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Supreme Court upholds margins tax initiative, sends to Legislature

Updated Thursday, Jan. 31, 2013 | 3:11 p.m.

The Nevada Supreme Court today upheld an initiative petition backed by the Nevada State Education Association that seeks to create a margins tax on business revenue, overturning a lower court decision invalidating the initiative.

The decision means the margins tax proposal will head to the Legislature, which will have 40 days to decide whether to enact it. If the Legislature decides not to approve the initiative, it will go to voters in 2014.

Last year, the Carson District Court found the petition's 200-word description of effect-- a brief summary of what an initiative would do-- to be misleading and incomplete, agreeing with a lawsuit brought by a coalition of business interests opposed to the initiative. The court invalidated the petition.

In a unanimous decision, the Nevada Supreme Court found that the description of effect couldn't possibly predict the many hypothetical situations that may arise if the petition became law.

"A description of effect need not articulate every detail and possible effect that an initiative may have," Justice Jim Hardesty wrote in the opinion. "Instead, given that these descriptions are utilized only in the early, signature-gathering phase of the initiative process and that descriptions of effect are limited to 200 words, they need only provide a straightforward, succinct, and nonargumentative summary of what an initiative is designed to achieve and how it intends to reach those goals."

The initiative would enact a 2 percent tax on businesses that make more than $1 million a year. It would provide various ways for calculating the tax, allowing businesses to either deduct the cost of goods sold or the cost of paying its employees. It largely mirrors a margins tax proposal put forward by Democrats in the last Legislature. That proposal, which would have enacted a 1 percent tax, was roundly defeated in 2011.

The initiative petition is backed by the teachers' union and the AFL-CIO, which gathered 152,703 signatures. They say the petition would generate $800 million in revenue that would go to fund education.

Opponents of the measure argued that even though the proceeds from the tax would be deposited into the distributive schools account, that money might simply offset what the state spends on education from its general fund. If that were to happen, overall education funding would not increase in Nevada.

Few lawmakers have come out in favor of the margins tax initiative, but sponsors hope it may provide leverage to compel lawmakers to address the state's tax structure. The Legislature is allowed to put a competing measure on the ballot in 2014, but no such alternative has been suggested. If lawmakers were to create a different broad-based tax on its own, the teachers union may back off their support of the margin tax petition.

Nick Di Archangel, director of communications for the education association, said there has already been an "earnest discussion" of more revenue for education by lawmakers before the session.

"These are optimistic signs," he said. "I can't predict where it will land but educators should be optimistic."

He called the petition "the will of the people" and commended the Supreme Court on its unanimous ruling.

The coalition that filed the lawsuit seeking to halt the initiative said they will continue opposing the petition.

"Obviously, we agreed with the District Court that the effect of the Petition would not be to increase education funding, as the Petition says, but instead would impose a harmful tax on businesses in order to free up funds for the Legislature to use as it wishes, for education or non-education purposes," said John LaGatta, Chairman of the Committee to Protect Nevada Jobs, in a written statement. "We will continue to fight this proposed legislation and take our case to the members of the Legislature and the public."

Gov. Brian Sandoval said he remains opposed to the initiative.

"I believe that raising taxes at this time is the wrong thing to do because businesses are still struggling, unemployment is still unacceptably high and raising taxes would harm our fragile economic recovery," he said in a written statement. "Education is a priority for me and my budget proposal increases general fund education spending by $135 million and targets the funds towards English language learners and working to improve our high school graduation rate, among other items. For these reasons, I remain opposed to this proposed tax increase."

In its decision declaring the petition invalid, the lower court found the 200-word description of effect should have told voters of the possibility that overall education funding may not be increased as a result of the petition. It also found voters should have been told how much revenue the petition would generate and that businesses operating at a loss would have to pay it.

The Nevada Supreme Court, however, found that addressing such hypotheticals is beyond the scope of the description of effect. Indeed, requiring too much of the short summary "could obstruct, rather than facilitate, the people's right to the initiative process," Hardesty wrote.

Reporter Cy Ryan contributed to this story.

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