Economists say Nevada’s budget problems not going away anytime soon

By Delen Goldberg

Wednesday, Jan. 5, 2011 | 2 a.m.

Nevada is struggling against its epic fiscal crisis with the hope that when the recession finally subsides, governments will no longer face budget deficits.

Don’t count on it, some economists say.

The experts, who analyzed budget deficits in Western states, concluded Nevada’s budget, built on sales tax and a revenue stream hitched to gaming and growth, was designed for a pre-recession world. It’s weakness: It relies too heavily on profligate consumers and more and more people moving here.

The formula, which afforded Nevada prosperity and fiscal soundness in the past, is likely to ensure ongoing distress in the new world order, according to economists who wrote the Brookings Mountain West/Morrison Institute for Public Policy report. Even after the Great Recession ends and spending rebounds nationally and locally, economists expect Nevada to remain stuck with ongoing budget deficits.

Housing prices, and consequently property taxes, are not anticipated to rise for years because of excess stock. Gaming revenue will remain flat for the foreseeable future, and the growth of gambling in other states and online could further erode it, experts predict.

Meanwhile, the state’s population of children and seniors is expected to grow, resulting in higher education and health care costs. Add that to the strong anti-tax sentiment and constitutional prohibition of an income tax, and the budget outlook is grim.

“We think you are going to confront many years of serious budget shortfalls,” said Matthew Murray, an economics professor at the University of Tennessee and one of the report’s authors. “The odds are quite good that you’re facing a very serious structural problem in addition to the cyclical problem.”

Chronic imbalances between revenues and expenditures are known as structural deficits.

The economists say both tax increases and new industries must be seriously considered if Nevada wants to improve its competitiveness, provide for the well-being of its residents and return to the black. Nevada’s economy and tax system are among the most narrow in the nation: Gaming tax revenue contributes a quarter of the state’s general fund; sales tax comprises 28 percent; and only 31 percent is derived from something other than discretionary consumer spending.

“You need all of the possible resources to deal with the scale of these problems,” said Mark Muro, director of policy for the Metropolitan Policy Program at Brookings and another of the report’s authors. “Rigidity or narrowness usually leads to trouble.”

In the boom years, Nevada’s economic structure sufficed. With every new house or commercial building that popped up, the state reaped money — sales tax on construction materials, property tax on new and increasingly expensive properties. The state’s libertarian leanings kept government lean, and revenue from the Strip overflowed the state’s coffers.

Arizona, by comparison, used surplus money in good times to permanently slash taxes. And California went on a spending spree.

When the recession hit, both states fell harder — at least initially — than Nevada. Nevada experienced the worst short-term deficit (caused by the dismal business climate) but fared best in terms of long-term structural deficiencies.

Now, three years into the recession, Nevada faces only a 1 percent structural deficit in its general fund budget, 8 percentage points lower than California’s and 20 percentage points lower than Arizona’s.

That’s the silver lining in an otherwise scary story. Going forward, Nevada is expected to do worse than its neighbors.

In Nevada, “you will not see the same revenue growth as in California and Arizona,” Murray said. “They are going to grow out of the problem in the next few years.”

Both have an income tax, which will boost state revenue as the economy rebounds and people return to work. Both also tax businesses more than Nevada. When Nevada’s economy began to crumble, the Legislature imposed sales and business tax increases that helped keep the budget deficit from growing even larger. The Brookings economists suggest a similar approach now.

“There’s a new normal in which your old traditional revenue system won’t work so well,” Muro said.

The economists recommend several options to cure Nevada’s ills: diversify; raise the sales tax again; expand the tax base to include consumer services; consider a gross receipts tax on businesses, which is a sales tax businesses pay on goods and services they sell.

All would be a tough sell politically. Gov. Brian Sandoval, who has promised no new taxes, disagrees with this approach, arguing that a low-tax climate is needed to lure businesses and industries to the state.

But Senate Majority Leader Steven Horsford, a key player in the budget process, said changes are needed in the state’s economic structure to make it more diverse and stable.

“We’re at a crossroads,” he said. “These are not just deficits in our budget; they are structural problems in the system, in the way we govern. There has to be an honest, straightforward discussion of what we want to be as a state and where we want to go.”

In the short term, Horsford is pushing for measures that would increase the state’s rainy day funds. His long-term solutions include diversification of the state’s industries — and tax base.

“I hope there is a political understanding that we need to have a broad-based, balanced approach, that cutting alone won’t solve our structural problems,” he said.