Kate Marshall & Eliott Parker: The State of the State budget

Almost eight years after the start of the Great Recession, our economy is growing again, and yet the Economic Forum tells us we are in another budget hole.

State revenues are below projections, we’ve eaten into our required 5 percent reserve, and all $28 million in the Rainy Day Fund is going to be drained. The budget office has desperately scoured all of its accounts, and has proposed sweeping them of money to get us through the fiscal year. Moreover, we appear to be short of money to pay for education at our currently budgeted rates.

Meanwhile, we are one of the last states in the union with state employees still required to take unpaid furloughs, and we have the fewest state employees, relative to population, of any state in the union.

At 2.4 percent of Gross State Product over the last three years, or roughly $1,170 per resident per year, our state general fund is among the smallest in the nation. If we add in state spending financed by federal funds, other state funds, and bonds, the total rises to 6.5 percent of Gross State Product, the lowest of any state. Our budget remains significantly below the cap written into NRS 353.213 by the Legislature in the late 1970s, a cap that indexes the budget of the time for population growth and price inflation without adjustment for the changing needs of the state.

Including our cities and counties, and we are dead last in our share of public education employees, including school teachers and professors, and we spend the least per resident on public education.

Ever since Gov. Bob List shifted the state from property taxes to sales taxes, every governor has had to cope with a budget crisis. Three-quarters of Nevada’s state government revenue now comes from one kind of sales tax or another, including the tax on gaming win. Few states have a higher share. By contrast, we are one of only seven states with no individual income tax, and one of only six states without a corporate income tax — and three of those six have an alternative tax on business income.

The economy is diversifying, but this is not going to solve our boom-bust budget without legislative focus. While we are striving for a Tesla-driven, Switch-powered, solar-paneled economy, our state’s revenue structure still is riding a sway-backed mare more than 30 years old.

In reviewing our budget, Gov. Brian Sandoval and the Legislature might consider the following:

First, the gaming sector’s past success means that gaming has now spread nationwide and overseas. Thus, a good question to ask is whether revenues related to this sector should remain a mainstay of our state budget, as our cash cow no longer provides as much milk.

Second, property taxes are capped, and while this primarily impacts city and county governments, this leaves the state on the hook for school funding obligations when local governments come up short. Capping property taxes for primary residences is a blessing for Nevada’s homeowners, as many still are faced with declining wages and increasing health care costs, but the Legislature should look into whether some major corporations are using the peculiarities of the property tax formula to pay less than the Legislature intended.

Third, inequality is baked in. Our tax structure means that middle class families in Nevada pay a much larger share than the rich. It’s estimated a Nevada family earning $40,000 per year pays around 9 percent of their income in state and local taxes, while a family making $800,000 only pays around 2 percent. In Utah, another fiscally-conservative state, the top 1 percent would pay around 5 percent, though still below the national average.

Fourth, the budget still is Internet-challenged. States that rely on sales taxes have watched their revenues slip away even as sales grow, because many of those sales take place on the Internet. In spite of recent negotiations to capture some of these sales, brick-and-mortar stores and the customers who support them still bear most of the tax burden. Similarly, our economy has become more reliant on the sales of services, most of which are not taxed.

Nevada is coming of age. This gives our governor and legislators the opportunity to review the tax structure to make sure it fits the economy we’re creating, not the economy we once had. As we diversify, we want to maintain our competitiveness with our neighbors. It’s generally better to have a lower tax rate on a wider base, and ensure our rates are not higher than other states around us.

There’s a story often told about Gov. Kenny Guinn. During the 2003 legislative session Nevadans from around the state had gathered in front of the legislative and capitol buildings, to protest the lack of money for roads and schools and the need for good paying jobs. As the story goes, his chief of staff walked in on him looking out the window on the protestors below. “Those are my people,” the governor said, “those are my people.” These are our people. Let us hope our elected officials remember Nevada’s budget should serve them.

Kate Marshall recently completed two terms as Nevada State Treasurer. Elliott Parker is professor of economics at the University of Nevada, Reno.