Suit calls teachers' tax petition unconstitutional

A coalition representing hundreds of Nevada businesses filed suit Monday to block a vote on the teachers' union ballot question imposing a statewide business tax.

The suit by the Nevada Pro-Education Alliance charges that the proposed 4 percent tax on business income is a flawed, unfair and thinly disguised personal income tax, which is barred by the Nevada Constitution.

"The provisions of the legislation proposed by the instant initiative are unconstitutional to the extent that they set forth a de facto personal income tax or a direct personal income tax or an indirect personal income tax in Nevada," according to the complaint filed in Carson District Court Monday afternoon.

The coalition includes a long list of individual business owners as well as the Carson City, Douglas, Las Vegas, Greater Reno and other chambers of commerce, the Nevada Taxpayers Association, Associated General Contractors and Nevada Association of Employers.

Carson Chamber Director Larry Osborne said the coalition represents hundreds of businesses statewide.

The initiative proposed by the teachers union would impose a 4 percent tax on all businesses in Nevada reporting more than $50,000 income on their federal tax returns. The plan would mandate the estimated $250 million a year from that tax go to public education.

The suit was filed late Monday and the teachers union had not yet been served.

It was certified for the ballot by the Secretary of State's office last week with more than 63,000 signatures.

Tax expert David Turner of Turner, Loy and Co. in Reno said the initiative is "very ill drafted." He said it would impose a personal income tax on some business owners while letting others totally escape the tax - all depending on how the business was structured legally.

He said, for example, a small corporation that pays out all its income to the owners as salary would pay no taxes under the plan while a sole proprietor would be taxed because "whatever your business made is your income."

Some corporations, he said, would not have to pay on gains or losses from the sale of assets while others would, depending on their structure.

He said teachers claim that estates and trusts don't pay.

"Well, if the estate or trust operates a farm or business, it gets hit," he said.

The plaintiffs in the lawsuit include small-business owners around the state who the complaint says would be effectively subjected to a personal income tax if the initiative becomes law.

"Even if it doesn't rise to the level of an unconstitutional income tax, it's an extremely unfair tax," said Turner.

The complaint also challenges the collection and verification of signatures, the secretary of state's handling of the petitions and argues that enacting the plan would violate the constitutional requirement that any mandated appropriation provide the cash to do the job.

That specifically refers to the provision in the plan requiring that the state spend at least half its general fund on education each year. That requirement is separate from the business tax and would require public education's share of the general fund increase by 12-14 percent. Without a specific source for that money, it would have to come out of other state agency budgets.

The complaint charges that hundreds of residents sent in cards demanding their names be taken off the initiative after changing their mind but that county clerks ignored those "rescission cards."

According to the complaint, there were enough of those cards to deny the petition certification in Douglas, Pershing, White Pine, Elko and Lyon counties. Along with Eureka County where the petition failed, that would leave just 11 counties where the petition received enough signatures.

In that case it would fail to get on the ballot because Nevada's initiative process requires certification in at least 13 of the 17 counties.

The complaint says many of the petitions were submitted with "numerous signatures crossed out, X'ed out, blacked out or otherwise tampered with." It says Nevada law requires that all those documents be declared invalid and the signatures on them deleted from the total.

The complaint also charges that the Secretary of State's Office was unreasonable in how it handled the certification process, denying the coalition access to the petitions and records needed to challenge initiative until there were only five days left to prepare a challenge. Lawyers for the coalition nonetheless managed to prepare a two-inch thick sheath of documents by the deadline.

The lawsuit asks district court to declare the proposed legislation "unconstitutional in its proposed form and that there is no way it can be constitutionally enacted as an unconstitutional personal income tax which is constitutionally prohibited in any form in Nevada...."

It asks the teachers' proposal be declared "constitutionally infirm and defective" because it fails to provide the revenue needed to meet its mandates - specifically the 50 percent of general fund.

The suit asks that the wishes of all signers who later decided they want their names taken off the petition be honored and that defective, marked up and defaced petitions be removed from the totals.

It asks the court to order the Secretary of State to decertify the petition and pull it from the ballot and says the businesses have no other option except declaratory relief because of the short time remaining before the election.

Osborne said the coalition was named the Nevada Pro-Education Alliance because its members intend to bring forward their own educational reform package for the Legislature to consider.

If the petition reaches the ballot and is approved by voters, it would be presented to the 2001 Legislature. If the Legislature refused to enact the plan as approved by voters, it would go to the 2002 general election for voters to make it part of the constitution.

Teachers, however, have said they will sit down and work with lawmakers to find a compromise.