depending on the industry.

Under consideration by the Nevada palen is a $350,000 exemption for small businesses and a $40,000 exemption for each employee, according to Jeremy Aguero, principal for Applied Analysis, a local economic research firm that provides technical support to the task force.

A small business with one employee doing $500,000 in sales a year would only pay about $260 a year in gross receipts taxes under that structure, Aguero said.

"That's a figure that is quite diminutive," he said.

Exactly how much even a modified gross receipts tax would impact individual businesses in Nevada is still uncertain. Most experts agree, the tax will impact companies that survive on high volume and small profit margins.

"There's a desire to want to understand those kinds of arguments. Just about any business would come to you and say it will have a difficult time with it," said Hobbs, who added that in the case of two competing businesses in a market sector with low profit margins, "pricing dynamics would maintain the margins."

"One thing about taxes is that you're extracting a certain amount of money from the overall economy, and nearly all the time (the tax) gets pushed to the back end of the transaction," he added.

But Keith Schwer, director of the UNLV Center for Business and Economic Research, said there is a significant difference between taxing the bottom and top lines.

"There are decidedly different equity impacts between the (corporate profit and gross receipts taxes)," he said, adding that companies teetering at a break-even point could be pushed out of business with any new tax.

"Any tax on any marginal firm likely will drive them out," he said.

"There are winners and losers with a gross receipts tax," added Brett Sheckler, a project manager with EcoNorthwest, an economic research firm in Washington and Oregon.

Sheckler agreed.

"Industries with higher profit margins are winners and smaller profit margins, like auto dealerships and some other retailers, gross receipts becomes more of a burden," he said.

Another concern is the impact of new taxes on the state's ability to attract new businesses.

Aguero said gross receipts tax will not make Nevada any less competitive in attracting new companies.

"I think that when you compare Nevada to any other state in the union as far as what it costs to do business here, we are the lowest by far," he said.

Not everyone agrees.

"On the downside, industries hit hard will find it less attractive to locate to Nevada," Sheckler said.

Valentine said if a true gross receipts approach, without exemptions or varying rates, is taken, it will probably discourage start-up companies or certain companies from coming to the state.

Beyond the tax issue, Hobbs said, the state needs to provide more "tools" to those involved in economic development to help them do their jobs.

Hobbs suggested access to venture capital for new companies, getting the state more involved in the courting process, and the enhancing abatement and waiver programs.

He said the state needs to disassociate taxes from providing these benefits and take the time to "see where it stands" on economic diversification, an area he believes the Nevada has not made a strong commitment to in the past.

"We still should be competing well (despite having a tax). The stigma isn't a big enough issue to upset the apple cart," he added.

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Article Copyright ©: B. Sodoma, LV Business Press