Nevada’s future depends on a broader tax base

Guy Hobbs, managing director of the financial consulting firm Hobbs, Ong & Associates

Tuesday, Aug. 31, 2010 | 2:01 a.m.

In August, Brian Greenspun turns over his Where I Stand column to guest writers. Today’s columnist is Guy Hobbs, managing director of the financial consulting firm Hobbs, Ong & Associates. He chaired Gov. Kenny Guinn’s Task Force on Tax Policy in Nevada from 2002 to 2003.

Imagine you are part of a family that has cut back on all but the most essential expenses over the past couple of years to make ends meet. This situation is not farfetched for many of the more than 190,000 Nevada residents actively looking for work.

Even though you have cut spending, you were still forced to exhaust your savings account, borrow from family members, and sell a few of your possessions to make things balance. Your remaining expenses, for the most part, are nondiscretionary necessities, including education, health care and the basic protection of your family’s welfare.

You have scraped through this past year and were able to make things balance by liquidating your savings and other actions, but you are keenly aware that next year will be far more challenging. The resources you will have available to pay your expenses, because of the economy, will be roughly half the cost of your family’s necessities.

You are now faced with some extremely difficult decisions. Do you accept that your family members will have to do without half of the things that guarantee their current and future welfare, and place them in a precarious position of risk?

Do you seek ways to supplement your income to help make up for the loss of resources that can help you better ensure your family’s welfare, even though generating additional income will not occur without facing some very difficult choices?

That’s the situation Nevada finds itself in. The state, as the head of the household in the above scenario, has dramatically cut back the services it provides to us, its family members, over the past two years. The services that it is able to continue to provide — for the education, health and safety of its residents, or family members — are significantly reduced and are, arguably, insufficient.

It has liquidated its savings from all sources, taken money from other family members (Clark County) and handouts (from the federal government), among other things, to help make ends meet. It has also supplemented its income to a degree, though this extra income is only temporary.

All of these actions allowed the state to make ends meet for the time being, but many of the extraordinary measures that have been taken will no longer be available. Going forward, what can or should the state do to balance its budget and provide for the welfare of its residents?

To provide the same level of services, even at the current greatly reduced level, the state is expected to be between $2.5 billion and $3 billion short over the next biennium to fund education, health and human services, public safety and other services. Education, health and human services and public safety alone represent over 92 percent of the state’s general fund spending, which was $6.6 billion for the biennium before the past round of cuts.

To provide these services at pre-recession levels, the deficiency would be far in excess of the numbers noted above. Without any of the begging, borrowing and stealing done in the past budget cycle, including temporary revenue measures ($1.1 billion), federal stimulus dollars ($541 million), diverted room tax revenues ($220 million), payroll cuts to employees ($504 million), and/or other expenditure reductions, account liquidations and diversions of local government revenue ($888 million), the state will find itself facing this unprecedented funding gap as it attempts to assemble its next budget.

Because many of these cannot be continued into the next year (e.g., federal stimulus, one-time account liquidations, room tax diversions), and many of the remaining are politically or practically difficult to continue, the challenge ahead is formidable and, politically, frightening.

The solution to this daunting problem may be surprisingly simple, although the political barriers are anything but simple. The state’s tax structure is inefficient and outdated. We have known this for more than a decade and, with the exception of Gov. Kenny Guinn’s courageous effort to fix the system in 2003, nothing notable has been done to correct the problem.

Further study is not necessary and would be merely a pretext to delay difficult decisions, as the structural problems with our system have been well-documented by numerous credible and well-intended studies. Those who argue that there are no problems with the current tax structure are either beneficiaries of the current system, or they have taken no time to observe the obvious.

Efforts to contain and reduce the long-term costs of labor, both in government salaries and benefits, need to continue and must be embraced by current and future generations of decision-makers. This is not a slight to the multitudes of public employees who do great work to improve the quality of life for Nevadans, but rather it is acceptance that these costs are simply unsustainable over time.

There must also be recognition that the state’s system, which relies on a very narrow sales tax base to produce a lion’s share of revenue for state and local government, is fundamentally and undeniably flawed, and it needs to be replaced with a more broadly applied system of taxing transactions.

No longer should we rely upon only selected sectors of our economy (such as gaming and construction) to carry the funding burden for the entire state. This antiquated and failed approach must be abandoned and replaced with a system that, from a standpoint of taxation, better emulates the economy as a whole and is more equitable for those who bear the burden.

Temptation to continue transferring the state’s problem to local governments through the shifting of local money to the state must also be avoided, as this jeopardizes the quality of services at the local level and does nothing to solve the underlying problem.

The lessons learned during the Great Recession must be viewed as an opportunity to finally correct and improve the system, or we will be destined to relive the consequences of continued inaction.