Target still vague as special session looms

By David McGrath Schwartz

Friday, June 20, 2008 | 2 a.m.

Let’s say your kitchen floods and you need to set aside money for the repairs. You ask the contractor for an estimate.

He checks the damage, whips out a calculator and crunches numbers.

“I’d say you’re looking at maybe $1,000,” he says.

“Or maybe $2,600.”

“Or maybe $600.”

If you find that answer bewildering — and a little suspicious — you know how Nevada lawmakers feel as they face the depressing prospect of next week’s special session.

They need to repair the state budget by cutting it. But, as of Thursday evening, no one could agree on how much needs to be cut.

What in the name of Pythagoras is going on?

The governor’s executive staff has projections that say the state needs to cut $260 million. The legislature’s staff has its own number, about $100 million.

Today five wizened business experts will meet for a special session of the state Economic Forum, which consists of economic experts appointed by the governor and top legislators. Their job is to make economic forecasts for the state.

This year, that’s a tall order. They are being asked to come up with a number very quickly that the Legislature and governor can agree upon before the special session starts Monday.

Why are the current estimates so different?

Hard to say. Details of revenue projections are being closely held until today’s Economic Forum meeting. But theories abound and include simple human error, differences in optimism in regard to the state’s economy, political influences and the nature of our tax system, which makes revenue inherently unstable and tough to predict.

$100 million. $260 million. Who cares?

Well, to bring it down to home economics again, that’s the difference between cutting out your vacation to Maui and selling the car and taking the bus.

The smaller amount could be cut with across the board reductions in state government that could even avoid layoffs.

At the higher amount, cuts would be more drastic, and more options would have to be looked at. (And no, we can’t put any of the bills on a credit card a la the federal government’s unfathomable deficit. Nevada’s state budget must balance.)

If there are no crystal balls in Carson City, where do these numbers come from?

You have a bunch of smart people in state government who have been doing this for a long, long time.

“There is a science and an art to it,” explained Jeremy Aguero, principal at economic and fiscal research firm Applied Analysis. “Ignore one or the other, you get into a lot of trouble.”

Here’s the science: develop a complicated formula — Aguero calls it an “econometric model” — looking at historical trends:

• How much are people buying? How much will they buy? The answers affect sales tax revenue.

• What does a new casino opening do to tourism? Will CityCenter and the other major projects bring hordes of new visitors? The answers affect gaming and room taxes.

Now let’s add the art. Call gaming companies, developers, industry leaders. What do they say? Are employers bullish, planning to add jobs? Or are they going to lay people off?

What will oil prices do to airline ticket prices for flights into McCarran International Airport or the number of cars driving from Southern California?

Adjust accordingly.

Wait, did you say the state’s budget future — and the need for cuts — is determined by whether some guy from Southern California thinks $4.25 a gallon gas is too much for a drive up Interstate 15?

So it is with Nevada’s tax structure. It is volatile and relies heavily on gaming and tourism. Critics say it is too dependent on those sources.

More important for the issue at hand, the tax structure makes predicting state revenue all the tougher, said Patrick Fleenor, chief economist for the nonprofit Tax Foundation in Washington, D.C.

The most stable form of taxation from year to year — and easiest to predict — has historically been property tax. But that revenue goes mostly to local governments.

Fleenor said a personal income tax would also be a stable source of state revenue, as it is in most states. But the Nevada Constitution bans a personal income tax.

The reason an income tax helps with forecasting is that “people adjust spending more than their income fluctuates,” Fleenor said.

For instance, if you’re making the same amount today as you did three years ago, you would pay the same income tax. But if you’re worried about the economy, you’re not going to buy a new car and thus the state will miss out on the potential sales tax on the purchase.

Without being able to draw on property or income taxes for revenue, Nevada is left to two comparatively fickle revenue sources: sales tax and gaming tax.

Fleenor said sales taxes can be a stable source — but only if the tax applies broadly to necessities such as groceries, things that people buy no matter the economy.

But in the 1980s, during a major tax shift in Nevada, the state decided to exempt groceries, under a theory that doing so would shift more of the burden to tourists.

It worked. Except that it tied the state’s fortunes even more closely to tourism and its resulting sales and gaming taxes. And the current economic downturn, coupled with higher fuel prices, has made tourism difficult to predict.

So what happens today?

Maybe the Economic Forum will come up with numbers everyone agrees upon.

Maybe not.

Preparing estimates for an Economic Forum meeting typically can take staff two months. In this case, that staff has had four days to prepare.

“I know there’s a lot of number crunching going on,” said Carole Vilardo, president of the Nevada Taxpayers Association. “Hopefully the five people on the Economic Forum will be able to sift through and come up with a number.”

Then maybe we’ll have a new estimate for that flood damage.