MINUTES OF THE meeting
of the
ASSEMBLY select Committee on State Revenue and Education Funding
Nineteenth Special Session
June 4, 2003
The Select Committee on State Revenue and Education Fundingwas called to order at 8:17 a.m., on Wednesday, June 4, 2003. Chairman Morse Arberry Jr. presided in Room 4100 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Mr. Morse Arberry Jr., Chairman
Mr. David Parks, Vice Chairman
Mr. Bernie Anderson
Mr. Walter Andonov
Mrs. Sharron Angle
Mr. David Brown
Mrs. Vonne Chowning
Mrs. Dawn Gibbons
Ms. Chris Giunchigliani
Mr. Tom Grady
Mr. Josh Griffin
Mr. Lynn Hettrick
Ms. Sheila Leslie
Mr. John Marvel
Ms. Kathy McClain
Mr. Bob McCleary
Mr. Harry Mortenson
Mr. Richard Perkins
Ms. Peggy Pierce
GUEST LEGISLATORS PRESENT:
Assemblyman John Carpenter, District No. 33, Elko County and portions of Humboldt County
STAFF MEMBERS PRESENT:
Mark Stevens, Assembly Fiscal Analyst
Ted Zuend, Deputy Fiscal Analyst
Russell Guindon, Deputy Fiscal Analyst
Bob Atkinson, Program Analyst
Mindy Braun, Education Program Analyst
Linda Smith, Committee Secretary
Susan Cherpeski, Committee Secretary
OTHERS PRESENT:
Douglas Thunder, Deputy Superintendent for Administrative and Fiscal Services, Nevada Department of Education
Jim Hager, Ph.D., Superintendent of Schools, Washoe County, and Chairman, Association of School Superintendents for the state of Nevada
Gloria Dopf, Education Equity, Nevada Department of Education
Carlos Garcia, Superintendent of Schools, Clark County School District
Mary Pierczynski, Superintendent of Schools, Carson City School District
Elena Fowler, senior, Reno High School
Hailey McNeal, freshman, Reno High School
Michon Affinito, sophomore, Reno High School
Emma Fulkerson, junior, Reno High School
Charles Chinnock, Executive Director, Nevada Department of Taxation
George Flint, representing the Nevada Brothel Owners Association
Paula Berkley, representing the Reno-Sparks Indian Colony
Jim Avance, representing the Nevada Retail Gaming Association
Sean T. Higgins, President, Nevada Retail Gaming Association
Stephanie Licht, representing Elko County
Steven D. Hill, President, Silver State Materials
Mark Fiorentino, representing the Focus Property Group
C. Rocky Finseth II, representing the Nevada Association of Realtors
Melody Luetkehans, General Counsel for the Nevada Association of Realtors
Jack Kim, representing Sierra Health Services
James L Wadhams, tax lawyer, Wadhams & Akridge
Mendy K. Elliott, Director, Community and Government Relations, Wells Fargo Bank, Nevada
Judy Stokey, representing Nevada Power Company and Sierra Pacific Power Company
Carole Vilardo, representing the Nevada Taxpayers Association
Tony F. Sanchez III, representing the Las Vegas Motor Speedway, Jones Vargas law firm
Michael Alonso, representing International Game Technology and the Reno-Sparks Convention & Visitors Authority
Joseph H. Edson, representing the Progressive Leadership Alliance of Nevada
Chairman Arberry called the meeting to order and welcomed everyone to the 19th Special Session of the Nevada Legislature. He commented that the Select Committee had been selected to ask questions and encouraged Committee members to ask whatever questions came to mind. He wanted every question on the table so there would not be any gray areas when decisions were made, and so the members would be able to find out everything they wanted to know.
Assemblywoman Gibbons said she had studied the bills to death and stressed that she was in support of education and intended to fully fund it. What she would not do, she said, was vote for a concept. She had to see a bill and fully understand it before she could vote on it. She cautioned that she would be asking a lot of questions during the next three days, but said the Committee would understand why.
Mark Stevens, Assembly Fiscal Analyst, Fiscal Analysis Division, Legislative Counsel Bureau (LCB) announced that the Committee would be going over two bills that morning, the Distributive School Account (DSA) bill and the class-size reduction bill, and that each member had been given a copy of each of those, as well as a copy of the DSA worksheet. He noted that the state Distributive School Account bill was a legal draft (Exhibit -C) that had not been introduced as a separate bill during the regular session. The class-size reduction bill, he pointed out, was S.B. 508. Mr. Stevens told Committee members they would have the opportunity to ask any questions that they might have had concerning the actions related to those areas that had been taken by Assembly Ways and Means and Senate Finance during the regular session.
Bob Atkinson, Program Analyst, Fiscal Analyst Division, LCB, began the presentation of the bill by explaining that it incorporated all of the changes to the statutes at the beginning, and then went into some transitory language for the biennium, so it might seem a little disjointed. He offered to walk through the bill section by section if that was the desire of the Committee.
The first section of the bill, Mr. Atkinson explained, fenced off funds for textbooks, instructional supplies, and instructional hardware so the funds could only be spent on those items. The amount that was budgeted for textbooks, instructional supplies, and instructional hardware was stated later in the bill, but the funds would have to be spent on those items, or the districts would not get that money. Whether the money had been spent properly would not be known until the end of the year.
According to the bill, Mr. Atkinson continued, the Department of Education would devise a formula that would allocate the total amount of money among the various districts that had to be spent on those three items. That formula was to be developed in consultation with the Budget Division in the Department of Administration and the Fiscal Analysis Division of the Legislative Counsel Bureau.
Once the formula was determined, Mr. Atkinson said notices would be sent to the districts in each fiscal year regarding the minimum amount of their budget they were required to spend on textbooks, instructional supplies, and instructional hardware. If a district did not spend that amount, which would not be known until after the end of the year, a reduction would be made from the following year’s basic support amount. He noted, however, that would not reduce the amount they would be required to spend on textbooks, instructional supplies, and instructional hardware during that following year.
Mr. Atkinson further explained that Sections 2 and 3 of the bill incorporated some of the language in Section 1 into Nevada Revised Statutes (NRS) 387.207 and NRS 387.205 in order to maintain continuity.
Mindy Braun, Education Program Analyst, Fiscal Analysis Division, LCB, drew the Committee’s attention to Section 4, beginning on page 5, of the draft. She explained that it concerned a one-fifth retirement credit for teachers at at-risk schools, which were defined under Title 1 as being 65 percent or higher at poverty level, and teachers at schools that had been designated as having demonstrated need for improvement. If those teachers met the other requirements of five years of service, a satisfactory evaluation, and two years of work in a school that was either at-risk or designated—it would not have to be the same school, and it would not have to be consecutive years—they would then be eligible for a one-fifth retirement credit.
Ms. Braun went on to explain Section 5, page 7 of the draft, which provided for a one‑fifth retirement credit for teachers in high-impact positions such as math, science, special education, ELL (English Language Learners), and school psychologist. That, she said, would only occur in the second year of the biennium, and the appropriations for that were included later in the bill. Requirements for teachers to receive the one-fifth retirement credit for high-impact positions were that they would have to be licensed and actually acting in those roles, but there would only be a one-year requirement instead of the two‑years required for at-risk teachers.
Mr. Atkinson mentioned he had distributed a six-column spreadsheet (Exhibit D) that showed the breakdown of the money in the Distributive School Account. The average basic support, as approved by the money committees, was $4,295 per student. The Governor’s recommended amount was $4,259. Section 6 of the bill, he said, gave the basic support amount for each of the counties, taking into account the wealth adjustment and all of the other things that the Department of Education figured into that allocation. That information, Mr. Atkinson explained, was for the first year of the next biennium.
In Section 7, Mr. Atkinson continued, fiscal year 2005 was shown to have an average basic support of $4,424, compared to the Governor’s recommended amount of $4,291. He explained that, because the exact ad valorem adjustment that would be needed in 2005 was not known, those amounts would be recalculated by the Department of Education prior to the start of FY2005.
Section 8, Mr. Atkinson went on, was about the special education units provided to the districts. The total number of special education units in FY2004 was 2,615 at a value of $31,811 each. In FY2005 there were 2,708 provided, at a value of $32,447 each. The section specifically listed the numbers of special education units allocated in each of the years to each of the school districts. Mr. Atkinson observed that 40 of those special education units were reserved by the Department of Education for the State Board of Education to allocate based on requests from the districts. There was also a provision that allowed the charter schools to request units from that 40.
The last section of Section 8 provided up to $181,067 for 5.69 special education program units in the first year and up to $190,877 for 5.88 units in the second year for gifted and talented programs. Mr. Atkinson explained that did not mean those were all of the special education units for gifted and talented, merely that those 5 units, specifically, were handled through the State Board of Education. Some of the special education units described earlier in the bill would also go to the gifted and talented program.
Section 9 listed the appropriation in the Distributive School Account as $643,770,672 for fiscal year 2004 and $773,402,683 for fiscal year 2005. Mr. Atkinson pointed out that subsection 4 of Section 9 provided for movement of money in that appropriation from one year of the biennium to the other, or even back into fiscal year 2003. He explained that the provision for movement of funds back to FY2003 was necessary for the guarantee of funding in the DSA, since revenues from the remaining three months of the Local Schools Support Tax (LSST) and two months of estate tax were yet to be collected, making it difficult to come up with an exact amount for FY2003.
Section 10 included the monies, other than General Fund appropriation, that supported the DSA and listed authorized revenues of $202,909,432 in the first year of the biennium and $141,455,099 in the second year. Mr. Atkinson observed that those other monies were listed in a section near the bottom of Exhibit D as the federal flexible funding under Public Law 108‑27, the DSA’s share of the slot tax income, permanent school funding income, interest income from the mineral lease of federal lands, out-of-state local school support tax, and transfers of estate tax funding. He noted that those other monies included in those authorized revenues were not appropriations.
Mr. Atkinson described Section 11 as a section required for the mechanics of the Distributive School Account. The Department of Education was allowed to receive a temporary advance from the General Fund if payments needed to be made to the school districts for their allocations and the money had not come into the DSA yet.
Section 12 provided for the adult high school diploma program. The amounts approved by the money committees for the adult education program were $16,926,569 in the first year and $17,843,596 in the second year. Mr. Atkinson explained that Section 13 continued a provision that had been added in 1999 whereby $50,000 would be provided to each school district to ensure that there were counseling services available in elementary schools for pupils at risk of failure. Section 14 was a standard provision that, if necessary, the Governor could reduce the guaranteed amounts if there was a downturn in the economy and a reduction had to be made in the Distributive School Account.
Mrs. Braun explained that Section 15 provided for the Regional Professional Development Programs and the Nevada Early Literacy Intervention Program, which the money committees had now combined. The Nevada Early Literacy Intervention Program (NELIP) would now be under the umbrella of the Regional Professional Development Programs as one program. Section 15 appropriated $8.8 million in the first year, and $8.9 million in the second year of the biennium for the continuation of those programs. Section 16, she noted, appropriated $100,000 in each year of the biennium for the evaluation of the Regional Professional Development Programs.
Section 17 provided $80,000 in each year of the biennium to continue Project LEAD (Leadership in Educational Administration Development). Ms. Braun informed the Committee that, in the past, this program had been contained in a different budget account under state education programs. However, she said the “money committees”—Assembly Committees on Ways and Means, Taxation, and Commerce and Labor, and Senate Committees on Finance, Taxation, and Commerce and Labor—had recommended the program be placed under the Regional Professional Development Programs (RPDPs) so all professional development would be under one umbrella. The committees insisted, though, that nothing be lost from Project LEAD in this move.
Section 18 provided the appropriation for state remediation money for low-performing schools in the amount of $5.2 million for the first year of the biennium and $5 million for the second year. Ms. Braun explained that the three ways a school would be eligible to receive funding under state remediation would be if it was designated as demonstrating need for improvement, if it did not meet adequate yearly progress as defined under No Child Left Behind, or if 40 percent or more of its pupils scored in the bottom quarter on the state’s Norm Reference Test.
Section 19 provided another set of money for remediation funding in the amount of $1 million in the first year and $1.5 million in the second year. This included money for before and after school, summer school, and intersession programs, and was available only for at-risk pupils in non-Title 1 schools. The purpose of that, Ms. Braun pointed out, was that under No Child Left Behind, there was federal money for pupils in Title 1 schools that had been designated as demonstrating need for improvement, but there was no funding source for pupils in non-Title 1 schools.
Section 20 provided $2.9 million in the first year and the second year of the biennium for the funding for early childhood education programs. There was also, for that biennium, an appropriation of $301,000 for the Classroom On Wheels (COW) program. That particular early childhood program was also contained in the Other State Education Programs budget account. Ms. Braun explained that the money committees had approved bringing that early childhood program into the DSA funding and had also required longitudinal evaluations of the early childhood programs for the coming biennium. They had further required that the state money could not be used to remodel classrooms or for facilities or playground equipment, but was to be used for instructional purposes for early childhood programs only.
Section 21, as Ms. Braun explained, provided the appropriation for the one-fifth retirement credit for teachers in at-risk schools or schools designated as needing improvement. The amount of that appropriation was $2.7 million for the first year of the biennium and $7 million in the second year. Section 22 provided the appropriation for the one-fifth retirement credit for high-impact positions such as math, science, ELL (English Language Learners), special education, and school psychologist. That appropriation applied only to the second year of the biennium.
Mr. Atkinson stated that Section 23 spelled out the total amount in the first section that needed to be spent on textbooks, instructional supplies, and instructional hardware. In the first year, that was $64,425,447. In the second year of the biennium, it was $66,721,434.
Section 24, Mr. Atkinson went on, implemented a recommendation by the Governor that all of the estate tax collected in the Fund For School Improvement that remained in that account at the close of fiscal year 2002-2003 be transferred into the Distributive School Account. That would reduce the amount of supplemental appropriation that was needed and would reduce the ultimate amount at the end that would have to be moved from the next biennium back into FY2003 to make the account whole for the year.
Mr. Atkinson observed that Section 25 contained standard language that had been in the bill for some time. It required that all of the specific items in Sections 15–22 be spent for the items specified there. Those funds could not be used for negotiation or arbitration of disputes. Section 26, he said, pertained to special transportation for school districts that transported students from other districts. It currently applied only to Lyon County, and provided for $47,715 in each year of the biennium.
Mr. Atkinson commented that there had been a separate appropriation of $72 million approved earlier in the session to cover an unanticipated revenue shortfall during the current biennium. He added that Section 27 provided a supplemental appropriation of $3,152,559 to the Distributive School Account for FY2003 based on the current estimate of that shortfall.
Mr. Atkinson described Section 28 as added language that surrounded the fencing language and indicated that each school district would expend the revenue made available by this act, as well as other revenue from the state in accordance with NRS 288-150, specifically to attain the goals of the Legislature regarding educational reform in the state. The last section, Section 29, incorporated the effective dates of every other section.
Assemblywoman Pierce asked what out-of-state local school support tax income was. Mr. Atkinson replied that the 2.25 percent in-state local school support tax (LSST) that could be specifically allocated to counties was credited to each county. However, if it was charged by out-of-state vendors, it was not necessarily known what particular county it applied to. As a result, that portion was brought in at the state level and used to offset the state General Fund.
Assemblyman Mortenson asked how the $64 million and the $66 million that were to go for textbooks and instructional supplies, as specified in Section 23, compared with amounts in previous years. Mr. Atkinson answered that the requirement that those funds be spent specifically on those items was new, but that the amount was an increase of roughly $18 million over the previous years based on the recommendation in the Governor’s Budget of $50 per student for those three items. He added that everything else brought forward based on the FY2002 actuals was then rolled up for projected enrollment amounts, but no inflation was built into it. In addition to that rolled-up amount for the additional enrollment, there was about $18 million added on for the $50 in the Governor’s recommendation.
To Assemblyman Mortenson’s follow-up question of how the $4,295 and $4,424 per-pupil allotment compared with the national average, Mr. Atkinson responded that those were interesting numbers because they were used to allocate the amount of funding provided in the Distributive School Account. He said all of the per-pupil expenditures or per-pupil revenues in the districts were not included in the DSA, but that even when Nevada’s total expenditures were taken into account, the state was still below the national average.
Assemblyman Marvel asked if the $67 million in federal flexible funding was a one-time revenue. Mr. Atkinson replied in the affirmative. Mr. Marvel wanted to know if that would leave a hole in the budget the second year that would have to be picked up by the General Fund. Mr. Atkinson’s response was that the $67 million in federal flexible funding the first year simply reduced the amount needed from the General Fund, but that the General Fund would have to pick it back up in the second year. Mr. Marvel then asked how much the estate tax was, and if it, too, would go away. Mr. Atkinson replied that was $16,125,000 in each year of the biennium, but that it, too, would indeed go away.
Douglas Thunder, Deputy Superintendent for Administrative and Fiscal Services, Nevada Department of Education, confirmed what Mr. Atkinson had said. He noted that when Mr. Atkinson had been talking about how the amounts designated per student compared to the national average, he stated that amount was only a portion of the amounts that were reported to the federal government. What Mr. Atkinson did not say was that other states calculated their support in completely different ways, and that it was really not possible to compare that particular number with other states. Mr. Thunder explained that all of the other expenditures from federal and other sources were combined to come up with the nationally reported numbers for Nevada and the other states.
Assemblywoman Giunchigliani noted that, early in the current legislative session, a national newspaper had ranked Nevada 46th in the nation in per‑pupil expenditures. She asked if that was still Nevada’s ranking. Mr. Thunder explained that those statistics were approximately two years behind. He added that it was difficult to project what effect current legislation would have on those rankings, because other states were also making the same kinds of changes. He said Nevada was receiving more federal funding than in the past because of the No Child Left Behind legislation, but added that other states were as well. Mr. Thunder said he hoped that Nevada would move up a few places in the rankings. Ms. Giunchigliani expressed frustration that Nevada’s current ranking could not be immediately determined, but that the ranking probably was still poor.
Assemblywoman Giunchigliani noted that the language on page 28 of the bill draft did not match what she had understood about the funds for the Classroom on Wheels and early childhood programs having been combined and the distribution method for their funding having been established in the budget closing. She asked if Mindy Braun could clarify that situation. Ms. Braun responded that the staff’s understanding was that all the early childhood money was to go into one pot but that in the first biennium, the Classroom on Wheels (COW) program would receive $301,000. Ms. Giunchigliani countered that had not been the decision of the Committee on Ways and Means.
When Ms. Braun offered to go back and look at that, Ms. Giunchigliani stated that she had staff go back over it three times, but that the Senate had continued to change it. She stressed that it gave her great discomfort to know that language had changed from what the subcommittee voted out. Mr. Stevens asserted that there was a difference of opinion among the Senate and Assembly members. He said it was one of the issues that was being discussed in an attempt to reach a resolution, and that the discussion could continue, or the language could be changed by the Assembly Select Committee as it went forward.
Assemblyman Brown stated that one of the concerns of many legislators was that the monies set forth in Section 23 for the purchase of textbooks, instructional supplies, and such be used for those items. He cited Section 25 as saying that those particular accounts, specified in Sections 15–22, had to be accounted for separately and the monies only used for that purpose, and could not be used to settle disputes, which, of course, did not include Section 23. Mr. Brown observed that Section 28 stated expenditures should be consistent with NRS 288.150, which was designed to attain the goals of the Legislature. Mr. Brown said Section 28 went on to state that material and supplies for the classrooms were subject to negotiation by employees with recognized employee organizations.
Assemblyman Brown commented that he had been told those monies were not accessible for that type of resolution. He expressed uncertainty about what NRS 288.150 did in terms of constraints of expenditures, but said it was his understanding that those expenditures were essentially inaccessible for other purposes. He asked if there was any reconciliation.
Mr. Atkinson replied that he believed it was the intent of Section 1 to clearly state there was a specified amount that would absolutely be spent on textbooks, instructional supplies, and instructional hardware. He said Section 1 might have included the language that those funds could not be used in negotiations, arbitration, and such. The intent was that the funds would specifically be spent on textbooks. He quoted the last sentence in Section 28 as saying, “Materials and supplies for classrooms are subject to negotiation by employers with recognized employer organizations.” Language in NRS 288.150, subsection 2(t), specifically referred to “materials and supplies in the classroom.” Mr. Atkinson asserted that Section 28 of the bill simply reinforced the intent of spending that money on materials and supplies.
Assemblyman Brown noted that Section 1 mentioned a formula that would be developed, so there was not a formula at this time, so the amount of the $64 million and $66 million for the two separate years that would be fenced off or restricted could not yet be determined. Mr. Brown asked if any attempts were currently being made to put the formula together.
Mr. Atkinson explained that the fencing language was new, and that nothing like it had existed in the past. The dollar amount, he said, was based on actual expenditures from the past rolled up plus the $50 per student that was recommended by the Governor. Mr. Atkinson added that the formula that had been looked at by the Department of Education incorporated the concept of a last-four-year average of a per-pupil amount that was spent for those items, and then required that amount, with a slight adjustment, be spent in the following two years. He noted that the formula was not finalized yet.
Assemblyman Brown said he had heard that Nevada had been grossly deficient in those particular expenditures over the past four years, and he hoped this legislation would bring about a significant increase. He inquired when the formula might be completed. Mr. Atkinson replied that the formula had to be in place by July 1, and the districts had to have been notified within the first 30 days of each fiscal year as to how much they were required to spend. In response to Assemblyman Brown’s question about legislative oversight or approval of the formula, Mr. Atkinson replied that the formula was to be developed by the Department with the approval of the Budget Office and Department of Education administration and the Fiscal Analysis Division of the Legislative Counsel Bureau.
Assemblyman Andonov asked if the estate tax funds were specifically earmarked for any particular program, or if they went to basic support. Mr. Atkinson’s response was that the estate tax funds were just one of the revenue sources used to reduce the amount of General Fund necessary to fund the basic support and the other items that were included in the Distributive School Account. Mr. Andonov supposed that if the estate tax funds came in higher than expected, then there was more money to be applied, and if they came in lower, then there was less money to be applied to the basic support. Mr. Atkinson explained that the amount of the basic support did not change, but what did change was the amount of General Fund needed for basic support.
Assemblywoman Giunchigliani pointed out that estate tax for K-12 was called the “Fund for School Improvement income,” and that would basically be gone, so when the 73rd Legislative Session started, there would be a $32 million hole that would have to be made up immediately from the General Fund. She said the current Legislature had used every other revenue source they could to fund this budget instead of using the General Fund in order to limit the amount of taxes that would have to be raised. She said the reality, however, was that in two years there would not only be a hole in kindergarten-through-twelfth-grade education for kindergarten through twelfth grade (K-12), but there would also be a hole in higher education because the estate tax would also have been depleted. She said a few more dollars might have come in the following year, but that it was very minimal. Ms. Giunchigliani asserted that the current Legislature had been very creative in finding $65 million in one-shot money to offset the need for the General Fund. She claimed that Nevada was unique in that, under the state Constitution local districts could not raise revenue other than bonding for construction revenue. Otherwise, they were totally dependent on state funding.
Referring to Assemblyman Brown’s question regarding funds for textbooks and supplies, Assemblywoman Giunchigliani reiterated that the Governor had allocated $50 per textbook in addition to instructional supplies and so forth. The instructional supplies and materials, though, would be procured through the bargaining process, so the teachers would have input on where they thought those materials and supplies should go. She asked if someone could tell her what the average cost of a single textbook was. She speculated that $50 was probably not one-fourth of what a textbook cost.
The reality, Ms. Giunchigliani said, was that people would still complain, no matter whether or not textbooks were funded. In fact, she said, according to the audit that was done, every single district spent over the amount that had been allocated for instructional materials, supplies, and textbooks in the past two years, somewhere around $300 to $400 per student. Not only did the previous Legislature not bother to give them enough money to cover that cost, the current Legislature did not make that up in the current budget. She noted that while some increases had been allocated, that would not guarantee anything. There were still students who would not have a textbook in every classroom. Ms. Giunchigliani stressed that even though that was the intent and the effort that had been made by the districts, the reality was they were under funded.
Assemblywoman Angle asked if anyone could tell her what percentage of the budget in each district would go to salaries and benefits for employees. She said that in the school district where she had served it had been 85 percent. Mr. Thunder replied that it ranged between 85 and 90 percent, especially if you included the class-size reduction funding, which was all salaries and benefits. Mrs. Angle then inquired how much of that percentage went to the classroom teacher. Mr. Thunder said he did not know for sure, but surmised that it was in the neighborhood of 55 or 60 percent of all salaries and benefits.
Assemblywoman Angle’s next question was what percentage went toward administration. Mr. Thunder’s response was that it depended on whether administration was classified as both central office administration and school administration. He noted that there were federal reports that gave that information. Nevada, he said, was slightly higher than the national average on school site administration and slightly lower on central office administration. He cited the main reason for that was that Nevada had 17 districts, where most states had many times that. He supposed the percentage was probably around 10 percent for the combination of both on-site and central office administration. In response to Mrs. Angle’s request for his definition of on-site administration, Mr. Thunder said he would define as principals, vice principals, and any immediate support for those people, deans in larger districts, and office support. He added that he believed school psychologists would fall under the classification of student support activities.
Jim Hager, PhD., Superintendent of Schools, Washoe County, and Chairman, Association of School Superintendents in Nevada, noted that in Washoe County, school psychologists were part of the School Administrators Association and, as such, were considered administrative figures at the site level. He stated that, in Washoe County’s central administration, if the General Fund budget was included, approximately 0.97 percent of the funding went to central administration costs and approximately 5.7 percent went to school site costs. Assemblywoman Angle asked him if the remainder, approximately 20 percent, would then be for ancillary services or support for unclassified employees. Dr. Hager confirmed that. Mrs. Angle then asked if the percentage for textbooks came out of the remaining 11 to 15 percent outside of salaries. Mr. Thunder said that was correct. He explained that the utilities and all the other related expenditures for the operation of schools would also come out of that remaining 11 to 15 percent.
Assemblywoman Angle commented that her understanding of the Nevada Plan was that each student in every county would be funded the same amount of money, but that she saw some variations within the districts on that. She said she would have expected it to be exactly the same amount per pupil in each county, but that she was seeing such things as $4,000 and $7,000 in the rural counties and was wondering how that happened.
Mr. Thunder replied that was the result of a formula that had been used for many years in Nevada in an attempt to equalize the cost of education. He said the amount of property tax varied significantly from district to district, and that the formula included an element called “wealth adjustment” that tried to analyze the amount, on a per-student basis, that each district was capable of generating through the sales tax. For example, in a county like Lincoln that had very little property to be taxed because most of the land was owned by the federal government, the amount of property tax revenue would be significantly less on a per-student basis than in Clark or Washoe or Douglas Counties. Another equalization factor was aimed at the differences in per-student transportation costs. Mr. Thunder stated that the higher costs were due to some districts being more spread out than others, with students living farther from the schools. Another situation that caused transportation to be more expensive on a per-student basis was if a district had a lot of small schools. He noted that in larger, more concentrated districts, where the schools were larger, the costs were less. Mr. Thunder said the formula that was used to determine those amounts was fairly complicated.
Assemblywoman Angle asked if the allotment for aides in the classrooms and substitute teachers was taken out of the 11 to 15 percent or out of the 85 to 89 percent. Mr. Thunder replied that they would be included in the instructional costs. He said the districts had instructional licensed staff and instructional non-licensed staff, and aides and substitute teachers would be a part of the instructional non-licensed staff.
Assemblyman Anderson informed the Committee that his U.S. history textbook cost $48.50. He stated that the average student was taking six classes and had roughly $200 worth of textbooks; at the elementary level it was not that high. Mr. Anderson said that in the old formula, everything was rolled into a single dollar, but that now there was going to be a special textbook fund. He asked how that would be done, and how a comparison would be made between the old formula and the new.
Mr. Atkinson answered that the $64 million that would be required to be spent on textbooks, instructional supplies, and instructional hardware was based on the FY2002 expenditures rolled up for enrollment plus $18 million that represented the $50 per student the Governor had recommended. He said it did not alter the way that the funding was allocated to the districts in total, but merely defined an amount the district must spend on those items. Mr. Atkinson added that because the calculations were based on FY2002 expenditures, plus the additional amount that the Governor added, the districts would be required to spend a greater amount than they had the previous year.
Assemblyman Anderson asked if it was fair to say that, by restricting the way the local school district could allocate its dollars, fencing off these dollars so that they would have to be expended on textbooks, the legislation would not have actually increased the amount of money there, but simply deducted it from the overall amount. Mr. Atkinson replied that the only new money was the $18 million per year.
Assemblyman Brown stated that teachers had told him they were photocopying textbooks and paying for instructional supplies out-of-pocket, which he found absolutely abhorrent. He asked if the formula under discussion was a formula to determine how the monies in Section 23 would be allocated among the school districts and schools. Mr. Atkinson answered that it would be at the district level only.
Assemblyman Brown then asked if the figures for actual budgeted textbook and instructional supplies for 2001–2002 and the actual expenditures in the overall state budget were available. Mr. Atkinson’s response was that the budget for the Distributive School Account was built on the entire budgets of the school districts. He added that roughly 20 percent of that was funded with revenues outside of the Nevada Plan, so the numbers could add up to more than the total amount in the Distributive School Account. He said actual expenditures in FY2002 were $15,890,000 for textbooks, $24,346,000 for instructional supplies, and $2,289,000 for instructional hardware. Mr. Brown noted that the actual expenditures in FY2002 for textbooks, instructional supplies, and instructional hardware, then, had been in excess of $41 million. Mr. Atkinson confirmed that. Mr. Atkinson said he did not have the information on hand as to how much had been budgeted for FY2002, but said he could get that information.
Mr. Thunder observed that, in the past, the Legislature had not budgeted those particular line items, and that the current legislation represented a departure from the way it had been done. He said the total amount in the Distributive School Account had been based on those particular line items. Once that total amount had been determined, and the basic support amounts per student had been determined, he stressed that it then became the responsibility of the local boards of trustees to do the budgeting. Mr. Thunder said the money was unrestricted when it went to the districts, and the districts would do the best job that they could in budgeting the funds.
Mr. Atkinson commented that, in fiscal year 2002, the amount budgeted for textbooks was $14,975,000, while the amount actually spent was $15,000,000; the amount budgeted for instructional supplies was $21,243,000, while the amount actually spent was $24,000,000; and the amount budgeted for instructional hardware was $3,290,000, while $2,289,000 was actually spent. Assemblyman Brown observed that meant that $39 million had been budgeted while $41 million had been expended. He said he would love to have teachers tell him that the raise they had received had not gone to instructional materials. He stated that he wanted to be certain that $64 million would be going to those items, and that he thought that could be accomplished by amending Section 25 to read, “the sums appropriated by or authorized in Sections 15–23” and amending Section 1 to read, “Sections 15–23 would be used for those purposes only.” Mr. Atkinson said he did not see any immediate reason it could not, as that had certainly been the intent.
Mr. Stevens explained that the reason Section 25 mentioned Sections 15–22 was that those were separate items that were listed in the top section of the sheet, which was where the textbook money was. He said that the figures listed below that were for special education, adult diploma, school improvement programs, and special funding. He added that the money included in Sections 15–22 was for specific line items within the Distributive School Account and had to be spent in the manner specified in the bill. The textbook restrictions in Section 23, Mr. Stevens said, were included in the basic support figures, which then were distributed on a per-pupil basis to the school districts, which were then responsible for budgeting at each district level.
Assemblyman Brown stated that he was new to the process and did not quite understand why the money for textbooks could not be moved into the upper section. He said he understood it was distributed on a per-pupil basis, but was not sure why the two could not be tied together. Mr. Stevens pointed out that until now, the basic support guarantee had been an amount that had gone to the districts as a local responsibility. He said it was possible, if such was the intent, to take textbooks, instructional supplies, and instructional software out of the basic support guarantee figure and away from being a local responsibility, and make it a separate appropriation line item within the Distributive School Account. However, he stressed that would have many ramifications that the districts would want to discuss with the Committee.
Assemblyman Brown said a prime concern was seeing that students were provided with updated, excellent textbooks, and that supplies were provided in the classrooms. He maintained that if money were poured into the Distributive School Account and that did not happen, it would not be fair to teachers or students. Mr. Brown expressed a desire for the Legislature to be able to make sure it did happen.
Assemblywoman Giunchigliani explained that the $50 the Governor recommended would not be subject to the formula but would be allocated directly to districts exclusively for textbooks in addition to what they currently spent on textbooks, instructional supplies, and materials. She said that language was already fenced off for that purpose. Ms. Giunchigliani expressed a desire that teachers would not have to spend out of their pockets, but she said that, unfortunately, even with the $64 million plus the $50 in the textbook money, teachers would still be buying out of their pockets as the funding would still not be enough.
Ms. Giunchigliani pointed out that although Nevada had always believed in local control for the school boards on where to direct certain monies, only basic support funds had been subject to bargaining. School improvement programs and special funding had not been subject to bargaining, and now the instructional supplies and materials had also been excluded from bargaining. She added that the language that said the money for instructional supplies and materials could only be spent on instructional supplies and materials, but with input from the teachers, had been hotly contested and negotiated in meetings and subcommittee hearings. She said the only reason some legislators had agreed to the fencing-off language was so they could say, “We did fund additional monies for textbooks that are specifically allocated for that.”
Mr. Stevens pointed out that Section 1, subsections 4 and 5 of the bill, provided that if the Department of Education determined that the school district had not expended the required minimum amount of money for textbooks, instructional supplies, and instructional software, the basic support allocation otherwise payable to that district would be reduced in the future in the amount equal to the difference. He saw this as a strong incentive for the districts to expend the minimal amount of money required as outlined in the bill since, if they did not, it would come out of their next year’s basic support allocation.
Assemblywoman Angle asked how many non-licensed staff were paid out of the 55 percent of the school budget that went to instructional licensed staff and instructional non-licensed staff. Mr. Thunder replied that, in terms of the full-time employees (FTE) involved, the non-licensed would equal slightly less than 10 percent of the licensed.
Assemblywoman Angle then inquired if the settlement dispute money for negotiations with the associations came out of the 85 percent for salaries and benefits or out of the other 11 to 15 percent. Mr. Thunder responded that if money was needed for arbitration or a settlement, the funding would come out of the local school districts’ budgeting process. If the amount needed was more than was originally budgeted, then various line items considered somewhat discretionary in those expenditures could possibly be postponed. The one thing that had been mentioned earlier by Assemblywoman Giunchigliani was that the local districts would not have the option of seeking additional revenue to fund those line items, but that the money would have to come from somewhere else in their budgets.
Mrs. Angle asked if the funds ordinarily came out of the part negotiated for salaries and benefits or if the funds came out of the part that was left over after those negotiations. Mr. Thunder stated he was not directly involved in those negotiations, and was not sure there was a distinction. For example, he noted if the Legislature provided for a salary increase, it did not automatically mean that teachers would receive that percentage salary increase. The Legislature would provide the funding for the raise, and then the local districts would have to go through the process of negotiating with the associations to come up with the effects of that on their district.
Mr. Thunder added that 85 percent of the school budget was not fenced off for salaries. Assemblywoman Angle said she understood that but wanted to know, when there was a dispute, if the money came out of a teacher’s salary or out of the operating expenses. Mr. Thunder replied it came from wherever there was room in the budget for it to come out of.
Assemblywoman Angle said she had heard Mr. Thunder mention something about 80 percent of education support being in the Distributive School Account. She asked if money was given to education outside the DSA or if the DSA was all that was funding education. Mr. Thunder noted that a relatively small portion came from the federal government and that a very small amount of local revenue was contributed. When you put all of those together, he said, that would be the total amount expended for education in Nevada. If you divided that by the number of students, you would come up with a total expenditure per student. The formula of the Distributive School Account, the Nevada Plan, had originally been intended to pay approximately 85 percent, the General Fund portion, of the cost of educating students in Nevada. He explained that the remaining 15 percent had been intended to come from monies “outside the formula,” the two main components of which were a $0.50 property tax and the basic government services tax.
Assemblywoman Angle clarified what she wished to know, which was whether the 85 percent that was the state portion was all included in the Distributive School Account. She said she was not interested in federal or local funding, but only in state funding mechanisms. Mr. Thunder noted that a few years earlier, the Distributive School Account, Budget Account 2610, had meant only the basic support per-student amounts. Two or three sessions earlier, however, other little line items had been added, including remediation money and early childhood. Mr. Thunder stated that most education budget items were in that account, but that a few more were in Budget Account 2699, which contained funding for specific purposes, much of which went to school districts. Budget Account 2699, he pointed out, would be an additional amount of state funding. Virtually all of the state educational funding, with the exception of Budget Account 2699, was in the DSA, although it was not all in basic support.
Assemblyman Marvel asked if parents ever contributed any money out of their pockets for textbooks. Assemblywoman Giunchigliani’s response was that if a child lost a library book or a textbook, they were supposed to pay, but districts were lucky to collect 5 percent of the replacement cost. Mr. Marvel then asked if parents ever volunteered money. Ms. Giunchigliani replied that they did so through PTAs and PTOs. She said there were many fund-raisers. She stated that such funds accounted for probably about a fourth of the budget, yet it was not acknowledged that they were subsidizing what the state should be paying, which she said was unfortunate. Ms. Giunchigliani stressed that she would like PTAs to get out of the business of fund-raising for schools.
Assemblywoman Leslie commented that schools sometimes charged lab fees and fees for some extra instructional materials. She added that if parents could not afford to pay, arrangements could be made, but that parents did at times contribute.
Assemblywoman Leslie expressed the opinion that the budget passed by the current Legislature was a good budget. She related that in her daughter’s current literature class, she had been issued a textbook that had her father’s name in it from when he had gone to Reno High School. Ms. Leslie said the book was still in fairly good shape, and the schools had done a good job at stretching their resources as far as possible, but averred that when students were using the same books their parents had used in high school, there could be no question that education was under-funded.
Assemblywoman Leslie asked Mr. Thunder what progress he would say the new budget represented, in general terms, over the previous session. Mr. Thunder said he thought significant progress had been made. One of the key changes he noted was in the amount for group insurance was to be increased 10 percent in each year of the biennium, plus another 2 percent had been proposed to be set aside for that. The most significant thing about that proposal, he said, was there was to be an increase in the second year. In prior budgets there had usually been a slight increase in the first year, and that same percentage had been used again in the second year. He claimed that would bring the budget more in-line with rising costs facing the state. He commented that there were positive changes in other areas as well, and that the budget generally was a step forward.
Assemblywoman Chowning stated that schools provided lists of $50 to $100 worth of items that students were encouraged to bring if they could, such as pencils, pens, tissues, and school boxes. Those were supplies that were given to the classroom out of the parents’ or the children’s own pockets. She said each child felt very intimidated if they could not afford to bring those supplies while their classmates could.
Mrs. Chowning asked about the difference between the new budget and the prior year’s budget concerning special education and at-risk students, especially the differences in the mandates from the No Child Left Behind Act and what our students are going to have to endure because of the increase in the number of at-risk students. She wanted to know how the state would adequately fund those students. Nevada, she said, had one of the highest percentages in the country of students who did not speak English proficiently. Because of the impacts of the No Child Left Behind Act, many more students were not going to pass their classes and the requirements that were being placed upon them. She asked that those needs would be addressed in the budget.
Mr. Thunder explained that the funding for those student needs would continue the way it had in the past, with the unit funding approximately $31,000 per year. Those units had originally been intended to cover the cost of one teacher but the $31,000 was obviously short of the approximately $56,000 or $57,000 that it currently cost per teacher. In special education, Mr. Thunder stated that the unit amount covered roughly 45 to 55 percent. The number of units had been allowed to grow at the same rate the student population had grown. Approximately 10 to 11 percent of the students were in special education programs.
Mr. Thunder said the more critical section that Ms. Chowning had mentioned had to do with at-risk students, and many of the special education students were in that category. He noted that the one area not really addressed in the budget in the past, or in the current budget, for that matter, had to do with the English literacy problem. So many students not being proficient in English put a great strain on school districts’ budgets and was a disservice to those children. Mr. Thunder said one area that started in the last budget, or possibly even the one before, that would address some of those concerns was that of remediation funding, with $1 million in the first year and $1.5 million in the second year, for students in non-Title 1 schools, to help with some tutoring and extra activities to help them correct their academic problems. He added there was a substantially greater amount for schools in the Title 1 schools that were declared in need of improvement.
Assemblywoman Chowning asked Mr. Thunder if he felt that, although the state had started to address those problems, the needs were going to be far greater than the funding currently being provided in both areas. Mr. Thunder responded that the districts were trying very hard to take care of children with special needs through the normal funding, but that it had become the same kind of issue as special education, where insufficient revenue was provided to cover all those costs. He asserted that funding on a per-student basis would be significantly less than the amount that was being spent, but that was not recognized in the current budget.
Assemblyman Anderson commented that the special programs, music, field trips, and such all had ended up having to be paid by parents. With the basic support that had been put into education in the past, the school districts could barely meet their needs. Parents, he stated, were putting forth at least $200 for every one of their children. Mr. Anderson’s second observation was that sometimes a textbook was looked upon as the best material going to a student. In reality, he said, that was not true. In some classes, the best piece of material was a handout that could be distributed, or a section of a textbook. In his opinion, the fact that Ms. Leslie’s daughter’s textbook was still in circulation merely demonstrated the care that teachers took with the resources that had been given to them for fear there would be nothing else to give future students. He said that when his textbooks were replaced, he threatened the students in his classroom with dire consequences if they lost that $50 book. He noted that a huge amount of quality classroom time was devoted to ensuring that textbooks were there and were covered and clean and kept in a proper fashion.
Assemblyman Anderson went on to say the at-risk schools had the least opportunity to get computers and things that were provided in schools with solid PTAs and student support groups. He asked how the Legislature could, in the current budget, make a sizeable contribution to at-risk schools to meet their needs in terms of school support materials that parents who held minimum-wage jobs could not provide. He wondered if there was a formula that would allow the school districts to make those decisions.
Mr. Thunder pointed out that there were some federal funds available for technology. He added that some funding for educational technology was also included in S.B. 191. One of the purposes of that was to provide computers able to network so they could be available in all schools, focusing upon those at risk.
Assemblyman Anderson acknowledged that past budgets had fallen short of funding the number of special education classrooms that were in place. He noted that the school districts had to make up the difference from their General Fund revenue and asked, in comparison to the last fiscal budget, how many special education classrooms the current budget was short.
Gloria Dopf, Education Equity, Nevada Department of Education, explained that, under the 387 Budgeting Plan (performance-based budgeting), school districts were required to identify the amount of funds that they spent for special education services in total, without regard to the revenue source. The districts, as of the previous year, had expended over $200 million in funds for the special education programs, of which approximately $65 million to $70 million was state unit funding. The difference would be what the districts had paid above and beyond state unit funding for special education services. Ms. Dopf said that amount did not equate to the number of additional classrooms, because part of that was the shortfall in the amount per unit, which was $31,000 in the current biennium or $30,000 as of last biennium. She added that a teacher’s salary and fringe benefits cost more than $30,000, so the districts had to first make up the difference in the salary to support the instructional service, and then all of the related services and additional classrooms that were needed came out of the previously mentioned $130 million difference. She stated that the districts had operated approximately 100 additional classroom units out of that $130 million, as well as transportation, teacher assistants, and all of the other additional costs associated with a full special education program.
Assemblyman Anderson asked how the state was anticipating budgeting for the No Child Left Behind concept in the not-too-far-distant future without any additional state dollars to meet the needs. Ms. Dopf asserted that it was clear the state did not intend to use the Distributive School Account or put forth additional funds to fund No Child Left Behind mandates, so there would not necessarily be an increase to meet No Child Left Behind in the current budget. She said federal funds had been looked at to meet the requirements of No Child Left Behind.
According to Ms. Dopf, there had been discussion that at least some mandatory components of No Child Left Behind were not funded within the program. At the current time, she noted, districts had voiced that funding concern to the Congressional staff. Ms. Dopf listed the assessment, the site data collection, the building for reporting purposes, and the analysis of the data needed for No Child Left Behind as areas that already had inadequate federal funds, but she said school districts were not looking for state funds to pick up the federal requirements.
Assemblyman Anderson asked if it was true that the local districts had the responsibility of putting the No Child Left Behind program in place and that the money was not going to come from the state. Ms. Dopf confirmed that the districts would have to do it. Mr. Anderson reiterated that funds for textbooks and other items had been fenced off so the districts could not use any of those funds. Ms. Dopf noted that having funds dedicated to specific uses would make it more difficult for districts to meet certain mandates.
Assemblywoman Giunchigliani said she was aware that everyone felt the budget contained a large dollar amount, but she asserted that there were still things it did not fund. She pointed out that it did not fund the full-day kindergarten that the Governor and the iNVest Plan had asked for. She added she did not know any other business that did not have an inflation cost built-in, yet the budget lacked that. The Legislature had funded absolutely no inflation cost for textbooks, instructional supplies, library books, instructional software, or anything else.
In addition to inflation costs and full-day kindergarten, Ms. Giunchigliani pointed out that no additional time or days had been added to the school year, even though parents, teachers, and school boards had requested that. What had been added in the last five years, she said, was an entire rewrite of new standards and new curriculum and new items to teach and not one minute or day of extra time, even though the superintendents had asked for at least ten days. She noted that the Governor had wanted to add time to the school year, but, in the end, there had been no funding for it
As for health insurance, Ms. Giunchigliani said the Governor had put in increases of 10 percent and 10 percent for the next two years. The problem was that the districts were seeing an 18 percent cost increase, so even with the 10 percent increase in the budget, the districts were still 8 percent in the hole. She acknowledged there was an additional 2 percent of funding that the districts would have to come to the Interim Finance Committee (IFC) for, but they were already in the hole just on that matter.
Assemblywoman Giunchigliani made it clear that it was still not known how much of an impact the unfunded mandates of the No Child Left Behind program would have. Funding for special education was $30,000 per unit, which was defined as a teacher and a classroom; $56,000 was the actual cost per unit, so the state pitted special education students against students in regular education just to fund the average budget, and had now taken away from instructional supplies and materials and the ability to negotiate for a decent wage.
Ms. Giunchigliani then addressed teachers’ salaries. The Governor had included a 2 percent salary increase in the first year and zero in the second year. Teachers in the last biennium had gotten a sole 2 percent increase, which did not even cover inflation. Even with the 2 percent raise the Legislature had recommend for the second year of the coming biennium, not one beginning salary schedule would meet $30,000 to start. That had been a goal of the Legislature, but even that would still not have been enough to recruit quality new teachers.
Ms. Giunchigliani said she had read in an article that day that Clark County had been looking for 1,200 teachers, but had only been able to hire 200. She stressed that, in her opinion, the Legislature had not done as good a job as it could have in dealing with the huge issue of taxes, but that an $869 million budget was not sufficient to fix the problem. At some point, she said, they would need to recognize that and face up to the fact that, although they had made some good strides, they had not fully funded education. She stressed that the current increases did not even cover the growth or the cost-of-living increases for purchases of a textbook or a piece of paper.
Assemblywoman Leslie stated that what she had been very disappointed to see cut in the final budget negotiations was $2 million for class-size reduction in kindergarten. She said teachers had told her that kindergarten classes in Washoe County often contained over 30 students. For $2 million more, class sizes could have been cut to 22 in kindergarten.
Assemblywoman Gibbons related that teachers had told her that in the past the Legislature had approved raises of 3 percent or different amounts, and the teachers had to go back to the districts and negotiate. Most often, she said, they had not gotten the 3 percent, but received perhaps 0.5 percent. She asked if that were true.
Mr. Thunder replied that what the Legislature provided was funding for cost-of-living increases, but that it was still the prerogative and the responsibility of the districts to go to their associations and negotiate the actual salary increase. The Legislature did not grant salary increases per se. The Legislature provided the funding, and technically, the actual changes in the salary schedules were the responsibility of the school districts and their associations.
Assemblywoman Angle noted that Section 27 addressed an account to cover a shortfall of funds. On April 29, $71,753,040 had been put into that account to cover some shortfall areas. She said she had heard about $3 million that had not been replaced, yet there was currently $4,196,000 left in the account. She asked if that meant that in the next month the state was going to spend $7 million.
Mr. Thunder explained that during the current year, because of the cash flow situation, the Distributive School Account was being paid on a monthly basis. The monthly amount was approximately $56 million to $60 million. The amount that Mrs. Angle had seen remaining in the account was the cash that was there, and that the state still had one more month to pay. The Department of Education’s analysis of the money that was coming in, the school support tax, showed that slightly more than the $71 million supplemental appropriation would still be needed. A large amount of that would come from the slot tax that would not start coming in until near the end of June. The amount of that line item was currently zero, and was going to be somewhere in the area of $30 million, which would make up a large part of the amount that would be paid out, but not all of it.
Assemblywoman Angle asked if the Classroom on Wheels program was going to be moved from Budget Account 2699 into the Distributive School Account. Mr. Thunder replied that the Classroom on Wheels program had been subtracted from Budget Account 2699 and put into Budget Account 2610. Mrs. Angle asked if the $301,000 spent last time was going to be raised to $1.3 million. Mr. Stevens responded that the $301,000 had been subtracted from the other state programs budget and placed within the DSA and was added to the amount for early childhood education. Section 20, subsection 2, provided that $301,000 in each year would be provided to the Classroom On Wheels program. He added that was an area of contention between the Assembly and the Senate members.
Chairman Arberry announced that members would be going into the committee for class-size reduction discussion. He said he wanted to get everything in before noon, and he called for a five-minute break. The meeting was recessed at 10:06 a.m.
Chairman Arberry called the meeting back to order at 10:20 a.m. to deal with the issue of class size.
Assemblywoman Giunchigliani questioned why $2.5 million was being taken out of the Distributive School Account for non‑Title 1 schools in Section 19. Ms. Braun replied that was the before/after school funding. Ms. Braun said it historically had been $1 million in each year, but that, at the last hearing, in a discussion of the DSA, it had been increased to $1.5 million in the second year for supplemental services for the non-Title 1 pupils. She added that was for No Child Left Behind.
Assemblywoman Giunchigliani asked why the state was going beyond the mandate and then leaving an unfunded mandate. She said that had not been discussed by the subcommittees. Ms. Braun said that it had been discussed in the very last hearing. Assemblywoman Giunchigliani countered that there was then a $2.5 million unfunded mandate, and a $9 million one in S.B. 191. Ms. Braun explained that in S.B. 191, the $9.95 million was for educational technology that had been provided by previous Legislatures and was not directly tied to No Child Left Behind or for that purpose. Both women agreed that had not been contained in the Governor’s Budget.
Ms. Braun referred the Committee to Senate Bill 508, which provided the class-size reduction information. She explained that the appropriation for fiscal year 2004 in the amount of $408.9 million, contained in Section 1 of the bill, was essentially for salaries and benefits for 1,887 teachers. That particular appropriation, she added, continued class-size reduction as it had been in the past: 16:1 for grades 1 and 2, and 19:1 for grade 3. In Section 2 of the bill an additional $117.1 million had been appropriated to fund salaries and benefits for 1,953 teachers.
Section 3 of the bill, Ms. Braun explained, had been in place since the 1997 Legislative Session, and provided school districts flexibility regarding class-size reduction funding for grade 3. They could carry out alternative programs for reducing the ratio of pupils per teacher, carry out programs of remedial education, and so on. Rural school districts, she noted, often utilized that flexibility to implement reading recovery programs.
Ms. Braun explained that subsection 2 of Section 3 was the new component of the bill. It provided that in lieu of complying with implementing 16:1 in grades 1 and 2 or 19:1 in grade 3 or utilizing the funds for remediation programs such as Reading Recovery, the rural school districts could carry out a program with alternative pupil/teacher ratios. They could not exceed 22:1 in grades 1 and 2 or 25:1 in grades 4–6, thus expanding class-size reduction to grades 1–6. If they were to do this, if any school district chose to do this, they needed to evaluate the effectiveness of the program in order to gain approval. Had they been able to reduce team teaching in grades 1 and 2; had they reduced pupil discipline problems in the classroom; and had they improved the academic achievement of pupils? That would be part of the evaluation process. A report would go back to the Legislative Committee on Education during the interim and to the Legislature at the next session.
Because the large school districts, Clark and Washoe, had not been able at that time to come up with a plan and implement it in the next biennium to expand class-size reduction or have flexibility in class-size reduction, they would be required to do a study of class sizes in their districts during the next biennium. They would be required to look at different class sizes and how they would affect discipline, achievement, and team teaching in those counties. They would report back to the next Legislature.
Ms. Braun mentioned that Section 5 of the bill simply allowed the class-size reduction funds to be used for the pupils who were most at-risk. It provided authority to do that. The money could not be used to settle disputes or adjust salaries or such. Section 6, she said, provided a sunset clause to the flexibility in class-size reduction. It could not continue after the next biennium without the Legislature’s approval.
Assemblyman Perkins asked Ms. Braun how Nevada’s average class sizes compared, either individually by grade or across grades 1–5, to the national or western states averages. Ms. Braun replied that, based on 2000–2001 information, the average class size in the United States was 16:1. The average in Nevada, across the grades, was 18.6:1. As for individual western states, she said Colorado’s average was 17.3:1 and Arizona’s was 19.8:1.
Assemblyman Perkins next asked if it was known how many districts were actually achieving the class-size mandate that the state had determined was desired in Nevada, and how many of them would achieve it, given the money that was included in the bill. He also asked how many waivers existed. Mr. Thunder answered that the law required a ratio of 15:1. Many of the waivers that were granted, he added, were necessitated by the districts’ inability to meet the 15:1 due to funding being provided only for 16:1 in grades 1 and 2 and 19:1 in grade 3. Assemblyman Perkins asked if there were a number of districts that were unable to accomplish the class-size mandate with the existing funding. Mr. Thunder replied there were very few, and they were small districts that only had three or four classrooms, and adding a teacher would have been a considerable cost that they did not have the funding for, and would have dropped the average class size in the district significantly under the proposed rates.
Assemblyman Perkins noted that it might be easier for the rural districts with fewer students to achieve the proposed average, but asked how class-size reduction was affecting the two largest districts in the state. He said he understood that the large districts were faced with a number of challenges in trying to accomplish the proposed class sizes without hiring more teachers. Ms. Braun explained that when the discussion first arose regarding providing flexibility to the larger school districts, there had been great concern about facilities and classrooms, as well as the additional teachers that would be needed. She cited that as the reason the large districts had been asked to do the study instead.
Assemblywoman Giunchigliani commented that class-size reduction and the issue of flexibility had been hotly contested throughout the session. She noted that the main goal of flexibility was to eliminate team teaching, and that Elko County had been able to accomplish that because that district did have the classroom space. She asked if dollars had been allocated to some of the rural districts that did not even have 1:25 in grades 4, 5, and 6, and asked what the average was at that grade level in the rural districts. She mentioned that she had seen documentation that those districts were actually at 1:22 and asked if they would still get funding for class-size reduction. Mr. Thunder replied that even though Elko had the pilot program, it was still funded on the basis of the money the district would have received under the traditional program. He said the Department of Education had looked at grades 1 through 3 and had allocated the teachers based upon that model. Assemblywoman Giunchigliani asked what the dollar difference was on that. Mr. Thunder said Elko had received the same amount of money for the class-size pilot program as they would have received under the traditional program. He said they had been given the money assuming they were using the same program that everybody else was, except that they were allowed to use that money to expand the program to grades 1 through 5 or 6.
Assemblywoman Giunchigliani said the reality of going to 1:22, then, was that it was not a savings as some people had been arguing throughout the session. Mr. Thunder agreed. He pointed out that two districts had not received funds because their existing class sizes had already been lower than the proposed ratios. He said he assumed that if a funding mechanism were devised based on a ratio of 22:1, and that ratio already existed in a district, the same principle would apply. They would not get the money.
Assemblywoman Giunchigliani stated that there had been an agreement to go to 1:22 for kindergarten, but that had somehow gotten lost. She said it was shameful that, according to some kindergarten teachers, some kindergarten class sizes were in the 40s. Ms. Giunchigliani asked why Nevada was treating 5-year-olds differently from first and second graders. She asked why higher education was funded at a ratio of 1:12 for adults, but smaller children were not helped to be successful in learning. She commented that if there were not teacher/pupil ratios of 1:40 for 5-year-olds, it might be possible to teach them and sort out developmental problems earlier on and not have them enter school unready to learn at the first- and second-grade level. Ms. Giunchigliani expressed the opinion that the most shameful part was that kindergarten class-size reduction would only cost $2.1 million. She urged the Committee to consider including kindergarten in class-size reduction, as had been the original intent.
Mr. Stevens addressed areas involving the Distributive School Account and the class-size reduction bill where the closing actions of the Ways and Means Committee had differed from the Governor’s recommendations. The first area, he said, was full-day kindergarten. The Governor had recommended that 30 percent of the classrooms in the state be implemented for full-day kindergarten in the second year of the biennium at a cost of about $24 million over the biennium. Mr. Stevens noted the Committee had recommended that not be implemented.
Mr. Stevens stated that the class-size reduction program had been approved at the Governor’s recommendation level. Flexibility had been included in the bill for rural districts but not for counties with populations greater than 100,000.
On the stipends bonuses, Mr. Stevens said the Governor had recommended a $3,000 stipend for teachers in high-impact areas such as math, science, and special education, and a $2,000 stipend for teachers at at-risk schools. That recommendation had been replaced by the Legislature with a one-fifth retirement credit for teachers in those particular areas. The savings in the coming biennium, compared to the Governor’s recommendation, would be $17 million.
Mr. Stevens pointed out that, in early childhood programs, the Classroom on Wheels (COW) funding had been moved from the Other State Programs budget to the Distributive School Account. In Professional Development, the reading and English language literacy programs had been combined with the Regional Professional Development Centers. He noted that those changes would create a savings of approximately $3 million over the biennium. In the remediation area, he added, the total funding had been approved at the Governor’s recommended level, but there had been a switch of $500,000 from low-performing schools to the summer intercession funds area.
The Governor had recommended an additional $50 per pupil for textbooks, instructional supplies, and instructional software. The Committees had approved fencing off all funding in the Distributive School Account for those particular areas, and that had been included in the language in the DSA bill.
Allowances provided for inflation in health insurance rates were 10 percent in fiscal year 2004, Mr. Stevens continued, and an additional 10 percent in 2005. A separate bill would provide $5.8 million to the Interim Finance Committee that districts could apply for. That was based, as closely as possible, on an additional 2 percent in fiscal year 2004.
Finally, in K-12 salaries, the Governor’s budget had built in a 2 percent increase in the first year of the biennium. The Senate Finance and Assembly Ways and Means’ closing action had increased that to 2.75 percent, or an additional three-quarters of a percent, in the first year of the biennium and a 2 percent increase in the second year of the biennium.
Mr. Stevens stated that the financial impact of all those differences was about an additional $1 million in General Fund over and above the Governor’s recommendation in the first year of the biennium, and about $28,749,000 in the second year. That was the additional funding that would be added over and above the Governor’s recommendation, based on the current Distributive School Account and class-size bills.
Assemblyman Marvel asked if that salary increase was for kindergarten through twelfth (K-12) grade only. Mr. Stevens responded that the action taken by both Committees did include the 2 percent salary increase in the second year of the biennium for all employee groups. There was an additional cost of around $14 million for those other employee groups in that second year.
Assemblyman Carpenter stated for the record that the class-size reduction did include Elko’s 22:1 program, although he did not see Elko specifically mentioned. Ms. Braun added that was true because of the flexibility language in the bill. Chairman Arberry congratulated Assemblyman Carpenter for looking out for his constituents.
Chairman Arberry asked if the school superintendents wished to comment briefly. Dr. Hager, Superintendent of Schools for Washoe County, said he would really appreciate putting kindergarten class-size reduction back into the bill. He expressed hope that the Committee understood the difficulties each school district was in at this time because of the lateness of dealing with the funding issue. He said the districts were doing the best they could, but they were faced with a lot of difficult questions in their districts. He added that he hoped the Legislature would do all it could to fund education and increase revenues.
Assemblywoman Leslie asked Dr. Hager and Carlos Garcia what the impact on the school districts would be if the Legislature did not close the budget and raise taxes that week. She said she had read in a newspaper article that Clark County would not be able to hire teachers. Dr. Hager answered that the Washoe County Board of Trustees had passed a budget the previous night because of a June 8 deadline for submitting a final budget to the Department of Taxation and the Department of Education. Not knowing what would ultimately transpire in the Legislature, he said they had gone with a worst-case scenario and provided a balanced budget that showed the need for $16 million in budget reductions. He said Washoe County was allowing administrators to interview people, but that they could not transfer or move on anything until they knew what their funding would be. The district could not plan its future, so each day of delay really created a problem. He stated that Washoe County School District was still going to have to hire 300 to 400 people, and the district was losing the competitive edge, because anyone outside Nevada that might have been interested in coming here was probably afraid to make a commitment. He said the district was losing some of the quality, the competitive edge, and the ability to plan. Dr. Hager emphasized the phenomenal emotional impact the situation had on district employees who did not know whether they would have jobs. He added that the situation had a negative fiscal, emotional, and educational impact.
Carlos Garcia, Superintendent of Schools, Clark County School District, agreed that the situation had a huge impact. By this time, he said, his district had usually hired 800 to 1000 teachers. Currently, the district had hired 200 teachers. Until a budget was passed, the district could not know what to do with the existing unfilled positions. He said they would hate to hire people and then have to lay people off due to insufficient funds. Mr. Garcia stressed that if a district like Clark County ever hired more people and had to lay them off due to lack of resources, the district’s ability to hire new people from out of state would be greatly diminished. He noted that Clark County hired 70 percent of its teachers from out of state because there were not enough teachers in Nevada. He said Clark County had more than 400 contingency offers to teachers who had not accepted them, and the reason they had not accepted them was they were not certain they wanted to work in a state that had not resolved its budget issues.
Mr. Garcia thanked the Legislature for trying to make a commitment toward education, and called the current changes “good first steps.” He said he did not want to sound ungrateful, but the current proposed legislation would not move Nevada up five or ten points from being 46th in per-pupil funding in the nation. He expressed a desire to see a pupil/teacher ratio of 22:1 in kindergarten, at least as a pilot program for at-risk schools. He noted all available research indicated that children who went to preschool and who had small classes in kindergarten did better as they moved up through the education system. Mr. Garcia stated that the best way to improve student achievement was to start with the youngest children, and yet he had seen as many as 42 students in a kindergarten class. He said that was not a very good introduction to education.
Another thing Mr. Garcia said he would like to see was some great strides taken in ELL (English Language Learners). He pointed out that the fastest-growing segment of the student population in Clark County was the non-English-speaking students, and the impact that had on the school district was tremendous. About 10 or 12 years before, Mr. Garcia noted, there had been only about 15,000 non-English-speaking students; at the current time, Clark County School District had about 45,000. He said most states funded for ELL students just as Nevada funded special education, because that program required extra services that were difficult.
Regarding the proficiency exam, Mr. Garcia stated that 13 percent of Clark County students would not be graduating that year from high school, but would receive certificates of attendance. One of the reasons, he said, was that many of those students were non-English-speaking students. They were being asked to take tests in English that they were not ready to take, especially if they had arrived in the U.S. in 11th or 12th grade. Mr. Garcia stated that such issues would not go away, and that, sooner or later, the state would have to address those types of issues. He thanked the Legislature for having acknowledged the iNVest plan, which had been put together by the 17 counties and 17 school districts in Nevada, and which would have cost $879 million to implement. He said the districts had known that was not going to happen, but that was what it would take for Nevada to be among the top national educational systems in the United States.
Chairman Arberry asked if the kindergarten classes that had been mentioned as having 35 or 40 students were taught by one teacher or team teaching. Mr. Garcia replied that they were half-day classes and were taught by one teacher.
Assemblywoman Chowning mentioned she had heard Dr. Hager say his district had passed two budgets, a regular budget and a contingency budget. Mr. Garcia indicated that his district had done the same thing. Mrs. Chowning asked what was at stake if the education budget and tax package did not pass in time for the districts to meet their budget deadlines. She asked what the mechanics were for implementing a second budget and how much flexibility time there was. Mrs. Chowning said the Committee needed to know exactly what was at stake.
Dr. Hager stated that the Washoe County School District had presented two alternate budgets to the Board of Trustees the night before, but had actually passed only one, the worst-case scenario. He said a number of trustees felt that since they were not really sure what was going to happen, they ought to go with the worst case and adjust that later. They felt that would be better than going with a best-case scenario and then end up in a lay off position because they could not get the revenues. Dr. Hager explained that the budget the district had passed based on a worst-case scenario was balanced and called for reducing expenditures by approximately $16 million. Those expenditure reductions would mean increasing class sizes in grades 4 through 12 by 2 students, which, at the high school level, was going to put classes up to 32, 33, 34, because they would staff at 28:1, which actually generated 30, 32, or 33 in a classroom. The district would also eliminate one-half of the Center for Teaching and Learning, which included specialists in mathematics and science. Expenditure reductions would also include a nearly $900,000 reduction in administrative costs in both the central office and the school district. The district would also have to eliminate 90 percent its sex education program, though the law still required the teaching of sex education. Sabbaticals for staff would be eliminated, and out-of-state travel would be reduced by $250,000, or 50 percent. Also eliminated would be $1 million in athletic activities. Dr. Hager pointed out that many of the things that would have to be eliminated were those things that had allowed Washoe County School District to reduce the dropout rate from 7 percent per year to 3.5 percent.
Dr. Hager explained that, by law, if the Legislature could not conclude its business within the mandated 120 days, school districts had the right to modify and amend their budgets up to 30 days after the Legislature adjourned. He added that, hopefully, the district would be able to amend its budget to bring back many of the things it currently anticipated having to eliminate.
Mr. Garcia explained that Clark County was in a similar situation. The district had created the worst-case-scenario budget, and had also created a budget that was balanced based upon the recommendations of the Governor. Unlike Washoe County, Clark County had chosen to submit the budget that included the Governor’s budget and revenue recommendations. That budget, however, had not provided any opportunities to add on new programs, even though the district had reduced its budget by $97 million in the past two years. However, Mr. Garcia said the district did at least manage to stay afloat, and that they were content with that. He added that the district had done an analysis of all its programs and knew what programs worked. The frustrating part was that the district did not have the funds to implement some of those programs that were very successful with students.
Mr. Garcia stated that if the worst-case scenario actually came to pass, the Clark County School District would hopefully be able to develop a new budget plan. He pointed out there was no district in the entire state that received lower per-pupil funding than Clark County. As a result, Clark County had the largest classes in all the state of Nevada. There were only five states in the United States that had larger high school class sizes than Clark County did, which, Mr. Garcia noted, had an impact on student achievement.
Mary Pierczynski, Superintendent of Schools, Carson City School District, agreed with Dr. Hager and Mr. Garcia and added that, even though Carson City was a smaller district, it faced much the same issues as Washoe and Clark Counties. She said Carson City School District would not hire anyone until the Legislature had made its decisions as to what the education budgets would look like. She mentioned three things that were important for the Committee members to understand. First of all, she said, part of special education was unfunded, and that even Carson City spent $4.7 million of its General Fund to support special education. Second, Nevada had a large English Language Learner (ELL) population in all districts, even small districts like Carson City. Fully 24 percent of Carson City students were English Language Learners, yet there was no additional money to help support and shore up those students who needed help to pass such things as the high school proficiency exam.
The third thing, she said, was to keep in mind the No Child Left Behind program, of which the state had only begun to see the tip of the iceberg. She said the districts received some federal money to shore up testing and that sort of thing, but the key issue in keeping schools from being designated “in need of improvement” was the students in the classroom who needed extra help because they could not meet the requirements. She stressed that those children needed to be helped and supported.
Assemblyman Hettrick stated that he hated to sit and listen to some of the testimony because it seemed disingenuous to him. He asked, if the Legislature passed the budget and the Distributive School Account as they were at the time, the districts were going to reopen their budgets and raise the amounts to the amount the Legislature passed. Dr. Hager replied that whatever the DSA would generate for the districts, they would take that and do a reverse process, amend their budgets, and bring back in whatever the DSA amount would allow them to do.
Assemblyman Hettrick told Dr. Hager that was exactly his point. If the districts could open the budgets and add the money, why could they not open them and take it out instead of scaring constituents by passing a budget that was underfunded. He stated that no one was proposing to cut the education budget.
Dr. Hager answered that the districts were, by law, to provide balanced budgets on a variety of dates: April 15, the third Wednesday in May, and June 8. He said the state could promise a lot but, until it was delivered, he felt a very strong fiduciary responsibility to be able to recommend something to the school board. He said his district did exactly what it had to do, and every school district in the state did that. He took exception to being accused of using scare tactics. He claimed the districts had gone through a very extensive democratic process in determining what it was going to take.
Dr. Hager gave Assemblyman Hettrick a case in point. The districts had heard two weeks before that things were fine; they were going to get $704 million according to the Governor’s recommendation. The very next day the headlines had gone backwards to $560 million. Unless the Committee had a guarantee for the districts, he stressed that he could do nothing other than what he believed was his fiduciary responsibility. He said they had based their budget on what they knew.
Assemblyman Hettrick replied that the numbers Dr. Hager had quoted were the proposed tax numbers, not the Distributive School Account closing numbers. He stated that those numbers had nothing to do with funding of the DSA. The closing amount on the budget was up to the Legislature to fund the balance, and they had only passed a partial tax package. He said they were not trying to cut budgets in any of the school districts, and no one had proposed to do that.
Assemblyman Hettrick reiterated that he considered it disingenuous that the rankings constantly quoted listed Nevada as being 46th. He noted that according to certain rankings, Nevada was 24th, but that people always quoted the worst. He said Nevadans talked about having the best school system in the nation if the state would invest and asked if they were going to tie performance to money. Mr. Hettrick said the Legislature would like to tie it absolutely to the money, and if the money could be raised over time, they would be happy to do that.
Mr. Hettrick said they all wanted the best for Nevada’s children. He observed that anybody who said anything about the education budgets was accused of being anti-education, and he said that was disingenuous from the word “Go.” He said he did not like it.
Assemblyman Hettrick explained that Clark County received the lowest per-pupil amount from the state of Nevada because they got the highest per-pupil funding from other sources, and in the end the average property tax and sales tax revenues balanced it out on the Nevada Plan, or Nevada would be in violation of federal law. He said those things were all said, and made it sound as though the state were doing a terrible job, but that such things were partial and did not ever cover it all. He stressed that he got tired of being blamed or accused of being anti-education because he might question a dollar that was going into the system.
Mr. Garcia apologized if anyone thought they were in any way being blamed. He volunteered to take the full blame for everything that had happened during the session if anyone wanted somebody to blame. He stressed the school district representatives were not there to blame anybody, but simply to recognize that the legislators were in a very difficult position. Mr. Garcia said they appreciated the fact that they could even have such discussions. One thing he had said was that the school districts could not be too choosy, but he stated that he did recognize the hard work that had been done, especially with the tax base issues. He said he was sorry if he, Dr. Hager, and others had come across as critical, because that had not been their intent. He pointed out that if they sounded a bit frustrated, everyone in the room was probably frustrated. He said they all got calls from teachers and parents. He made it clear that they were all in this together, and the districts were there to support the legislators with information and assistance.
Assemblywoman Angle asked Dr. Hager if the $16 million in reductions he had mentioned earlier were from the budget for the last biennium or the budget for the upcoming biennium. Dr. Hager responded that the budget Washoe County School District had submitted the previous night had been based on what the cost would be of providing the current level of services with the projected level of growth in new students, new schools, and health insurance, plus the Governor’s proposed 2 percent pay raise, which would require $26 million in new revenues. The submitted budget also assumed no new revenues, but only the roll-up money, which would leave a $16 million deficit for the upcoming biennium.
Assemblywoman Angle noted that the Economic Forum had projected 9.2 percent growth. She asked Dr. Hager what growth the district had taken into account. Dr. Hager explained the district had factored in both student growth and revenue growth.
Assemblywoman Angle’s next question was whether birth certificates were still required for English Language Learners to enter school. Dr. Hager replied that birth certificates or baptismal records or something to identify the students was required to enter school. Mrs. Angle asked if that meant if they came in as transfer students, no birth certificates would be required, so the state would not know about their citizenship. Dr. Hager explained that if the students were enrolling from another school or school district, the district took their transcript records and moved them in. He said when students made their initial entry, or when they had no records to transfer, was when the district needed to have birth certificates, immunization records, baptismal records, or something to that effect.
Assemblywoman Giunchigliani commented that, in her opinion, the subcommittees in both houses had done a very good job of going through the Governor’s budget and making cuts that were very difficult, and even though the proposed new revenue sources would not move Nevada up in the rankings, especially when Nevada was ranked 50th or 51st in most of the programs. She noted that Nevada ranked 51st in Medicaid, and that to move up one spot would cost $92 million. The state could not afford to do it at this time. Because the Legislature had passed the Appropriations Act of $1.5 billion, Ms. Giunchigliani stressed that the only budgets left to cut, if there was no resolution to the tax issue, were in education.
Assemblywoman Giunchigliani asked if Spring Valley and Green Valley in Las Vegas had some of the largest kindergarten classes. Mr. Garcia verified that and added that Summerlin also had some of the largest kindergarten classes.
Assemblywoman Giunchigliani pointed out that, contrary to what many people thought, large class size was not just a problem in more at-risk areas, but also in upper, more mobile areas, and that was why parents wanted both class-size reduction and full-day kindergarten, because children going to school for two and a half hours per day was not enough. In looking at our Distributive School Account, she said, there were non-mandated funds of $2.5 million. That amount would cover the kindergarten 1:22 class-size reduction. Ms. Giunchigliani asked Dr. Hager and Mr. Garcia if they would choose to have those funds non-mandated or mandated for kindergarten class-size reduction. Both men chose kindergarten class-size reduction.
Assemblyman Perkins observed that, even with 2 percent pay raises in both years of the next biennium, salaries for starting teachers would still be less than $30,000 in Nevada. He supposed that hampered efforts to recruit teachers from out of state. He asked Dr. Hager and Mr. Garcia how much of a challenge it was for them to obtain quality teachers. Assemblyman Perkins speculated that, with Nevada’s low starting salary and uncertainty about the future, the top teachers were being recruited all over the country in other districts with more pay and less uncertainty. He asked if Nevada was starting to lose the better teachers to other locales.
Mr. Garcia pointed out that the sooner a district was able to hire teachers, the more likely it was to get the cream of the crop. He said people who were looking for jobs, and who were planning a move with their families, wanted to know in plenty of time, which made it very difficult for a district to fill positions in August. Mr. Garcia added that, in spite of its high demand for teachers, Clark County did not hire every teacher who came in and applied. His district was still very selective, turning down easily 50 percent of those who applied, believing that a teacher was not just a body to put in the classroom, but had to be someone of quality. Mr. Garcia noted that, in the face of a nationwide teacher shortage, the only good news was that every state had some economic hardships, so there were layoff talks in California and other places, which Nevada districts hoped would help them attract some good people.
Assemblyman Perkins said the Legislature had taken the Economic Forum’s projections into account when it looked at the revenue stream and had built them into its revenue projections before ever discussing a tax increase. The $860 million in the proposal extant at the end of the regular session was still close to $140 million short of what the Governor had proposed. Assemblyman Perkins emphasized that many of the services and programs being discussed for kindergarten through sixth grade education could have been funded with another $140 million.
Assemblyman Perkins stated that he disagreed with the Minority Leader in that he did think the state was doing a terrible job in terms of funding education when Nevada was ranked 46th in the country. Assemblyman Perkins commented that the Legislature needed to continue to work toward improvement. He expressed dismay that the legislators found themselves in the situation they were in.
Dr. Hager, speaking as the Chairman of the Superintendents Association, stated that the Association, together with the School Boards Association, had come up with the iNVest Plan 24 months earlier in response to the Governor’s question of what they believed a quality educational program would be like in Nevada. He said the members of the Associations had known the plan would be a point of discussion. He thanked the Committee members for listening to the iNVest Plan and using some of it, as had the Governor in his opening remarks of the State of the State address that year. Dr. Hager expressed hope that iNVest would not be lost simply because the 72nd Legislative Session was drawing to a close.
Chairman Arberry recessed the meeting at 11:20 a.m. for a 15-minute break. The meeting was called back to order at 11:51 a.m., at which time Chairman Arberry asked the Committee members for comments.
Assemblywoman Leslie expressed hope that the Distributive School Account and class-size reduction bill could be closed without deleting anything. She urged the Committee to consider, in Section 19, reinstating what the Subcommittees agreed to in terms of reducing kindergarten class size to 1:22 in the second fiscal year, which would actually save the state $400,000 in the DSA.
Assemblywoman Giunchigliani agreed with Ms. Leslie. She commented that the Committee had an opportunity not only to fix something that had been agreed to, but also to do the best thing for the youngest of the young to make sure they entered school ready to learn. Ms. Giunchigliani pointed out that the state could not only save money by reducing kindergarten class sizes, but could also save money with less remediation needs, because students would be taught in a smaller class size setting. She said teachers would be held more accountable, the students would also be learning more, and learning problems could be detected earlier and something could be done about the problem at an earlier date rather than waiting until the students were in middle school.
Assemblyman Hettrick asked which budgets were going to be closed because he wished to comment, depending on how the Committee would be closing them. Chairman Arberry replied that the budgets being closed were the Distributive School Account and the class-size reduction bill. He added that they would both be closed with one motion, and that the tax package would be discussed later that afternoon. Mr. Hettrick commented that he would wait for the motion and the second, and then would make his comment.
ASSEMBLYWOMAN GIUNCHIGLIANI MOVED TO AMEND THE DISTRIBUTIVE SCHOOL ACCOUNT (DSA) BILL AND S.B. 508 of the 72nd Session, THE CLASS-SIZE REDUCTION BILL, BY TAKING THE $2.1 MILLION REQUIRED FOR KINDERGARTEN OUT OF THE DISTRIBUTIVE SCHOOL ACCOUNT AND INSERTING IT INTO S.B. 508 of the 72nd Session TO BEGIN IN THE SECOND YEAR OF THE BIENNIUM AND DO PASS ON S.B. 508.
ASSEMBLYWOMAN LESLIE SECONDED THE MOTION.
Assemblyman Hettrick noted that he had voted against various budgets in subcommittees and in the Ways and Means Committee at various times. He said he thought that overall spending was too high and he voiced a concern about opening the other budgets. Mr. Hettrick stated he would be consistent with his earlier voting, because to not do so would be to leave himself open to accusations of being disingenuous. However, he stressed that he fully supported the Distributive School Account budget as it was and had no desire to see it cut in any fashion. He reiterated that he would vote no on the DSA, not because he disagreed with the DSA budget, but because he disagreed with the total budget amount.
Assemblyman Andonov asked if the Committee was actually adding $2.1 million to the total amount of the DSA or taking it from the DSA. Assemblywoman Giunchigliani explained that the $2.1 million was being taken from page 25 of the Distributive School Account bill and moved to the class‑size reduction bill, S.B. 508. She noted that she felt that was more responsible, as the money in the DSA had not been discussed in subcommittee and was not necessarily required by No Child Left Behind.
Assemblyman McCleary stated, for the record, that he would reluctantly support the motion. He stated he did not feel the Legislature was doing a good enough job. He said they were not providing enough money for supplies and textbooks or paying the teachers appropriately. He added that they were not even giving the teacher or schools a hedge against inflation over the following two years. Mr. McCleary expressed disappointment, and said he could not believe the legislators were squabbling over education funding when it was so far below what it should be, but said he would support it because he knew how tight things were and that consensus of opinion could not be found to do anything else.
Assemblyman Perkins supported the change Ms. Giunchigliani had suggested. He said he believed the Committee had to give some credence to what the superintendents had said would be their priority with the same amount of money or less money. Making that swap would save $400,000 in the coming biennium. Assemblyman Perkins averred that with class sizes growing, particularly in those areas of Clark County that were exploding the most, Summerlin and Green Valley, that change was going to be very helpful.
Assemblyman Mortenson supported what Mr. McCleary had said. He stated probably the most frequent complaint he got from constituents was that their children could not have textbooks. Mr. Mortenson said that while he knew the problem could not be solved during the current session due to lack of adequate support in the Legislature, he wished to go on record as saying the education budget was inadequate. However, he urged the Committee to at least pass the inadequate budget.
Assemblywoman Chowning strongly supported the motion and the comments that had been made. She deemed it heartbreaking and infuriating and frankly disgusting that the state did not properly fund the needs of its future leaders. She said she doubted that people realized how critical the mandates were that were being placed on teachers and students. Mrs. Chowning said she frankly did not know how Nevada districts were going to be able to hire any teachers or any paraprofessionals with all of the mandates and the requirements that were placed upon them. She noted that not all of the mandates that had come with the No Child Left Behind were funded.
Mrs. Chowning asked if the state did not support its kindergarten classes, how 42 children with one teacher were going to get that head start that they were supposed to get by going to kindergarten. She pointed out that the statement made in No Child Left Behind was, “Every student shall succeed.” She stressed that every student could not succeed when burdened with those types of injustices. Mrs. Chowning proudly supported the motion and said she wished it were more.
Assemblywoman Gibbons stated that while she liked the idea of smaller kindergarten classes, she wanted to make sure the money being taken from the Distributive School Account by the motion was not something necessary to comply with the No Child Left Behind Act. She also wanted to know if moving that money out of the DSA would cause the state to lose any matching dollars. Mr. Stevens assured Mrs. Gibbons that there were no matching dollars involved in that particular section, nor would there be in the class-size reduction program, but that the money was 100 percent General Fund.
Assemblywoman Giunchigliani responded to Mrs. Gibbons’s question that the money in the DSA did not fund a requirement of the No Child Left Behind Act. She explained that part of the concern the Education Committee members who worked with the Subcommittee from Ways and Means had was that S.B. 191 actually went beyond federal requirements, which had not seemed appropriate at the time, especially when there was no additional funding. She expressed hope that the Legislature would be able to pare down some of the impact on the districts over and above what was required by the No Child Left Behind Act.
Assemblywoman Angle commented that Section 19 referred to No Child Left Behind, and was for before and after school services and tutoring for non-Title 1 schools. She noted that refusing funding for special education would not mean that the mandate would go away. Schools would still have to provide those services even though the state had refused the funding. Echoing Mrs. Gibbons’s concern about matching funds, Mrs. Angle wondered if the DSA did not match that funding would the state then have to pay the entire amount because it was mandated.
Mrs. Angle noted that in the class-size reduction bill, there were class-size requirements of 22:1 and 25:1 in grades 4 and 5 for counties with a population less than 100,000. She asked if the kindergarten class-size reduction would be for all counties, or only for those with a population less than 100,000. Assemblywoman Giunchigliani said current law stated that the Legislature was to achieve a pupil-to-teacher ratio of not more than 15 students per teacher or 30 pupils per 2 teachers in kindergarten and grades 1, 2, and 3 where core curriculum was taught. Currently, she noted, most districts were under waivers because the Legislature had never funded the 1:15. Ms. Giunchigliani said the Legislature had only funded the 1:16 for first and second grades, and had gone to 1:19 funding two sessions previously. She explained that what was currently being recommended, and the testimony that had been heard throughout the hearings, was that, in the second year of the biennium, all districts, not just those under 100,000, had the capability of reducing kindergarten to 1:22. Currently, Ms. Giunchigliani said, Nevada funded 23.5 at-risk kindergartens at 1:16, so those would actually go up to 1:22, and that money could be redistributed.
Assemblywoman Leslie stressed that was the kind of hard decision that the Budget Subcommittee had to face for the past four months. She said everyone on the Committee would like to be able to do both things, funding the remediation in the non-Title 1 schools and reducing kindergarten class size, but unless there was an appetite on the Committee to do both things, the members would have to make a choice. She agreed with the superintendents that she would choose to reduce kindergarten class sizes. She said kindergarten class sizes needed to be brought down from the 30s in Washoe County and the 40s in Clark County.
THE MOTION CARRIED. ASSEMBLYMAN HETTRICK VOTED NO. (Assemblyman Grady was not present for the vote.)
At 12:07 p.m., Chairman Arberry recessed the meeting until 1:30, at which time, he said, the Committee would discuss the tax issue.
Vice Chairman Parks called the meeting of the Select Committee on State Revenue and Education Funding back to order at 1:50 p.m. to deal with the revenue issues. However, before the Committee started coverage of the proposed tax package, he acknowledged Assemblywoman Leslie. Assemblywoman Leslie said she had brought some young people from Reno High School with her, including her daughter. She pointed out that Reno High School was the top-ranked school in the state. Ms. Leslie noted that the Reno High School swim team, which had just earned its third state championship, was one of the programs in danger of being cancelled due to lack of funding, as was the ski team. She begged Vice Chairman Parks indulgence in allowing a few of the students to address the Committee.
Ms. Leslie mentioned that some of the girls from the swim team had received swim scholarships from such fine universities as Yale, Brown, and Stanford. She said a young lady swimmer at McQueen High School had qualified for the Olympic trials and might be representing the country in the next summer Olympics. She pointed out that it was really important for the Committee to keep Nevada’s youth in mind during its deliberations.
Elena Fowler, a senior at Reno High School, said she was getting a scholarship to swim at the University of Vermont. She cited the Reno High School Swim Team Program as a large factor in why she would be swimming in college. Her brother, she added was on the Reno High School debate team and had gotten accepted to McGill University in Montreal for his parliamentary debate, which was also a program that would be cut. Swimming, Ms. Fowler said, was a predominantly female sport, and one of the sports in which females could get recognized in the city and the state. She declared it ironic that the state had demanded students meet certain academic standards, and now all that the students asked was funding to keep the programs that they succeeded in.
Hailey McNeal, a freshman at Reno High School, stated that on May 15, the high school had held a forum in which students could talk about budget cuts. She related that a senior named Katie Anderson had gotten up and started to cry because she had been in Reserve Officer Training Corps (ROTC) since she was a freshman, and it had meant so much to her. Without extracurricular activities, Miss McNeal said, she did not think the students would have anything. She urged the Committee to fund their extracurricular activities.
Michon Affinito, a sophomore at Reno High School, made the point that Nevada was the 14th wealthiest state and ranked 45th in education. She stated that there had been 34 students in her biology class the previous year. There had been 32 in her geometry class. This year, in her chemistry class, students were forced to sit on the counter because there was not enough space for everyone. By cutting their funding, she said, the Legislature was cutting part of the students’ future. She stated that Nevada either needed to pay for the young people now or pay for them later.
Emma Fulkerson, a junior at Reno High School, pointed out that even at a privileged school like Reno High, she knew students whose parents still struggled to pay for simple fees such as choir and band. Students, she said, enjoyed excelling in such programs. Sometimes, she noted, those programs were the only things they could excel at. If those programs were not funded, those students would not have anything to fall back on. Often, those programs were what those students were relying on to get into college. She said she did not know how the state expected all of those students to excel academically when they did not have anything to go for. Miss Fulkerson urged the Committee members to consider not putting their reelections ahead of Nevada’s future. She asked, if they were for education, what their plan was for funding it.
Assemblyman Griffin congratulated Green Valley High School, which was in his district, and Wooster High School, his alma mater, for also having achieved the same honors list as Reno High School.
Assemblywoman Giunchigliani thanked the students for being there. Too often, she noted, legislators forgot to put faces to the people that would be affected by what the Legislature was doing. She especially appreciated the points made about the extracurricular programs. She said the Legislature tended to think only about academics, but not every child or young person could succeed or excel at academics, and sometimes the one part of school that brought out their ability to achieve might be music or swimming or football. Ms. Giunchigliani said she thought the Legislature would have to look at the fact that Nevada’s schools were intended to educate all students, not just those who were good in math or English. She emphasized that the districts would do the best job they could with what little money the state would be sending them to make sure the extracurricular programs did not go away.
Assemblywoman Chowning complimented the young women who had testified. She admitted she did not know if, when she had been a freshman in high school, she could have faced the Committee or the situation with such poise.
Mrs. Chowning said studies had now proven that extracurricular activities were actually an integral part of academic success. Drama reinforced English skills and English reinforced drama skills. Music reinforced foreign language ability and vice versa. Participation in sports and physical activities also helped academic skills. Mrs. Chowning claimed that if legislators said they were for education and for students succeeding academically, they were not really being sincere if they were going to cut off half the portion that was helping students succeed academically. She thanked the girls for doing a great job and urged them to keep on advocating.
Elena Fowler stated she had recently applied to attend college and was familiar with what colleges were looking for in applicants. She said a well-rounded education including sports and extracurricular activities such as drama, speech, debate, or swimming or other varsity sports, on top of an applicant’s academic load, was very important to them. She added that SAT scores or how many AP classes a student had taken were no longer everything. Colleges were concerned with how knowledgeable applicants were about the world around them. In order for Nevada students to be competitive in the world of higher education, it was very important that they received a well-rounded education in high school. Vice Chairman Parks thanked Miss Fowler for her well-spoken feedback and thanked all four girls for taking time to testify.
Assemblyman Anderson observed that the Washoe County School District could not find a greater group of students than those from Reno High School. He thanked the girls for setting a high standard for everyone.
Vice Chairman Parks moved the Committee on to a discussion of the proposed tax package. He noted that the draft bill for the revenue program (Exhibit E) that had been close to being passed several nights earlier. He asked Ted Zuend to lead the Committee through the tax package and make comments.
Ted Zuend, Deputy Fiscal Analyst, Fiscal Analysis Division, Legislative Counsel Bureau (LCB), directed the Committee members’ attention to four items in the middle of the bill relating to allowances that wholesalers and retailers were currently allowed to retain because of their activity relating to either collecting or paying taxes. The first of those items in the bill would reduce the cigarette stamp fee from 3 percent to 0.5 percent. That reduction was estimated to raise approximately $3.5 million per year, contingent on the $0.65 increase in the cigarette tax. Mr. Zuend explained that if the cigarette excise tax increase were different, the amount of revenue generated by reducing the cigarette stamp fee would change proportionately.
The second of the four items, Mr. Zuend said, was the 2 percent fee on the 30 percent excise tax on the wholesale price of other tobacco. The bill would eliminate that fee completely, which would generate only roughly $100,000 per year, but would be consistent with the other proposed changes.
The third of the four items would eliminate the 3 percent liquor tax allowance. Mr. Zuend explained that, with the 50 percent increase in the liquor tax proposed in this bill, it would generate slightly less than $1 million each year.
The big ticket item among those four, according to Mr. Zuend, was the elimination of the retailer fee. Retailers were currently allowed to retain 1.25 percent for collecting sales taxes. The numbers representing revenue to be generated, $19.2 million the first year and $20.3 million the second year, reflected two parts, the reduction in the state commission and, on the local school support tax commission, additional revenue generated for local governments due to this change.
Mr. Zuend next introduced the annual business license fee relating to Chapter 364A of the Nevada Revised Statutes (NRS), which included the business license tax. The bill proposed a $100 annual fee in place of the $25 one-time fee that was currently collected. That change, he said, would raise approximately $48 million over the biennium. The $100 annual fee would apply to all businesses, including those recently registered with the Secretary of State.
Charles Chinnock, Executive Director, Department of Taxation, noted that the fee could become effective July 1, 2003. Mr. Zuend pointed out a provision in the bill that would not provide a penalty the first year for late payment of this fee upon the annual renewal because of a business’s ignorance of the new law change. After the first year, however, there would be a penalty if a business did not subsequently renew its license.
Mr. Zuend next directed the Committee to the live entertainment tax. He noted that there was currently a 10 percent casino entertainment tax that applied mostly to cabaret-type entertainment. For example, he pointed out that at John Ascuaga’s Showroom, there was an additional 10 percent excise tax on the admission charge plus an additional 10 percent excise tax on the sales of food, drinks, and merchandise within the venue. The proposed change would expand that tax within the casino industry, as of July 1, 2003, by encompassing various live entertainments on casino property that were not taxed under the casino entertainment tax. An example of that would have been the Celine Dion show at Caesar’s, because currently, if the number of seats exceeds a certain amount, the tax did not apply, so there had been no tax applied to the tickets for the Celine Dion show.
Effective January 1, 2004, the tax would be extended beyond the boundaries of the casino properties to take in live entertainment very similar to that under the casino entertainment tax. The tax would be applied in the same way, the idea being that if a performance took place in a 500-seat arena in a casino or in a 5,000-seat arena in a casino, or at Lawlor Events Center, the tax would have to be paid and collected. Mr. Zuend noted that there was a trade show exemption so that anyone holding a trade show who had already bought and paid for the performers would not be subject to the tax. He said there was also an exemption for boxing. Assemblywoman Giunchigliani asked if another tax was paid on boxing, so the intent was not to double-tax them. Mr. Zuend verified that. He said the existing tax was the athletic commission fees that were currently collected on boxing matches.
Assemblyman Andonov wondered if any analysis had been done on the live entertainment tax to break down what percentage of the total revenue raised would come from local resident Nevadans versus out-of-state visitors. He commented that tourists would pay much of the tax, but Nevada residents would pay some of it. Mr. Zuend replied that specific information had not been provided. He did not believe that type of information was available to determine who attended casino shows. Vice Chairman Parks interjected that any information that could be found would be made available to the Committee.
Assemblyman Mortenson asked if events put on by nonprofit organizations or schools would still be exempt from the live entertainment tax. Mr. Zuend said he could not answer that, as he did not have the bill in front of him. However, he did not believe the intent of the bill had been to tax those events. He promised to take a second look at the bill to ensure the exemption was provided. Mr. Mortenson added that he believed the intent had been to exempt local opera companies or local ballet companies that put on performances. Mr. Zuend agreed, and stated that, as far as he knew, such events had not been included in calculating the revenue that would be generated. He said he would check and make sure those events were exempt, and added that the Committee could make that intent known through its later actions.
Assemblyman Mortenson said the existence of those exemptions might help to answer the previous question of how much was paid by local citizens, because if local symphonies, opera companies, ballet companies, and local sports were exempted, it was his belief that the majority of the tax would be exportable.
In response to Mr. Mortenson’s question, Vice Chairman Parks commented that he had provided specific language to Legal Division relative to what exemptions there should be. Those exemptions would include events provided by a governmental entity, school activities, and events such as a theater group performance at a high school. Also included would be those events, such as a nonprofit symphony, that would fall under the IRS 501c category. Mr. Parks said the Legal Division did have that information, and was looking to make sure those particular areas were covered.
Assemblywoman Chowning mentioned she had not been able to find any exemptions in the bill. She asked if she was correct in saying a race held at a local school would be exempt, but if the race were at the professional for‑profit raceway, then it would be subject to the tax. Vice Chairman Parks said it was his understanding that she was correct. Drawing the Committee’s attention to page 31, line 6, of the tax package, the language indicated the term did not include a governmental entity. Mr. Parks said that presumable a university event, including a sports event that was put on by the university, would be exempt.
Ted Zuend pointed out that, in Section 70, there was a reference to a “natural person engaging in a business if he is deemed to be a business entity pursuant to Section 74 of this act.” He said that applied only to for-profit entities as well.
Mr. Zuend next directed the Committee to the cigarette tax on page 63 of the bill draft. The bill, as had almost been approved, had proposed a $0.65 per pack increase in the cigarette tax, raising the tax to $1.00 per pack. That had been estimated to generate $95.8 million the first year and $99 million the second year, and could be imposed by July 1, 2003.
Assemblyman Hettrick expressed concerns about that rate of tax. He noted that the Committee had heard a lot of testimony earlier in the session to the effect that if the Legislature raised the cigarette tax too high, there would actually be a reduction in sales and a quick diversion of purchases to the Internet where consumers did not have to pay the tax and/or a diversion to cigarettes that did not pay the Master Settlement Agreement [MSA], so he was concerned that the rate could ultimately be counterproductive in terms of the sales. He urged the Committee to consider that very carefully before choosing that rate.
Assemblyman Brown asked what the national average was for the tax on cigarettes per pack. He said he had heard it was $0.60 to $0.625. Vice Chairman Parks did not have that specific information, but he stated that, with the exception of one neighboring state, Nevada’s tax rate was considerably lower than the other states. The current tax in Arizona was $0.58; California was $0.87 but would go to $1.10 per pack on July 1, 2003 and to $1.50 per pack in 2004. Of the other adjoining states, Idaho was the one that currently had the lowest rate at $0.28. Oregon’s rate was currently $0.68; Utah was $0.695.
Assemblyman Griffin recalled that earlier in the testimony there had been concern that the projected revenues had been based on current sales levels, and that some sales would be lost in the first year after the tax increases. He cautioned the Committee to be mindful of that. Vice Chairman Parks noted that Carole Vilardo had commented on the immediate reaction, which she had referred to as “sticker shock.” Mr. Parks noted that 70 percent of all cigarettes sold were sold by the pack as opposed to by the carton. He said such behavior did not lend itself to individuals buying cigarettes by the pack through the Internet. He added that the maximum quantity that seemed to be sold over the Internet was six cartons of cigarettes. One other thing the Committee had heard in recent testimony was that the cigarette manufacturers adjusted what the rates were for their cigarettes based on what the tax was. In other words, if Nevada were to increase the tax, the wholesalers would wind up buying their cigarettes for considerably less. Mr. Parks called it a rather interesting concept that regardless of the tax rate in any one state, the likelihood was that the sale price for the cigarettes would be moderated to accommodate that.
Assemblywoman Giunchigliani asked if the entertainment tax would include escort services. Mr. Zuend replied that the intent had been to tax gentlemen’s clubs. He noted that houses of prostitution were also specifically listed, but he did not know whether escort services fell under the definition of “live entertainment” or not. Assemblywoman Giunchigliani said that should be clarified.
George Flint, representing the Nevada Brothel Owners Association, expressed hope that the bill would pass in its current form, because it would have an effect on every sexually-oriented business in the state. As things currently stood, the brothels paid extremely high privilege licenses in the local counties. Mr. Flint stated that brothels were prepared to participate in an admissions tax, and had already created an industry standard, which he said he would like to present separately.
In answer to Ms. Giunchigliani’s question, Mr. Flint explained there was a huge, multimillion-dollar business in Las Vegas that was much bigger in concept and in reality than the brothels. The brothel business had approximately 200 women actively working at any one time. The outcall entertainment business in Las Vegas had from 2,000 to 3,000 women working at any one time. Mr. Flint claimed that the outcall entertainment industry spent $20 million per year on yellow pages listings alone in Las Vegas, which brothels could not do because brothels were not allowed to advertise.
Mr. Flint said he would love to see a live entertainment tax reach out and cover the outcall entertainment industry, too, because those businesses operated on a $200-per-year business license. They did not pay any taxes at all. According to Mr. Flint, the outcall businesses were a perpetual headache to Las Vegas Metro Police because, for all practical purposes, they were a front for prostitution.
Mr. Flint said there was one problem, and that was that the women in the outcall industry did not claim to be prostitutes, but rather claimed to be exotic dancers. Under the First Amendment, they enjoyed freedom from specific taxation under freedom of artistic display or artistic presentation. Mr. Flint observed that there was some exemption under the First Amendment for nude dancing as a legitimate art form, so although he thought the tax should cover all areas of sexually-oriented businesses in Nevada, the huge business of outcall entertainment might claim they were exempt under the First Amendment as nude, exotic dancers.
Assemblywoman Giunchigliani commented that art was truly in the eye of the beholder. She said she would rather risk including outcall entertainment in the bill and have them argue that they should not be included rather than have them exempted.
Ms. Giunchigliani asked why, in looking at both liquor and cigarette taxes, the liquor tax generally stayed the same. She said there had been some talk about raising it a nickel, but she did not recall seeing liquor tax fluctuate. She asked if there had been discussion in the Tax Committees about that.
Mr. Zuend replied that the Assembly Committee on Taxation had proposed a 50 percent increase in the liquor tax, and he believed the Senate Committee on Taxation had approved a proposal for a 100 percent increase. In the negotiations the 50 percent increase was what had been accepted. Mr. Zuend pointed out that liquor taxes were relatively low compared to cigarette taxes, although, doubling it would put Nevada’s liquor tax higher than that of many other states. He noted that the Governor had proposed an 89 percent increase in the liquor tax to compensate for inflation since the tax had been last raised. He said most of the liquor taxes had been last raised in 1983, although he believed the tax on hard liquor might have been last raised in 1981.
Assemblywoman Giunchigliani asked if liquor was taxed by the gallon or by the liter. Mr. Zuend answered that it was taxed by the gallon. He noted that there were four separate liquor tax rates, and beer was taxed at a lower rate than wine.
Assemblyman Griffin agreed with Mr. Zuend that a 100 percent increase would put Nevada above many other states. He recalled there had also been testimony about a genuine cross-state market. People from California and Oregon, the two states with the highest liquor taxes, had been buying quantities of alcohol as part of their visits to Nevada and taking it home. He added that those purchases had accounted for a measurable amount of sales.
Assemblywoman McClain commented that the figures the Committee had gotten regarding 70 percent of the people in Nevada buying cigarettes by the pack also included 40 million tourists every year who probably did not bring cartons with them. She said there were many “mom and pop” stores in northern Nevada that depended on people from out of state coming in and buying cigarettes by the carton. She reiterated that Nevada was going to lose a huge amount of money from residents, if not tourists, who were going to go straight to the Internet to buy their cigarettes by the carton for the price they now paid in stores in Nevada.
Paula Berkley, representing the Reno-Sparks Indian Colony, noted that since the Legislature had been in session, Idaho’s cigarette tax rate had gone up higher than Nevada’s. Vice Chairman Parks agreed, noting Idaho’s tax rate had gone up from $0.28 per pack or $2.80 per carton to $0.57 per pack or $5.70 per carton. Ms. Berkley said that meant that all the surrounding states were currently higher than Nevada. California had passed an additional $0.65 increase over two years. The average weighted tax in the United States was $0.66. She explained that the weighted average was based on population, on total stamps sold, rather than just averaging New York with Nevada, which would not make sense. She noted that the average national discount from tobacco manufacturers was the exact same amount as the average tax. The tobacco industry’s strategy, she said, was to nullify, as much as possible, the effect of tax increases.
Ms. Berkley said Ms. McClain was correct in saying that tourists generally did not carry cartons of cigarettes into Nevada. She added that, according to statistics, 70 percent of people bought cigarettes by the pack in every state. Ms. Berkley remarked that what was even weirder was that when there were big tax increases, smokers did not buy cigarettes by the carton in order to save money. They continued to buy by the pack. In actual numbers, she said, that meant they paid $1.29 more than they would have if they bought them by the carton.
Assemblyman Hettrick observed that the Committee talked about the cigarette tax and the fact that other states raised theirs, but that they were not talking about just raising the cigarette tax. The Legislature was potentially talking about raising business license fees, the business activity tax (BAT), the sales tax, and net income tax. He pointed out that if a business was selling cigarettes, it was acting as the state’s collection agent. Still, the Legislature was considering potentially hitting them with three or four other taxes at the same time. Mr. Hettrick said the Committee had to consider the fact that it was proposing more than one tax or tax increase.
Mr. Hettrick stated that the Committee members all understood that consumption would bounce back after the initial sticker shock, but the state was going to lose some revenue before it did bounce back, and some consumers might switch to non-MSA (Master Settlement Agreement) cigarettes, which would not help Nevada at all. He cautioned the Committee to be careful and not go too far. Mr. Hettrick remarked that if the legislators had only been talking about raising the cigarette tax, that would have been one thing, but when they were talking about hitting businesses with multiple other taxes, and then asking them to pay potentially on their net profits, they needed to be careful.
Mr. Hettrick added that the argument had been presented to him that the reason an increase of 89 percent or 100 percent increase on alcohol had not been proposed was that the state was going to charge some other tax to the businesses collecting it, yet the proposal was to double the tax on cigarettes. He said that did not make sense, and there ought to be a balance somewhere.
Vice Chairman Parks said Ms. McClain had commented on the potential loss of revenue to Internet sales. He asked Ms. Berkley to address that issue. Ms. Berkley said there were two ways to address that. She cited New York City as the most extreme example of raising the cigarette tax. Nine months earlier, New York City had raised the cigarette tax from $0.14 to $3.00 per pack or $30 per carton. She invited the Committee to imagine the sticker shock that had caused. Ms. Berkley said consumption in New York City literally dropped by 50 percent and consumers were going to the Internet or across state lines to buy their cigarettes. However, cigarette tax revenue had gone from $21 million to $200 million.
Ms. Berkley called all such tax issues balancing acts. She thought Mr. Hettrick’s concern had been in regard to what the state was trying to do by raising cigarette taxes. She noted that the 21 states that had increased cigarette taxes the previous year had been reacting to the health issue. Ms. Berkley claimed that it cost the state of Nevada $96 million per year out of the General Fund for Medicaid for tobacco-related diseases alone, yet the state was collecting only $40 million per year in cigarette taxes. According to the Center for Disease Control, annual medical costs in Nevada, both public and private, for tobacco-related diseases was $404 million. Ms. Berkley stated that if the state was trying to cut consumption, and so cut health care costs that non-smokers would have to pay for, which was 75 percent of the taxpaying public, then taxes should be raised high. If, on the other hand, what the state was trying to do was protect consumption, then taxes should be kept lower with a smaller increase that would raise more revenue without cutting consumption.
Assemblyman Anderson observed, relative to Assemblyman Hettrick’s statement about businesses operating as collection agents and being double taxed, that in many states the sale of alcohol was a state-operated business with 100 percent of the profits going to the state. In Nevada, the liquor business was privatized, which had been to business’s advantage as an economic stream. Mr. Anderson commented that businesses that were collecting “sin taxes” had made profits that could otherwise have gone to the state. He commented that those businesses seemed to be doing very well at selling alcohol and other products, so he was sure they would be willing to collect a few extra dollars in taxes for the state.
Assemblyman Marvel said there had been discussion about the Internet and about out-of-state sales tax being collected for the Distributive School Account. He stated that the Legislature should be thinking about what point in time Nevada would be able to tax Internet sales and how that money should be distributed. Vice Chairman Parks expressed the opinion that the Legislature had made a great move forward earlier in the session when it had adopted the Streamlined Sales Tax proposal. He said that should enable the state to generate additional dollars.
Mr. Zuend moved forward to the gaming tax. He pointed out that the percentage fee for non-restricted licensees would be increased by 0.25 percent in all brackets effective July 1, 2003, and another 0.25 percent effective July 1, 2004, which had been estimated to raise approximately $22.5 million the first year and nearly $50 million the second year. He explained that there would actually be a one-month slippage in the realization of the revenue, because a tax imposed on July 1 would not be collected until August. It was not an accrued revenue. Actually, he said, the figure quoted for the first year understated the long-term impact of each 0.25 percent.
Next to be addressed by Mr. Zuend was the restricted slot fee. This was explained as the per-slot fee on restricted licensees, which was currently $61 for each of the first five slots under a restricted license and $6 for slots 6–10. The proposal in the tax package would raise those slot fees by approximately 33 percent the first year. In the second year, they would be raised again to a combined increase of 50 percent from their current level. That could be made effective on July 1, 2003, and would raise roughly $6 million over the biennium.
Mr. Zuend said the Secretary of State fees were addressed in A.B. 536, but he did not believe they were in the current bill. He stated that the proposal for the Secretary of State fees had originally evolved from S.B. 298, which had come over from the Senate and had been predicated on a proposal outlined by the resident agents. He noted that the current numbers differed from some earlier numbers because the current proposal would several different things in addition to what the resident agents’ proposal had done. One thing it would do would be to apply a fee increase to securities, doubling their rates. Mr. Zuend said those fees had not been changed since that chapter had been adopted in the 1990s.
The second thing the proposal would do would be to lower the rate for the annual renewal fee on commercial licenses proposed in S.B. 298 by $40 because of the additional $100 business license fee that had also been proposed so that those registered with the Secretary of State, who were also required to pay the annual fee, would not get hit with a double increase. The securities fee plus the net proposed change to the business license fees would generate $32 million in revenue over the biennium. Most of the changes could be imposed as of July 1, 2003. The commercial license fee change would have to be delayed until October 1, 2003, because of notification and other things that the Secretary of State’s Office had to do before implementing the fee.
Mr. Zuend noted that the next item on the agenda was the state business license tax, which was the employee head tax.
Assemblyman Marvel asked Assemblyman Carpenter how the slot tax would affect him per machine. Assemblyman Carpenter said that, if he remembered correctly, it would increase his fee $50 per machine. He noted that with all the other fees the slot operators paid, including a quarterly license fee to the county and $50 to the state per machine, some people would probably start taking the machines out.
Assemblyman Carpenter said the operators did not make a great deal on their slot machines because they had to compete with the larger casinos. If they tightened their machines down too much, people would not come to play them, so they really did not bring in enough revenue to pay to keep them. Mr. Carpenter observed that the machines required a lot of upkeep and maintenance. In his opinion, the proposed increase was too much to expect people with just a few machines to pay.
Assemblyman Marvel asked what the total cost per machine was per year. Assemblyman Carpenter said he would have to find out exactly, but it was quite a bit. He stated that he had gotten a letter from a person in Las Vegas, who had the same opinion that he did, that people were going to be taking machines out because it just would not pay to have them on the floor. He said they had to pay too much in taxes.
Vice Chairman Parks pointed out that the slot fee could be found on page 97, Section 154.
Assemblywoman Gibbons asked Mr. Carpenter if he had fewer than 5 machines or 6 to 15. Assemblyman Carpenter responded that he thought if someone had a restricted license, they could have up to 15 machines. Mrs. Gibbons remarked that amounted to about a $770 increase per slot machine.
Mr. Zuend said that would depend on the number of slots someone had. He noted that the increase for the first five slots would be $31 per slot per quarter, which would amount to $124 per year. For the sixth through fifteenth slot, the fee would increase from $106 to $159, which was an increase of $53 per quarter or $212 per machine per year. Mr. Zuend pointed out that if a person had 15 slots, the fee would be $2,120 on the top 10 slots and an additional $620 on the first 5 per year.
Assemblywoman Leslie noted with some confusion that the numbers Mr. Zuend had just quoted were different from those given on page 97 of the tax package. Mr. Zuend explained that was because there would be a two‑year phased-in increase, and he was comparing the current fees with what they would be when fully phased in.
Jim Avance, Nevada Retail Gaming Association, pointed out to Vice Chairman Parks that there was an error in the legislation, but that he would gladly talk about the inequity in the slot increase if Mr. Parks preferred. Mr. Avance drew the Committee’s attention to page 3, line 12, and then to page 3, line 8, of his handout (Exhibit P). He noted that the information on line 8 of page 3 was in the current bill and pertained to non-restricted gaming. The exemption for restricted slot operators that had been in all three of the previous gaming-related bills had been removed from the current bill, so that restricted slot operators would be double taxed. Mr. Avance requested that the Committee put that exemption back in.
Mr. Avance introduced the gentleman at the table with him as Sean Higgins, President of the Slot Route Operators Association, also known as the Gaming Association. Mr. Avance pointed out that the restricted slot industry had volunteered a 33 percent increase in both years of the upcoming biennium. He did not believe any other business had volunteered 33 percent, but said the slot route operators had volunteered to pay a 33 percent increase because they were good corporate citizens. He stressed that 33 percent was a huge increase, but said the restricted slot operators would have no complaint if the Legislature would limit the increase imposed upon them to that 33 percent.
Mr. Avance noted that the Assembly Taxation Committee had analyzed the taxes on the slot industry in 1987, 1989, 1991, and 1993 and had determined that restricted slot operators paid their fair share. He said that in 1993, the restricted slot operators had come up at the last minute and volunteered to increase their taxes after the Committee had said that was not necessary, and they had volunteered to do that in order to balance the budget. Mr. Avance stated that restricted slot operators just wanted to be treated like good citizens, but they wanted to be treated fairly.
Assemblyman Marvel asked if the cost would be prohibitive for people who owned their own slot machines to maintain them. Mr. Avance replied that many of them would be taking their machines out. He recalled that in the early 1980s, when he had been Chairman of the Gaming Control Board, locations had been allowed to have up to 50 machines, then taxes had started going up and locations started removing those machines.
Mr. Avance noted that along with the cost of having more machines, there had been the problem of needing more employees on the floor to watch them. For example, three Wonder World stores in Las Vegas had 50 slot machines with three change girls working them, but they had reduced their number of slot machines due to taxes and overhead costs. Mr. Avance added that the restricted slot operators had also been adversely affected by the situation where a location could not have more than 15 machines unless it had 200 hotel rooms. He claimed that the restricted slot operators had been victims of the big gaming operations over the years.
Sean Higgins, President, Nevada Retail Gaming Association, noted that while people referred to the tax as a slot route tax, it was actually a restricted gaming tax. He pointed out that owners of locations such bars, taverns, restaurants, and convenience stores, who put their own slot machines in those locations on a participation basis, got the vast majority of the revenue back from those games. As a result, they, not the slot route owners, would pay the majority of the tax.
As Mr. Avance had said, a coalition of the slot route operators, the Nevada Petroleum Association, which was the convenience stores, and the Nevada Tavern Owners Association, which constituted over 3,000 separate businesses, had come forward and agreed to a 33 percent tax increase before anyone had asked them to do it. Mr. Higgins commented that getting the coalition to come to agreement on that number had been a major task. The Legislature by proposing a 50 percent increase was, he thought, unfairly singling out the restricted slot industry when that industry had come forward to volunteer the largest single tax increase, percentage-wise, on any business.
Mr. Higgins asked the Committee to consider that other taxes would affect the restricted slot industry as well. Convenience stores sold cigarettes, and they and bars and taverns sold beer, wine, and liquor. That was their livelihood. He claimed that when all the new taxes and tax increases that would affect those businesses were added cumulatively, revenue for the state would decrease rather than increase as businesses had to close their doors because it was no longer profitable to operate.
Assemblyman Marvel commented that the only impact he could see on the businesses cited by Mr. Higgins would probably be 50 percent or more of all the little taxes that were going to be imposed. He asked if that would be within livable standards, or if it was just too much. Mr. Higgins responded that the coalition had agreed, during meetings in October, November, and December, that they could happily agree to a 33 percent increase. Mr. Marvel commented that the state wanted the small businesses to make money so they would not go out of business. He added that they were the taxpayers.
Mr. Avance said the answer to Mr. Marvel’s question was that the restricted slot industry had agreed to that 33 percent before they found out they were going to have all those other taxes piled on top of it. He claimed that the tax pyramid was pushing those people down. Assemblyman Marvel said that was the exact point he had been trying to make.
Assemblywoman Angle referred to deleted language in Section 156 of the bill. The language had stated that those licensed gaming establishments would not be subject to the tax. She asked if she was correct in assuming the deletion meant they would be subject to the tax. Mr. Avance pointed out that was a change in the entertainment tax. Mrs. Angle then asked if establishments with 50 or more slot machines would be subject to the entertainment tax. Mr. Avance said it was his understanding that the entertainment tax being proposed would go outside of casinos, so that section had to do with the live entertainment tax that had recently been discussed.
Assemblywoman Giunchigliani said she thought many people in small businesses, because the businesses were marginal, chose to put in a slot machine in order to make additional revenue. She opined that the difference in the way the Legislature was doing business in the 72nd Legislative Session was that legislators, not lobbyists, were making the decisions on what tax changes would be implemented. Ms. Giunchigliani said the legislators needed to focus on the tax package and move along with their own dialog rather than have each individual group come forward. She stated that part of their duty as legislators was to listen to citizens, but that, in the past, they had allowed lobbyists to have too much influence on their decisions. She said she appreciated Mr. Avance, Mr. Higgins, and everyone else who had come forward. However, she commented that the tax package was still the legislators’ decision to make. Assemblyman Marvel disagreed, saying the people who came forward were the taxpayers. The legislators represented them, not the other way around.
Mr. Zuend moved on to the business license tax (BLT), which was the $100 per year per full-time-equivalent employee tax that had first gone into effect in 1991. The proposal in the bill would increase that rate to $125 per employee per year, or $31.25 per employee per quarter. That increase was projected to generate $20.3 million in revenue the first year. However, during the second year, the tax would be reduced to $85 per employee per year or $21.25 per quarter, which would result in a loss of $12.6 million in the second year of the biennium from what it would have been if the tax had stayed at the current rate. The bill also proposed to decrease that further to $50 per employee per year in fiscal year 2006, which, of course, would not affect the revenue for the coming biennium.
Mr. Zuend next described the bank franchise fee of 5 percent, which would basically be a net income tax on banks in lieu of the unified business tax. He stated that the best estimates of the revenue it would generate were $20.5 million the first year of the biennium and $22.1 million the second year. Mr. Zuend said the Department of Taxation thought the tax could be implemented as of July 1, 2003. However, there would be a deferral of the collection of the tax until after January 2004, so the Department would be collecting two quarters of tax at the same time due to delays in ensuring that everything was correct.
Vice Chairman Parks noted that the franchise tax on financial institutions was covered in Sections 39 through 64 of the bill draft, and that it was all significantly new language starting on page 20, Section 39.
Assemblyman Mortenson asked if the business license tax would still exempt the sole proprietor. Mr. Zuend replied that, under the current proposal, the sole proprietor would continue to be exempt, meaning that person would be exempt from the tax. His business would not necessarily be. If he had five employees, the five employees would be subject to the tax, as they currently were. As an individual, though, the sole proprietor’s position would still be exempt from the tax, as would that of the first partner of a partnership.
Assemblywoman Giunchigliani asked if her understanding was correct that the Secretary of State fee for an initial filing would be $125, and then it would go down to $85 for the annual fee. Mr. Zuend verified that, noting that an exception would be the new LLLP (limited liability limited partnership), which would have an annual fee of $135. He said he believed the initial fee for an LLLP was higher.
Assemblywoman Giunchigliani asked if the Committee still had to act on A.B. 536 and merge it with the current bill draft. Mr. Zuend said that was correct. He noted that the current legislation was effectively a clone of S.B. 209, which the Senate had discussed on Monday.
Assemblyman McCleary asked why there was a separate business tax or franchise fee for banks in lieu of the unified business tax (UBT) that would apply to other businesses. Vice Chairman Parks explained that financial institutions were, in many ways, very different entities. The prospect was that if financial institutions paid the bank franchise fee, they would then be exempt from the UBT.
Assemblywoman Giunchigliani added that the banks had asked to be treated separately. She noted that in California, for example, the bank franchise fee was 9 percent. She said the Legislature had originally proposed a 7 percent franchise fee, but had dropped it to 5 percent, which should be far more competitive. She suggested that a franchise fee was fairer, because financial institutions were a bit different as an industry.
Assemblyman Hettrick said he did not know whether it was true, but he had been told that because of some federal law, banks could not be taxed on their net earnings, and that was why they typically had to pay a franchise fee. In terms of the amount of the franchise fee, he had been told that some of the smaller banks in Nevada actually earned only 2 percent on assets as a net return. Mr. Hettrick commented that if the Legislature decided on a 5 percent fee, some of the smaller banks in Nevada, possibly in the rural areas, might be forced to close. He urged the Committee to consider that. He said it might be necessary to go to a tiered fee if that were the case. He emphasized that the state’s intent was not to close banks. Vice Chairman Parks agreed.
Assemblyman Anderson asked if mortgage companies were included in the bill draft and, if so, which category they would fall under for tax purposes. He also asked how the legislation treated credit unions. Mr. Zuend said he believed mortgage companies were included, because they were covered in the definition of a financial institution under Title 55 or 56 of the Nevada Revised Statutes. He added that nonprofits and credit unions were specifically exempted on page 20, Section 42, of the bill draft.
On Mr. Hettrick’s point, Mr. Zuend said he believed the Constitution of the State of Nevada precluded actually taxing assets. The proposed franchise fee was actually a net income tax, so a financial institution would have to register a profit to pay the tax.
Assemblywoman Giunchigliani pointed out that she and Assemblyman Oceguera had presented the actual amendment to A.B. 517 regarding banking, which, in an attempt to be cognizant of the smaller banks, had included a tiered approach based on the amount of deposits and such that had been made. She said she would have the Committee look at that language. Ms. Giunchigliani agreed with Mr. Zuend that they could not tax assets. She noted that the bank she had used as an example in her testimony had been Wells Fargo. Their percentage for deposits had been 38.2 percent in profit. Nevada State Bank’s had been 26 percent, and Bank West’s had been 17 percent.
Mr. Zuend proceeded to the real estate transfer tax. He observed this would not be the first time that tax had been established as a General Fund revenue source, as it had been a General Fund revenue source years ago, but had since been turned over to local governments. He noted that the tax would be set at $1.88 per $500, which was roughly equivalent to 0.375 (3/8) percent. The tax would also provide that the first $100,000 of value would be exempt, so that if someone transferred a $200,000 home, for example, the tax would be paid only on the $100,000 after the exemption. Mr. Zuend explained that the tax would continue to be collected by county recorders effective January 1, 2004, and would raise approximately $24 million the first year of the biennium and $48 million the second year.
Mr. Zuend added that the bill also provided for some commissions for the recorders to collect the tax. The commissions would be 0.2 percent in Clark and Washoe Counties and 1 percent in the remaining counties. The bill also provided, if requested, for the Department of Taxation to help any recorder in a county with a population less then 30,000 with the administrative issues related to the tax. In that regard, though, the state portion would probably be very minor because in many of the rural counties there were housing transactions that were less than $100,000, so there would be no tax liability incurred. Of course, as Mr. Zuend pointed out, when the economy was weak in those areas, there were not many transactions going on at all.
Vice Chairman Parks thanked Mr. Zuend. He noted that the language in the bill relevant to the real estate transfer tax began around page 66, Section 124. He said that because there were some questions related to the real estate transfer tax, and because there was an exemption for the first $100,000, if someone had, for example, a $1 million piece of property that changed hands, that $1.88 per $500 would be levied only on $900,000 and not the full price. As it currently stood, when someone transferred a piece of property, both in Washoe County and Clark County, they were paying $1.25 on the full price based on the first dollar, so the sale of a $100,000 home, for example, would be a tax of $250. Vice Chairman Parks gave an example of a home that would sell for $200,000, the tax on that currently would be $500. Under the proposal in the bill draft, the tax would be $1.88 per $500 on the $100,000 over the exemption, for a cost of $376. Vice Chairman Parks explained that what would happen was that the current $500 would go to the funding sources that were currently enumerated, and the additional $376 would go to the state, for a total of $876 transfer tax on that transaction.
Assemblyman Grady noted that the real estate transfer tax in the bill would be in addition to what the counties were collecting. He asked if the $0.05 in Senator Rhoads’s bill would be in addition to the $1.88. Vice Chairman Parks replied that yes, according to Senator Rhoads’ bill, S.B. 370, the county commission of each county could decide whether they wished to levy the up-to-5-cent rate to fund measures to fight cricket and grasshopper infestations. Vice Chairman Parks said that amount would be an added fee were it to be implemented. He noted that counties with a population over 400,000 were exempted from S.B. 370.
Assemblyman Griffin said there had been a recent discussion about conceptually making the real estate transfer tax deductible for whatever iteration of a business tax that might or might not be adopted. He asked if that was still the case, or if that was something that Vice Chairman Parks would prefer to talk about during the discussion of the next item. Vice Chairman Parks said that was certainly something the Committee could bring up. According to his recollection of what was contained in the bill draft, that was not included. If it was there, Vice Chairman Parks mentioned that he had not seen it.
Assemblyman Griffin commented that he wanted to make sure there was a deduction for the real estate transfer tax in those certain situations. He said there were two ways to go about that. The first was to make it clear in the business tax section that what was being identified was the gross of a business involved in real estate transactions. Mr. Griffin noted that there had previously been questions as to what constituted pass-through revenue. The second way of going about the deduction, he said, was to make sure that certain industries who routinely did real estate transactions as part of their business were not double- or triple-taxed.
Vice Chairman Parks said that one of the next topics of discussion would be the exemption for pass-through revenue, which would include real estate sales individuals. He said the Committee would also discuss the issue of “cascading,” where multiple businesses ended up developing a finished product that required a number of subcontractors and other manufacturers in the process. Vice Chairman Parks noted that cascading was addressed elsewhere in the bill.
Assemblywoman Chowning mentioned that she thought there had been a ceiling on the real estate transfer tax, and that it did not apply above $100 million. She said she had not seen that ceiling in the current bill. Vice Chairman Parks said there was no ceiling.
Assemblywoman Chowning asked why the exemption for the transfer of title to community property without consideration had been taken out. She said she doubted its removal would gain the state much in additional revenue, and that only affected a few spouses who were transferring property from one type of ownership to another type of ownership, such as joint tenants or tenants in common. Mrs. Chowning wondered what the rationale had been for removing that exemption. Vice Chairman Parks noted that when exemptions had been discussed previously, there had been 16 exemptions. He said the Committee would have to look very closely at those to see what impact they would have. Vice Chairman Parks said that was something the Committee would have to look at and review further.
Assemblywoman Angle noted that, on page 86 of the bill, “an educational foundation” and then “is exempt from the tax on transfers” had been crossed out, so that exemption had apparently been deleted as well. She said she would appreciate it if the Committee could check on that when they were looking at exemptions. Vice Chairman Parks assured her the Committee would check every one of the exemptions, and would find out where that recommendation had come from.
Vice Chairman Parks confirmed for Assemblyman Brown that the $100,000 exemption from the real estate transfer tax referred to sale value and not to assessed value. Mr. Brown noted there had been a comment that the recorder’s office of a county could, as a collection fee, retain 0.2 percent. He asked if that referred to 0.2 percent of the total amount collected or a percentage of the 0.375 percent. Vice Chairman Parks replied that it would be on the total amount of revenue that would be collected.
Mr. Zuend stated that the final item in the tax package was the unified business tax, which would in part go into effect January 1, 2004, and be fully in effect January 1, 2005, the difference being that the tax would only be imposed on businesses with gross annual revenue in excess of $3 million per year for the first 12 months it was in place. After that, it would be imposed on all businesses that qualified. Mr. Zuend noted that the current version of the unified business tax was a variation of the original proposal by the Governor in the sense that it had a $450,000 exemption, which would exempt roughly 55 to 60 percent of the businesses in the state from paying any tax. An additional provision had been added that would allow a business to compare the tax under the 0.25 percent rate with what was called its gross profit, which was gross receipts minus cost of goods sold, and pay the lower of the two.
Other deductions, Mr. Zuend said, had been provided for food sold, which was also exempt under the Sales and Use Tax Act, and for subcontractor costs incurred by a master developer. He pointed out that those deductions were aimed at avoiding the cascading problem. He added that gross gaming revenue had also been excluded from the tax because there was a separate tax increase on gross gaming revenue. Financial institutions were exempt because of the separate tax on financial institutions.
Assemblyman Brown asked if there was e a definition of “master developer” within the document. Mr. Zuend pointed out that the definition was located in Section 22, page 13, subsection 12. Mr. Brown said it was his understanding that in order to avoid a cascading effect for contractors or subcontractors, any subcontractor costs would be a deduction. He asked if that applied only to the developer or if that deduction was also available to any contractor who used a subcontractor or a subcontractor who used a sub‑subcontractor. Mr. Zuend’s reply was that the deduction, as he understood it, would only apply to the last person in the chain. If the contractor sold real property directly, he would have the deduction. If the contractor sold the property to a developer, then the developer would get the deduction. The deduction would not apply to a subcontractor or sub‑subcontractor. Mr. Zuend quoted the bill as saying, “who sells that improved real property to a person who is not in the business of developing real property.” He said a buyer was being described there who was not going to resell the property again.
Assemblyman Brown asked, in regard to the $3 million threshold for the implementation period of July 1 through December 31, 2003, if a business’s gross receipts reaching $3 million would trigger analysis of its receipts all the way back to $450,000. Mr. Zuend said that was correct and because the Department of Taxation, with its current system, would have had trouble implementing the tax on all businesses, the decision had been made that they could handle a 12-month implementation if it was limited in scope. Mr. Zuend stated that limiting the implementation to businesses with gross receipts of at least $3 million for a year would eliminate all but approximately 3,000 businesses in the state, so those top 3,000 businesses would be subject to the tax first. The limit would actually be based on a quarterly amount of $750,000. For businesses close to the threshold, Mr. Zuend said the Department of Taxation would probably have to identify and determine whether they were under that amount for a quarter or over that amount. Those businesses would then get the $450,000 deduction, which was only one-fourth of that each quarter. However, once the unified business tax had been fully implemented, every business would be theoretically subject to the tax, but all those that had the gross revenue under $450,000 would, in effect, pay no tax.
Assemblyman Brown said he understood the practical difficulties, but he sympathized with those businesses that would be at $3.1 million versus those at $2.9 million, as the business at $2.9 million was going to pay absolutely nothing. Mr. Brown asked what amount would be paid during the 6-month implementation period by businesses that had revenues of $750,000 per quarter. He noted that the threshold seemed a bit arbitrary.
Mr. Zuend responded that the implementation period would actually be a full year. It would come into effect on January 1, 2004, but because Nevada dealt on a fiscal year basis, it was split. For a full year, if a business’s revenues were at the $3 million minimum, the business would pay about $6,200 in taxes.
Assemblywoman Giunchigliani asked if strip clubs, which were different from escort services, would be subject to the unified business tax (UBT). She noted that a number of strip clubs were located in her district and were currently not paying a dime. Vice Chairman Parks replied that they were businesses, and the unified business tax did apply to all businesses. Mr. Zuend supported Vice Chairman Parks’ answer, saying there were, as yet, no exemptions provided other than the $450,000 per year standard exemption. So, a $20 million business would be subject to the tax.
Assemblywoman Giunchigliani asked if the strip clubs would then no longer be able to claim they were “entertainment,” and therefore not subject to the tax. She stated that the clubs told the strippers what color nail polish and what height heels they had to wear, and that, in her opinion, made the strippers employees rather than subcontractors.
Mr. Zuend stated that whether or not a business would have to pay the unified business tax was based on the business’s income. Ms. Giunchigliani asked if the strip clubs would be taxed under a net profits tax. Mr. Zuend asked if the strip clubs were publicly held. He said a net profits tax would clearly hit any publicly held company, but it was a bit more difficult under a privately held company, because a business could easily zero out its net income for tax purposes by paying the owner a higher salary or some such thing. Ms. Giunchigliani commented that strip clubs were a business that should be captured by the business tax.
Assemblyman Griffin expressed an interest in the notion of “pyramiding” and “cascading.” He pointed out that Nevada’s economy did not have a lot of business industry that would have several layers, with the exception of the construction industry. However, he wanted to make sure that the issue was addressed for other industries such as manufacturing. Mr. Griffin asked if the subject would be better discussed when the Committee addressed the relevant amendment. Vice Chairman Parks commented that the issue would probably be more effectively addressed during the following day’s work session. He stated that the Committee would spend the remainder of the afternoon discussing the proposed revenues and additional possible revenues, and would then listen to public testimony.
Vice Chairman Parks also noted that Assemblymen Beers and Conklin were present in the audience and that Assemblyman Sherer and many other legislators were observing the hearing via closed circuit television within the building. He thanked them all for their interest.
Assemblywoman Giunchigliani mentioned that she had not yet located the language pertaining to tiering the bank franchise tax. She did share the information that California had a 10.8 percent franchise fee, Oregon had a 6.6 percent franchise fee, Idaho’s franchise fee was 7.6 percent, Utah’s was 5.0 percent, and Arizona’s was 7.0 percent. Nevada, she noted, currently had a zero percent franchise fee, so the proposed fee would put Nevada at the lowest end of the threshold of the surrounding states.
Ms. Giunchigliani asked if, at some point, the Committee was going to talk about some of the other taxes that had been suggested, such as the net profits tax. She thought the Senate had a version of a net profits tax drafted at some point. She noted that a commercial lease tax had been discussed, but because people had some concerns, that had been removed from the Assembly’s recommendation. She said there were some other taxes that should be discussed briefly as well.
Vice Chairman Parks stated that as soon as the Committee had finished discussing the UBT, the discussion would be opened up to other revenues the members were interested in pursuing.
Assemblywoman Chowning asked that before the Committee leave the subject of the real estate transfer tax, they discuss the reason for removing the aforementioned exemptions as well as the dollar amounts they involved, so they could see which ones were big ticket items versus small ticket items. Vice Chairman Parks said the amount of information that had been provided was fairly limited, but he would be happy to make that available as part of the work session the following day.
Vice Chairman Parks noted that the Committee had covered everything contained in the draft. He added that if anything had been overlooked, or if there were any questions from Committee members, he would be happy to entertain those. Otherwise, they could move on to the other document that Fiscal staff had provided, which contained a list of 16 other revenue sources.
Assemblyman Perkins said he wanted to make sure he fully understood the unified business tax. He noted that many constituents did not understand that the levied rate would be 0.25 percent, which would amount to $25 on $10,000 worth of revenue. He said people had asked him about a much higher number, if it would be $250 on $10,000, and he wanted to make sure that was clear.
Vice Chairman Parks stated that all the legislators had probably received hundreds, if not thousands of e-mails on that subject. He said that some of those e-mails had come from people who used their own businesses to indicate what their tax levy would be. He noted that many of them had made miscalculations because they did not know on what the rate would be calculated. He thought some examples would probably help everyone better understand how the unified business tax would work. He asked staff to give a brief overview of the revenue table sheet (Exhibit F).
Mr. Zuend noted that some of the items in the table had already been covered. Number 2, said, was simply the 0.25 percent increase in sales tax that would go to the schools and the amount of revenue that increase would generate. He said that increase would probably be effective on October 1, 2003, not July 1, 2003. Mr. Zuend pointed out that sales tax was a very productive revenue source, so the increase would raise quite a bit of revenue.
Mr. Zuend then proceeded to the increase in the business license tax. He said each 10 percent increase, or $10 per year, or $2.50 per quarter, would raise approximately $8 million per year. The business license fee in the table was the $100 that had been considered by the Senate on Monday night.
Mr. Zuend noted that the Committee had talked about the cigarette tax and the liquor tax. The table showed the amounts of revenue that different increments would raise as opposed to a fixed increment such as the one that had been proposed in S.B. 509. He pointed out that in the table entries for cigarette tax, Fiscal staff had reduced consumption as the tax was increased, utilizing a 4 percent decline in consumption for each 10 percent increase in price. Staff had basically set the price at a per-pack basis so, based on the 65-cent “sin tax” rate that was in the plan, there was actually an approximate 6.5 percent decline in consumption put into the model. That was based on a lot of studies that had been done on consumption effects. However, Mr. Zuend added, the figures did not capture any effects due to cross-border sales, Internet sales, or anything of that sort.
Mr. Zuend noted that the Committee had not yet discussed number 8 in the table, which was a state room tax. Each 0.25 percent tax would raise roughly $8.5 million per year. Mr. Zuend said that the tax was primarily a local revenue source with a 0.375 (3/8) percent tax currently used to fund a state commission on tourism.
According to Mr. Zuend, each $0.05 increase in property tax statewide would raise roughly $31 million per year. Mr. Zuend pointed out that the real property transfer tax in the table differed from the one that had been discussed by the Committee because the one in the table was calculated without an exemption, so $1.25 per $500 would raise $27.4 million in the first year of the biennium and $54.8 million in the second year if it was started on January 1, 2004. He noted that the rate was quite a bit lower if there was no exemption than if there was an exemption.
Mr. Zuend said the figures for the live entertainment tax were the same as in the table the Committee had seen previously. He pointed out that a full service tax of 0.5 percent on all services, with no exemptions or deductions, would be a productive tax. As for the commercial lease tax that had been discussed briefly in several meetings Mr. Zuend said each 1 percent tax on the lease value had been estimated to bring in $21 million, but that the tax could not be implemented until 2004.
The 1 percent tax on net profits would generate $37.4 million. The Department of Taxation felt it could implement a net profits tax on July 1, 2004, but would probably not be able to collect it until after January 2005, when it had its system in place based on its Request for Information (RFI). Mr. Zuend pointed out that the net profits tax was one of the most volatile of all taxes from year to year, and that the figure quoted represented median scenario. He recommended the Committee consider some type of holdback that would allow for the volatility of the tax to be mitigated if a net profits tax were to be adopted.
Mr. Zuend noted that the Committee had already discussed the bank franchise tax. He explained that if a net profits tax were imposed, the bank franchise tax would not be part of the proposal, because financial institutions would be covered under the same income tax as everyone else.
Finally, there was the payroll tax. Mr. Zuend explained that the tax would be on the gross wages reported to the Employment Security Department (ESD) and would be very similar to the proposal introduced by Governor Miller in 1991. He said that proposal had eventually been replaced with the per‑employee tax.
One other item that had been discussed, at least on the Senate side, but had not been included in this table was a tax on the net proceeds of minerals. Mr. Zuend explained there were constitutional issues involved with that tax, but the state controlled, by legislative action, how net proceeds were determined.
Assemblywoman Giunchigliani commented that Assemblyman Mortenson had proposed a room tax, but she had not considered a statewide room tax. She asked exactly how that tax would work. She inquired if it would simply be in addition to, but not have an impact on, local revenue, and would be collected at the state level.
Mr. Zuend said he did not believe the state would collect the room tax, as the 0.375 percent tax was currently collected by local governments and remitted to the state. He noted the state actually imposed a 2 percent room tax in Clark County, of which 1.625 percent went toward school capital projects. The remaining 0.375 percent was remitted to the state to fund a commission on tourism. Every other county had a 1 percent tax, of which 0.625 percent was kept in the county for the Fair and Recreation Board. Those other counties also remitted 0.375 percent to the state.
Assemblywoman Giunchigliani made the comment that the room tax should then be easily implemented, because the counties were already collecting the current room tax. Mr. Zuend pointed out that, because of the late date, July 1 would probably not be the appropriate time to implement it. He suggested that an implementation date of August 1 would probably allow enough time for notices and such, and to allow local governments to gear up to collect the tax.
Assemblywoman Giunchigliani recalled that a tax on professional services, such as advertising consultant, had been discussed at one time. She asked if that was still being discussed by anyone. She thought the idea of a sales tax on services had “bitten the dust,” but there had also been the concept of taxing professional services, which would get the proverbial “camel’s nose under the tent.”
Mr. Zuend stated that numbers were available on those categories, and he did not believe they had changed. However, he said no one had taken another look at those figures. He thought the discussion had perhaps been about a 1 percent tax that would have raised approximately $50 million on those categories. He noted those figures were only a guess, but he recalled the prospective tax had been fairly productive.
Vice Chairman Parks asked if there were any additional revenue sources that Committee members would like staff to explore. Assemblywoman Gibbons recalled that Senator Rhoads had proposed perhaps a 0.25 percent sales tax increase in one of the Taxation Committee’s very first meetings. She asked how much would the increase have brought in.
Mr. Zuend noted that the proposal was still on the table. He said it was under the local school support tax (LSST) because the state could not raise the state 2 percent tax unless it received voter approval, which would delay any implementation, if it were approved, until January 2005. In response to Mrs. Gibbons’ question, he said the LSST currently raised over $87 million per year per 0.25 percent. Mr. Zuend explained that, for the first year, the increase would probably have to be delayed three months before it could be implemented, in part because of notification, and also so quarterly reporters would not be required to submit two tax returns at two different rates.
Vice Chairman Parks opened the witness table to individuals who wished to provide public comment.
Stephanie Licht, representing Elko County, stated that she had recently met someone locally who had an interest in a small bank, and had been told that a 5 percent hit on small banks was different from that on the big banks. She noted that the big national banks had the opportunity to shift their business around to a better tax climate. However, the state-chartered banks were kept within the state and did not have that opportunity. She said the man had told her that 5 percent would be somewhat difficult on the small banks, but that 1 or 2 percent would not be too bad.
Ms. Licht said she had asked how the franchise tax would affect the little banks in Elko that did not go anywhere but inside the state. Her local bank representative said that a 5 percent franchise fee would be difficult for them. He said he had been in the banking industry for quite some time, and his small operation realized roughly 1 percent on its net assets. For instance, if a bank had $500 million in net assets, it would raise about $5 million over its banking history. He had made the comment that perhaps the franchise tax ought to be tiered, and break at about the $500 million asset area. Those below that level could stand perhaps 1 or 2 percent. He told her he could not speak for the other banks.
Assemblywoman Giunchigliani asked Ms. Licht if she had made that suggestion to the Senate Committee on Taxation at any time. Ms. Licht replied that the information had come to her only the previous afternoon. However, she said she had shared it with Senator Rhoads that morning.
Assemblyman Perkins requested that, as the witnesses came forward to the table, they could indicate if the information they were providing had been presented to the Senate that morning, as an attempt was being made to ensure both the Senate and the Assembly were operating off the same body of information. Mr. Zuend explained that the Senate had taken no public testimony that morning, but had taken until close to 1:00 p.m. to go through the information.
Steven D. Hill, President, Silver State Materials, said he was testifying on behalf of the Associated Builders and Contractors, the Associated General Contractors of Las Vegas, the Nevada Subcontractors Association, the Southern Nevada Home Builders Association, the Howard Hughes Corporation, the Nevada Association of Women in Construction, the Nevada Minority Contractors Association, and the Framing Contractors of Southern Nevada. He said the handout the Committee had received earlier (Exhibit G) containing the proposed amendments to S.B. 509 had been from those organizations, which had three general concerns with any tax package that was ultimately approved.
Their first concern was the inadvertent targeting of an individual industry. Mr. Hill noted that if the organizations could have figured out how to write an amendment that would have prohibited such targeting, they would have done so. He asked that, as the Committee members considered real property transfer taxes, commercial lease taxes, sales tax on professional services, and other potential core taxes, they would keep in mind that all of those taxes could quickly and dramatically pile up on members of the construction industry.
Mr. Hill stated that the two amendments that the organizations had proposed dealt with their other two concerns. He said pyramiding or cascading, where the same product or work product was passed on many different times in the course of the construction of a facility or home, was a concern to the construction industry. He quoted the consensus number of times that cascading took place in that industry as 3.2. He said that had been addressed somewhat in S.B. 509, but he thought the intention was that it apply to contractors with subcontractors, not just master developers, so some cascading would be dealt with, but certainly not all of it. Mr. Hill said his proposed Amendment 15 dealt with that issue.
Mr. Hill explained that his proposed amendment 16 dealt with the organizations’ concern regarding double taxation, where the same revenue could be taxed by both a real property transfer tax and a unified business tax or gross receipts tax. He pointed out that, under a scenario where there was not double taxation, there would be a 0.375 percent tax in addition to the local tax on the real property transfer. However, if there was double taxation and the 0.25 percent was added to that, the tax on many transactions would be significantly increased.
Assemblyman Perkins noted that in the waning days of the legislative session, there had been some concern that the provision could be held unconstitutional if contractors from within and without the state were handled differently that way. He asked if there had been any discussion among Mr. Hill’s organizations about how to address that issue.
Mr. Hill answered that there had been. He said that concern had been pointed out to the organizations by Jeremy Aguero of Applied Analysis when they had explained to him the concept they had in mind. Mr. Hill thought there had been some misunderstanding about the intention. He recounted that as they had discussed the issue, Mr. Aguero understood that it would not be a constitutional problem, but that language had not ended up in the bill. Mr. Hill stated that the changes the construction industry and Mr. Aguero had been trying to make had not made it into S.B. 509.
Assemblyman Perkins asked Mr. Hill if he was planning, when given the opportunity, to present the same information to the Senate. Mr. Hill replied in the affirmative.
Assemblyman Perkins pointed out that as the Committee attempted to put together the revenues that would support the budget, there were a lot of pieces to consider, and the piece that would be crucial to whatever the Committee did should be a broad-based business tax. He said that was no secret, and he had said it a number of times. He noted that Mr. Hill was offering an amendment to the unified business tax and that, in the scheme of broad-based business taxes, the Committee was trying to find out which one was most fair, which one was the best application, which one was easiest to administer, all those things. He said the legislators had been discussing the issue for virtually 120 days, but always seemed to come back to it because everything else they explored seemed to be even less fair in some way. Assemblyman Perkins asked if, in the context of all the things they were talking about, the current proposal was one of the most fair for your industry. He asked if it was the one the construction industry would support, given the choice of proposals that were out there. Mr. Hill replied that, with his proposed Amendments 15 and 16, the organizations he was representing would certainly support that proposed tax.
Assemblywoman Giunchigliani requested an explanation of Sections 141 through 146 of the bill, as it looked to her like an accountability commission or some such, which had not been discussed. Vice Chairman Parks said he would ask staff to give an update on that before the Committee adjourned for the day.
Mark Fiorentino came forward representing the Focus Property Group, one of the largest master developers in Clark County. He stated that his firm represented not only the Focus Property Group, but also businesses that were interested in the state and in education and their community. He said the firm represented large businesses, small businesses, gaming companies, slot route companies, and master developers, all of whom supported paying more money to cover the needs of the state, and all of whom supported a broad-based business tax. He said they were, in fact, prepared to support the unified business tax, but were surprised at the form it had come out in. There were some things in there that they had not expected.
Mr. Fiorentino stated that the businesses he represented were particularly concerned about the relationship between the real estate transfer tax and the unified business tax. He suggested two changes to the unified business tax (Exhibit H). Those changes were slightly different from those Mr. Hill had submitted, but Mr. Fiorentino believed they would accomplish the same things.
The first of Mr. Fiorentino’s amendments would change the definition of “total revenue,” which was directly related to the concern Assemblyman Perkins had raised about the constitutionality of how that language was drafted. Mr. Fiorentino pointed out that the bill already had, on pages 3 and 4 of the draft, a method for excluding certain revenue from the definition of total revenue. What he said his firm would suggest, if the Committee members were interested in ensuring that developers were not double taxed, was that a subparagraph be added to say total revenue did not include any revenue subject to the real estate transfer tax. He noted that was a much cleaner way of accomplishing the same thing Mr. Hill’s amendment attempted to do.
Mr. Fiorentino said the second point he wished to make would probably be easier if discussed in relation to page 13 of the draft. He explained that what the Focus Property Group, the Howard Hughes Corporation, and other master developers did was assemble large tracts of vacant land and invested a fair amount of money in getting that land ready for another developer to take to the end user. They entitled it, did the engineering on it, and often put in the streets, sewer, and other infrastructure that was needed for a home builder or someone else to take it and build homes.
The way Mr. Fiorentino’s firm read lines 11 through 14 on page 13 of the draft, the language would allow the homebuilders to deduct the cost of building the homes in their calculations of total revenue. The language said it only applied to people who sold improved real property to a person who was not in the business of developing real property. Mr. Fiorentino was concerned that the deduction, then, would not apply to master developers because they were in the business of selling real property to home builders and others who were developing real property for others. He said his firm was hopeful that, if the Committee processed the unified business tax, the master developers would be provided that same deduction for costs they incurred in providing the infrastructure before they turned property over to a home builder or someone else. Mr. Fiorentino stated that, with those amendments, his firm and its clients would support the unified business tax.
Chairman Arberry recalled that earlier, when the Committee had been going through the estimated revenue generated list of 16 items, he had wanted to ask Mr. Zuend how the definition of “net proceeds” could be changed if the Committee wanted to generate additional General Fund revenue from mining and add mining to the list. Mr. Zuend replied that the Constitution of the State of Nevada limited the rate and what could be taxed. The Constitution stated the net proceeds alone could be taxed until they were identified as lost. However, according to Mr. Zuend, the state might determine what constituted net proceeds. He said there was no constitutional definition of that, so the Legislature could eliminate a deduction, for example, or it could apply a percentage to allow only a percentage to be defined as net proceeds. He was aware of no hard and fast rule of what constituted net proceeds, and said that was in the eye of the beholder.
Chairman Arberry asked how much money would be generated by changing the definition of net proceeds. Mr. Zuend’s answer was that it would depend on how the definition was changed. If, for example, the cost deduction in the aggregate, other than the royalties, were reduced 20 percent, he estimated that about $20 million would be raised in total, some of which would go to local government. Approximately half, he said, would go to the state General Fund. A portion would be part of the Distributive School Account formula, the 25-cent rate the schools would get. The other 50 percent would flow directly to schools. There would not necessarily be an offset to DSA spending. In total, Mr. Zuend thought such a change would benefit the state by probably two-thirds of that once the Distributive School Account was taken into account. For example, of $20 million, the state would probably get $14 million.
C. Rocky Finseth II, representing the Nevada Association of Realtors, noted that he and the Association had previously had some discussions with the Committee and some of the members concerning the double taxation issue with respect to a typical real estate transaction on the unified business tax. He offered to answer some questions that had arisen earlier regarding the exemptions on the real property transfer tax.
Melody Luetkehans, General Counsel for the Nevada Association of Realtors, offered a proposed amendment to S.B. 509 (Exhibit I). The amendment addressed an issue that had not been addressed directly in the bill. Ms. Luetkehans stated that the bill had a double impact on the real estate industry. She noted that real estate agents, by law, could not collect directly from their clients. They were required to collect their compensation for any of their real estate-related activities through their brokers. Real estate agents, she said, were considered as independent contractors. However, the law required them to hold their licenses through a broker and, if they should change brokers, to contact the Real Estate Division and the regulatory agency and transfer their licenses through that agency. Ms. Luetkehans claimed that, even though they had been historically considered independent contractors, real estate agents actually lived in a quasi-world between being employees and being independent contractors.
Ms. Luetkehans pointed out that the way the current bill was written, when a real estate transaction closed and the broker got paid through escrow, the broker would be required to pay a complete tax on that transaction. Then the broker would turn around and pay the agent a certain percentage, and the agent would have to turn around and, on the same dollar, pay another tax based on the bill. She proposed three amendments (Exhibit I), any one of which should accomplish the goal of not taxing realtors twice on the same dollar.
The first amendment was in Section 22 of the bill. Ms. Luetkehans noted there were some proposed deductions for the cascading effect that occurred in the building industry. The Nevada Association of Realtors proposed that the real estate industry be recognized by not naming agents under NRS 645, which was the set of statutes that regulated them. She stated that the proposed amendments would ensure that, if an independent contractor was required by statute to work through another business entity that would be taxed, the independent contractor would not be double taxed.
As an alternative to that amendment, the Association offered an exemption from the gross profits tax. Ms. Luetkehans stressed that the Association was not suggesting that all three amendments be adopted. She urged the Committee to choose the one that best fit the situation and the legislative intent. She pointed out that the gross receipts tax did not include revenue collected from another under an independent contractor relationship when that relationship, that profession or occupation, fell under NRS Title 54. Title 54 was that entire section of statutes and chapters that dealt with licensed individuals in the state of Nevada.
As another alternative, Ms. Luetkehans asked the Committee to look at Section 8, which redefined or added to the definition of the pass-through revenue. She stated that the pass-through revenue exempted in the bill included a situation that would recognize the real estate agents’ dilemma for the double taxation.
Assemblywoman Chowning disclosed that, because her husband was a real estate broker licensed in the state of Nevada, and she was a real estate salesperson licensed in Nevada, she would be hit by the tax twice. Her husband would be taxed, she would be taxed, and their pocketbook would be lessened. Mrs. Chowning noted that Vice Chairman Parks would also need to make the same disclosure, as he was a licensed real estate salesperson.
Mrs. Chowning thanked Ms. Luetkehans for addressing the issue and presenting her amendments. She asked Ms. Luetkehans if she had made the same presentation to the Senate. Ms. Luetkehans said she had not yet had the opportunity to make that presentation. She understood that the Senate had not opened hearings to public comment yet. However, she assured Mrs. Chowning that she would be making the presentation and offering the three amendments to the Senate.
Vice Chairman Parks disclosed that he was a real estate licensee in Nevada.
Mr. Finseth pointed out to the Committee that the exemptions in Section 125 of the bill had been developed by the county recorders, so any questions concerning why things were eliminated or were not eliminated, and why things were consolidated, needed to be directed to them. He directed the Committee to his other handout (Exhibit J) entitled “Exempt Transfers for Clark County, April 2002.” He noted that what the Nevada Association of Realtors had attempted to do earlier in the session was retain some of the exemptions but insert some transaction fees that someone who qualified for an exemption would pay in lieu of the transfer tax. In order to estimate how much revenue those transaction fees would generate, the Association worked with the county recorders to get an idea of what kind of dollars, represented by the exemptions and the number of transactions that occurred, qualified for one or more of the exemptions.
Mr. Finseth said the process had been very time-consuming. For Clark County alone, two weeks had been spent just to get the numbers for April 2002. However, the information they had extracted would at least give the Committee an idea of the dollar revenues that were generated from the exemptions as well as the number of exemptions that were filed under each of the exemptions.
Assemblywoman Chowning asked Mr. Finseth if the “exemption 5” he referred to was the exemption on the transfer of title to community property without consideration, on page 70, line 11, which she had referred to earlier. Mr. Finseth verified that it was. He explained that, according to his chart, the exemption represented $37 million in the month of April 2002, and there had been a total of 242 individual applications for that exemption. He noted that the Association had tried to determine whether the state could gain additional revenue by charging those who would qualify for an exemption a nominal fee in lieu of a transfer tax.
Assemblywoman Chowning asked if the $37 million represented the total amount of real estate, in dollars, that had been transferred, and if that was the figure on which the additional charge would have to be calculated. Mr. Finseth said he did not want to speak for the county recorders, but he thought what they had been looking at was the idea that by eliminating exemption 5 and combining exemptions 6 and 7, they would pick up the community property exemption. He commented that the resulting exemption would be easier to administer because the new language would read, “a transfer of title between spouses, including gifts or to effect a property settlement agreement, or between former spouses in compliance with a divorce decree.” Mr. Finseth thought that part of what had been submitted was designed to make the exemptions easier to administer.
Assemblywoman Chowning noted that the information that had been submitted was helpful, but still did not tell the Committee what the tax would be. She expressed the opinion that a transaction fee was a much fairer fee, and said she would support it. She asked if a transaction fee was included in the bill draft. Mr. Finseth explained that the drafters of the bill had opted not to pursue a transaction fee concept. He said he had provided that concept to the Chairman, and would be happy to provide it to the rest of the Committee as well.
Assemblywoman Chowning stated that the Committee would have to decide what the transaction fee would be and would need a figure to use for comparison.
Vice Chairman Parks noted that, according to the chart, the total value of property transferred under exemption 5 for the month of April had been $37,467,000. The tax that would have been generated on that in Clark County would have been $93,667. He added that there had been 242 transactions, so, if there had been a transaction fee of $250, that would have generated roughly $60,000. A fee of $100 would have generated roughly $24,000. The revenue generated would simply be the fee amount multiplied by the number of transactions, unless the system created began with a minimal amount and then escalated according to value. He said the Committee could look at those particular examples and decide where it wanted to go from there.
Mr. Zuend agreed with Mr. Finseth that some of the changes to the exemptions in the bill were simply cleanup of existing language aimed at making the exemptions more straightforward and eliminating redundancies. Mr. Zuend noted that the exemption being eliminated stated, “The transfer of title to community property without consideration when held in the name of one spouse to both spouses as joint tenants or tenants in common.” The existing exemption said, “a transfer of title between spouses.” Before that, another exemption said, “a transfer of title without consideration from one joint tenant or tenant in common to one or more remaining joint tenants or tenants in common.” He commented that both of those exemptions seemed to cover exemption 5 that was being eliminated. Mr. Zuend thought, the way he read the language, that what would be exempt had not changed.
Vice Chairman Parks agreed. He said that had been part of the intent of the Legal Division when they submitted the change for consideration. He said he would, however, double-check that.
Jack Kim, representing Sierra Health Services, announced that he was in a different position from most who had testified in that the insurance industry and his company already paid a 3.5 percent premium tax, which was actually a gross receipts tax. Mr. Kim stated that the Governor’s tax bill, which had been presented to both Taxation Committees, had acknowledged that the insurance industry did pay that tax, and there had been an exemption for them in that bill.
In the current bill, however, that exemption had been removed, whether inadvertently or otherwise. Mr. Kim stated that Nevada had one of the highest insurance premium taxes in the country at 3.5 percent. He noted that the insurance industry was the third-largest revenue generator for the state, and the industry would very much like to see that exemption restored to the bill.
Mr. Kim stated that the insurance industry had other issues, at least with the unified business tax provisions. He said there were a number of exemptions for health care providers, some of which were not as clear as they should have been. Mr. Kim said he would be glad to provide some language for the Committee’s Work Session Document (Exhibit K).
Mr. Kim claimed that the insurance industry had multiple subsidiaries, which created a problem similar to the pyramiding or cascading effect. He noted that there had been some language in the exemption that seemed to address that. He volunteered to provide language for that the following day.
George Flint, representing the Nevada Brothel Owners Association, said he had received a call in January from Erin Neff at the Las Vegas Sun, who said a number of legislators were considering a brothel tax. Ms. Neff said the provision would be under the Governor’s proposal for an admissions and entertainment tax. Mr. Flint said he was not sure brothels were either one. He said he was still not sure they were live entertainment, although he had learned to live with that concept. He stated that he and the Senate Majority Leader saw very differently on certain things, but that the Senate Majority Leader had said earlier in the day that the brothel business was a unique business “in that, when they sell their inventory, they still have their inventory.” He said he had found that statement encouraging.
Mr. Flint noted that the live entertainment tax was in Sections 65 through 90 of the bill draft. He said the brothel owners were quite confident at that point that they could participate in a live entertainment tax. Mr. Flint noted that when he had testified on behalf of brothel owners earlier in the 72nd Legislative Session, they had not been in support of an industry-specific tax on brothels, but a broad-based business tax on all live entertainment. He said he had discussed that with leadership.
Mr. Flint noted that although brothels traditionally never had an admission tax, what the brothel owners had planned was not to have an admission or entry fee into the business itself, the bar and the parlor, but an admission fee that would begin at that red line known as the “bedroom area.” The tax would be part of the minimum fee that was charged. The admission fee would run between $15 and $30, which the brothel owners would establish as an industry standard. Mr. Flint added that would probably become part of the statute in 2005.
Mr. Flint pointed out that there was one section in the live entertainment portion of the bill that bothered him. He said he and the Chairman had agreed on acceptable verbiage. However, when he had later seen the entire bill, S.B. 209, and also on page 37, Section 84, of the current bill draft, he had found some confusing language that had been written for what had originally been the casino entertainment tax, and now that had been expanded into live entertainment outside the casinos. He directed the Committee to Section 84, page 37, subsection (b), which said, “If the Department determines that a taxpayer that is not a licensed gaming establishment is collecting an admission charge with the intent to defraud the state or to evade the payment of the tax or any part of the tax imposed by this chapter, the Department shall establish an admission charge upon which the tax imposed by this chapter must be based.”
Mr. Flint saw that as almost tantamount to telling the Department of Taxation they could set the businesses’ rates and fees. Mr. Flint found that bothersome, and asked the Committee members to consider whether that was an important thing to contain or to continue within the law. He stressed that, in his opinion, the definition of the admission fee and the definition of what constituted live entertainment, on pages 31 and 36 of the bill draft, was sufficient, and that the language he had quoted would give the employees in the Department an opportunity to tell brothels what they should be charging.
Mr. Flint reiterated that brothel owners looked forward to being contributors to the state in an area where they had never contributed before. He stated that 41 years earlier, when he had first come to the legislative process as a young lobbyist, he would never have believed that he would one day be talking to a legislative body that wanted tax money from him and those he represented and saying, “Sure, we would be willing and more than happy.” He said he was frustrated by so many people who said, “We want to participate and pay our fair share, but … “ He stressed there were no “buts” tied to this. The brothel owners wanted to participate, and they hoped and trusted that the state would be willing to allow them to participate.
Assemblywoman Leslie thanked Mr. Flint for having worked with her the entire session. She noted that brothels were one of the few industries she had talked to that had come forward and been willing to work and pay their fair share.
James L. Wadhams, a tax lawyer with the firm of Wadhams & Akridge, came forward to testify. He said his firm represented many taxpayers in tax matters in the state. He stated that an issue that had been raised by Chairman Arberry was purely a legal and constitutional consideration rather than a financial or even a tax issue, and that was the tax on minerals that the Legislature often referred to as a mining tax. Mr. Wadhams stated that there was no mining tax; there was only a property tax. He explained that what occurred in Article 10 of the Nevada State Constitution was it required that all property be subject to a uniform and equal rate of assessment and a just valuation. While he had heard staff say the legislators could vary the methods of assessment, they could not cause the valuation to be unjust, just as they could change the formula on depreciation of a house, but if that caused a $150,000 house to be taxed at $225,000, that would be subject to equalization irrespective of the formula.
Ultimately, Mr. Wadhams said, the Legislature could not contrive the value of property. Under the Constitution, all property had to be treated the same. He noted that the language that often confused people was the reference to net proceeds, and that caused people to think in terms of net income and an income tax. He explained that the net proceeds tax really was to identify the valuation of that property, which was the mineral that had been extracted, and perform an equal and just valuation. Mr. Wadhams cautioned the Committee that confusing that process with an income tax could result in some aberrations that would not serve the Committee well.
Assemblywoman McClain asked Mr. Wadhams if he knew of a way the Legislature could be sure of taxing escort services, which were a multimillion-dollar business, without the escort services being able to claim immunity under the first amendment. Mr. Wadhams replied that the simplest answer would be a service tax, but there were probably other methods of taxation that would not discriminate against other services. He pointed out that the Legislature would have to keep the tax in the context of the Constitution. He stated that taxation of expression was not in itself a violation as long as the taxation was on a nondiscriminatory basis, so all similar types of service would be taxed.
Referring to the entertainment tax, Assemblywoman McClain asked Mr. Wadhams if he would construe escort services as being entertainment. Mr. Wadhams agreed that he would. Ms. McClain asked how the escort services could say they could not be taxed for something that was probably ultimately illegal in Clark County when they were only advertising that they provided escort services, which were taxable under the entertainment tax.
Mr. Wadhams observed that there were, in fact, taxes that were levied by various jurisdictions on activities that were illegal. However, he did not think that was what she was asking. He pointed out that depending on how an entertainment tax was categorized so as to be fairly applied to all who entertained, whether they were escort services or people who would be available, other than taxi cabs, to drive someone home from a bar, all those services could be taxable if the law described them that way.
Assemblywoman McClain said she had not been talking about a service tax, but about an entertainment tax on the escort part of the services the escort services provided, which was an entertainment to someone who wanted somebody to go somewhere with them. She asked if that language would cover the escort services. Mr. Wadhams answered that it would.
Assemblywoman Giunchigliani asked if there had not been a time when the mining industry had come up with a different idea to offer some additional taxes revenue. Mr. Wadhams said yes, in fact, that was what could be so confusing about the property tax aspect of mining. He explained that what the specific provision dealing with the tax on minerals had been designed to do was prevent double taxation. If, for example, the Legislature were to enact a gross receipts tax, that would be paid by mining on all of their activity, save and except that part that was represented by that property called the mineral. On a large mining company, that would be several hundreds of millions of dollars of activity that would be taxed.
Mr. Wadhams noted, however, that if the Legislature were to enact a net business income tax, that tax would apply without any other consideration, as would a payroll tax, which, again, would focus the Committee’s attention on the property tax aspect of the mineral itself. Mr. Wadhams stated that the issue was not an income calculation, but a method of determining the just valuation that was the fair market value of that property.
Assemblywoman Giunchigliani asked if that meant that, under the unified business tax, mines would pay under net profits, or they could pay under a payroll tax, but would not pay on the mineral extraction itself. Mr. Wadhams responded that no property should be taxed twice.
Mendy K. Elliott, Director, Community and Government Relations for Wells Fargo Bank in Nevada, came forward to discuss the franchise tax on financial institutions. She announced that, at the invitation of the Chair, the Chief Executive Officer (CEO) for Wells Fargo Bank would be present the next day to provide additional testimony.
Ms. Elliott stated there were a lot of questions regarding the franchise tax, especially in one area related to financial institutions in other states. She claimed that in all the other states where there was a franchise tax, or an income tax, imposed on financial institutions, the tax was calculated so that the financial institutions were taxed at the same rate as other businesses. In California, for example, where other businesses were subject to a 10 percent income tax, financial institutions were subject to a 10 percent franchise tax, primarily because the financial institutions could not be taxed on federal obligations based on federal statutes. Ms. Elliott noted that was why banks were treated differently. In the other 44 states, she said, there was an income-based tax on businesses. Ms. Elliott said there was a lot of confusion as to what the banks paid or did not pay.
Ms. Elliott stressed that financial institutions in Nevada had always wanted to be part of the process, and were willing to pay their fair share. She said the financial institutions were good corporate citizens, no different from any other business. Wells Fargo was proud of its more than 100-year heritage, and so were the other financial institutions in this state. Nevada had been good to the financial industry. Ms. Elliot stated that Nevada was a growing state, and financial institutions wanted to continue to play an active role in Nevada’s success.
Assemblywoman Leslie expressed confusion as to why there had been no banking franchise tax in Nevada. She asked Ms. Elliott if she was saying a corporate income tax in Nevada would be fairer to the banks. She asked what Ms. Elliott was saying that was unfair about the proposed banking franchise tax. Ms. Elliott reiterated that financial institutions in other states were taxed at the same rate as other businesses. For instance, if Nevada decided to impose a payroll tax, that was not a tax on banks’ federal obligations, therefore the banks would be subject to the same tax as the other businesses. If Nevada decided to impose a net profits tax on corporations, financial institutions could not be taxed under that scenario because they had federal obligations, so if there was a 1 percent net profits tax on corporations, then, in other states, there would be a 1 percent tax on financial institutions.
Assemblywoman Giunchigliani said she had received a letter that said the financial institutions were concerned about being included in some kind of gross receipts or broad-based tax, but that they did want to pay their fair share. She asked Ms. Elliott if she supported some sort of franchise fee for the banking industry. Ms. Elliott emphatically replied that she did not. In response to Ms. Giunchigliani’s question of what type of tax she did support, Ms. Elliot answered that the banking industry was in support of a payroll tax.
Assemblywoman Giunchigliani responded that, as banks did not have many employees, that was really nice to say, but ATMs just would not generate the needed revenue under a payroll tax. Ms. Elliott pointed out that they had 24,000 employees in Nevada. Ms. Giunchigliani stated that in comparison to the other industries, though, and the way the banking industry was changing, in the long run they would reduce the number of employees on the payroll by that certain percentage as new technology moved into play. Ms. Giunchigliani saw that as a diminishing return. She expressed the opinion that a franchise tax was the most common thread in evidence, since Nevada did not have an income tax for corporations. She reemphasized that a payroll tax was “just not going to hunt,” so financial institutions were going to have to come up to the plate if they wanted to be good corporate citizens.
Assemblywoman Giunchigliani noted that she had handed out language for a tiered approach to the banking franchise tax that she and Assemblyman Oceguera had submitted to the Taxation Committee earlier (Exhibit L). She said that was for the members’ perusal and consideration, as Mr. Hettrick had raised that issue as well.
Judy Stokey came forward representing Nevada Power Company and Sierra Pacific Power Company. She said those power companies had not participated in the activities of the taxation committees, but had been listening and getting all kinds of information. She stated that her understanding was that, in most of the bills, the utilities had been exempt from the gross receipts tax or the unified business tax (UBT). She said the power companies would support any tax package that came out of the Committee or its Senate counterpart.
Ms. Stokey noted, however, that in the regulatory process, a public utility was not allowed to change its rates to collect any of those taxes until it had filed a general rate case, which currently required that those expenses be experienced and measurable. Even though the taxes would be measurable, due to the timing and the regulatory process, the power companies would not be able to collect them for 2.5 years. For example, the expense to the power companies on the UBT would be approximately $19 million over that 2.5-year period. She offered those numbers as something for the Committee to think about.
Ms. Stokey said she had submitted some language (Exhibit M) that said, “Notwithstanding any other provision of law to the contrary, effective with the implementation of this act, a public utility may increase its previously approved rates by an amount which is reasonably estimated to produce revenue equal to the amount of taxes the public utility is required to pay pursuant to the provisions of this act.” She asked the Committee to consider that amendment.
Carole Vilardo came forward next representing the Nevada Taxpayers Association, which, she announced, did not support the current tax package. In fact, she said she found the current version of the gross receipts tax even worse than the prior provisions. She noted there were a number of issues, some of which were policy issues, that needed to be brought to the Committee’s attention.
Ms. Vilardo pointed out that Section 4 of the current draft version of the bill, or S.B. 509, in relation to the definition of “natural person,” which was also as defined in Section 17, talked about filers who used Schedule C paying an income tax on income and dividends and the gain or loss on sale of assets. She said it appeared that a sole proprietor or partnership, who would generally be filing Schedule C, would be having their personal income taxed in violation of the Constitution of the State of Nevada, Article 10, subsection 9. Also, she noted that the language specifically required an independent contractor to be subject to the tax. They were specifically included in Section 4. However, independent contractors did not always file a Schedule C or F and, therefore, would not be captured by the gross receipts tax.
Ms. Vilardo noted that according to Section 7, relative to the language in Sections 9, 10, and 18, regarding the cost of goods sold, any tangible goods that had been produced, whether or not they had been sold, were subject to the tax. She stated it was her understanding, after consulting with two attorneys, that the bill would effectively be taxing inventory. Ms. Vilardo pointed out that the taxation of inventory had been prohibited in Article 10, Section 1, subsection 6, of the a Constitution of the State of Nevada since voters had approved the change in 1976 on a five-year phase out. Ms. Vilardo said that even if she had misread Section 7, and it did not violate the Constitution, because of the way the section was worded, there was another issue involving inventory. In order to do the filing, a business would have to take an inventory prior to the filing. Ms. Vilardo stated that standard practice was that a business would do an inventory once a year, prior to when its federal obligation was due. As Section 7 was worded, a business would have to take a quarterly inventory. In the last quarter of the fiscal year, the business might have received payments, and, for the last quarter payment, would pay tax on the revenue received plus the cost of the goods that had not been sold. In the first quarter of the new fiscal year, the business would have sold part of its inventory, so it would have to pay on what had been inventory, but was then receipts, so the state would be double taxing the inventory. If a business had widgets that had not sold, it might be taxed on them over a period of three years. Ms. Vilardo said that was a problem that needed to be addressed.
Ms. Vilardo moved on to Section 11, subsection 2, paragraph A, which referred to nonprofits and mentioned membership dues and fees. She noted, however, that if a nonprofit enterprise received revenue through a store, a silent auction, interest from certificates of deposit, or was left money in a will, endowment, or trust fund, none of which fell under the definition of what would be excluded for nonprofits, the state would then be taxing nonprofit income. Ms. Vilardo said she did not know if that had been the Committee’s intent and thought it needed to be brought to the members’ attention.
Ms. Vilardo next addressed Section 11, subsection 2, paragraph b, which specifically provided that operating revenue from specified utility categories, water, gas, sewer, and so forth, were exempt from the tax. Assuming that had been based on discussions of the Governor’s Task Force on Tax Policy regarding entities that currently paid a gross receipts tax being exempt from the proposed tax, Ms. Vilardo wondered why the definition in Nevada Revised Statutes (NRS) 704.033 and NRS 704.035, was not being used to put that exemption through. She noted that two additional exemptions not specifically enumerated would be railroads and regulated telecommunications or telephone companies, because they currently paid a mill tax based on gross operating revenue. She asked if the Committee was planning on double taxing those entities. Ms. Vilardo suggested that another way to avoid double taxing them would be to allow a credit for gross receipts tax paid within the state.
Ms. Vilardo noted that the Committee had raised the issue of the boxing tax relative to live entertainment. She wondered why the gross revenue on boxing had not been excluded from the unified business tax, as there was already a gross revenue tax on the boxing promoter on revenue over a certain amount. She pointed out that the statute referring to boxing was NRS 467.107.
Ms. Vilardo observed that due to the way Section 18, subsection 1, paragraph 1, was worded, the location of a sale would not matter, so it appeared that Nevada intended to capture manufacturing and fabrication plants and any other businesses not located in or doing any physical work in Nevada to produce a product. Also, Section 21, subsection 1, paragraph 2, said that a product not produced in Nevada but sold into the state would be allowed to get a credit for gross receipts tax which had been paid, which implied Nevada would be capturing Ford Motor Company, Honda, Doubleday Books, any company that produced tangible goods outside the state.
Ms. Vilardo also believed Nevada might be capturing companies outside the United States. She cited Section 21, subsection 4, paragraphs A (2) and B (2), which referenced a value added tax. Ms. Vilardo asserted that no state in the United States used a value added tax. She noted that the section represented a major policy change from the previous bills that had dealt with the gross receipts tax. She hoped that would be taken out, otherwise, the state would have an absolute nightmare in trying to collect that tax. She suggested such a tax would severely limit the availability in Nevada of products manufactured outside the state, thus taking away some of the benefits of Nevada’s growth
Referring to Section 18, subsection 2, Ms. Vilardo said she understood there was a very high cap for imposing the tax in the first year in an attempt to minimize the number of businesses that would be filing, so the Department of Taxation could handle them. She noted that if a business did not have revenue of $2.5 million for the first two reporting quarters but ultimately reported $5 million or $10 million in the end reporting quarters, which she said would not be uncommon for a professional service company or an attorney who received a large settlement or payment at the end of that period, that business would not be allowed to subtract the $112,000 from each of the first two quarters. She wondered if that had actually been the intent.
Ms. Vilardo also suggested that unless the state had an arrangement with the Internal Revenue Service, there would be no way of knowing who had $10 million in gross receipts in a year. She pointed out that there was no database in the state that contained that information, so unless there was a way of getting that information, everyone, or at least those businesses with perhaps 100 or more employees, would have to be notified, which would mean notifying some 40,000 businesses. Ms. Vilardo noted that would make implementing the tax by January 1 problematic at best.
In Section 22, subsections 3 and 5, the interest and dividends pursuant to those two subsections were listed as deductible. However, Ms. Vilardo noted that, in Section 10, interest and dividends were specifically included in the definition of revenue received or receivable. She said that would result in disparate treatment between equally situated taxpayers and probably would ultimately violate existing equal protection clauses.
Section 22, subsection 11, allowed for the deduction of the cost of goods sold from any revenue received by a business entity from the sale of food for human consumption, which was exempt from taxation under the Sales and Use Tax Act. Ms. Vilardo said she understood that there was already a deduction for cost of goods sold without further including food for human consumption, so businesses would be able to double count that deduction. Another problem Ms. Vilardo saw was that, as the tax would not be based on the ability to pay, a substantial receivable could result in a tax liability greater than a business’s cash on hand.
Ms. Vilardo stated that Section 23, in providing for the apportionment of revenue using the UDITPA (Uniform Division of Income for Tax Purposes Act) formula, represented another major policy issue that had not been addressed. However, she noted there was nothing in the bill that weighted that formula. She asserted that all states that imposed the UDITPA formula set in statute the weighting factor. Nevada, she said, was leaving the weighting factor to the Tax Commission. She cautioned that could result in numerous lawsuits. She also noted that UDITPA had never been used for gross receipts apportionment. She said it was probably better than having nothing, but, as no one had any idea how it would work, it would be very difficult to figure out the desired weighting factors.
Ms. Vilardo said she realized the hour was getting late and she had ten pages of potential amendments and policy issues that needed to be addressed (Exhibit O). She said she would e-mail them to everyone on the Committee that evening and would be available for questions the following day.
Tony F. Sanchez III, law firm of Jones Vargas, came forward on behalf of the Las Vegas Motor Speedway to address two proposed taxes contained in Senate Bill 509. The first was the 10 percent entertainment tax. He distributed a handout (Exhibit N) and emphasized that the Las Vegas Motor Speedway was the largest entertainment venue in southern Nevada and the host of an annual NASCAR (National Association for Stock Car Auto Racing) race. The Las Vegas Convention and Visitors Authority had estimated that race to have had a direct impact in southern Nevada of $133 million that past March. Mr. Sanchez claimed that with economic multipliers, that number would be increased threefold or fourfold. Currently, the Speedway was trying to compete with other cities around the nation in terms of getting a second NASCAR race. He asserted that a 10 percent surcharge, not only on ticket sales but on merchandise and food and beverages, would definitely put them at a disadvantage in terms of competing with cities such as Atlanta, Kansas City, Chicago, and Los Angeles.
Mr. Sanchez pointed out that during the Governor’s Task Force on Tax Policy, the issue of boxing and the danger of placing Nevada’s boxing industry at a competitive disadvantage with places such as Memphis and Los Angeles had been discussed. He said auto racing was facing the exact same scenario in this instance. He suggested that an event that had as great an economic impact as the NASCAR race, especially from a facility that was not supported by tax abatements and did not receive any subsidies to perform in southern Nevada, deserved the Committee’s consideration as much as any other entertainment currently under the casino entertainment tax.
Mr. Sanchez stated that sporting events were exempted for good reason. He said he thought the ability to possibly attract that second race would have a far greater economic impact on the state budget than if Las Vegas were to not have the race at all. Mr. Sanchez acknowledged that the Legislature was very supportive of economic incentives to attract new businesses to the state, and compared attracting a second auto race to attracting new businesses. He noted that the Speedway was not asking for any type of rebate.
Assemblywoman Chowning said she knew of people who came all the way across the country to go to the races. She noted that the tax would be something that would be charged above and beyond the admission. She asked if the Speedway really believed that if the admission price were to go from $40 to $44 that there would be that much of an impact. She expressed disbelief that people who were already coming all the way from New York were not going to attend. She also asked if exempting the Speedway or reducing its tax would mean that the same should apply to events like the National Rodeo.
Mr. Sanchez said he did not disagree that the same should apply to other events. He pointed out that the Las Vegas Motor Speedway was not relying on public subsidies to have events, and that there was no other event in Nevada of that magnitude.
In answer to the question of whether the added tax would be a disincentive to race fans, Mr. Sanchez explained that NASCAR races were awarded to track owners—in this case, Bruton Smith, who owned several tracks throughout the country and a very large track in Texas as well. If awarded the race, Mr. Smith would have to decide which location he was going to put it in. If his decision was, bottom line, between Nevada and Texas, and Texas did not have a tax on racing events—which, Mr. Sanchez pointed out, no other state in the country had—then Mr. Smith would look at the equities and place the race at a different venue than southern Nevada.
Assemblywoman Giunchigliani noted that boxing did pay a different tax. She thought, however, that other than a business license and some sales tax and concessions, the Speedway paid no other specialty tax. Mr. Sanchez replied that he did not know for sure. He said his clients thought there might be a pyramiding or stacking effect if the unified business tax were implemented, but they were not concerned about that. Mr. Sanchez stressed that the focus of his discussions with the client had been entirely on not opposing anything other than the entertainment tax.
Mr. Sanchez stated that his firm also represented an independent power producer, Reliant Energy, that had two facilities in southern Nevada, the Eldorado power plant outside Boulder City and a second plant, the Bighorn facility, that was expected to be online and producing power by October or November of 2003. Mr. Sanchez explained that Reliant Energy was building the Bighorn plant and was participating with the Eldorado plant under the provisions passed by the Legislature two years previously that were generically referred to as the A.B. 661 (of the 71st Legislative Session) process, whereby large users could leave a regulated utility and purchase directly from an independent power producer. At the time of that debate, the incentive for the process was to get new power facilities placed in southern Nevada and throughout Nevada and as an incentive for the building of new power generation.
Mr. Sanchez pointed out that in S.B. 509, Section 11, public utilities would be exempt in that the total revenue would not include the operating revenue of utilities. He stated that his client and others were concerned that they be placed on an even playing field as the A.B. 661 process had envisioned. Otherwise, if there was going to be a separate tax applied, everything would end up being passed through to the consumers. He expressed hope that, based on the same rationale as Section 11, His client would be given consideration for that same exemption. He did not have language to present to the Committee at that moment, but said he could get something to the Committee that evening that would more succinctly clarify that provision.
Michael Alonso, representing International Game Technology (IGT), stated that IGT had been supportive of the broad-based tax concept from inception and, in fact, had supported the Governor’s proposal, which had originally included the gross receipts tax. IGT’s concern was that, based on the language in the proposed bill, all of their revenues would be taxed under the unified business tax. Mr. Alonso said that the understanding under the Governor’s proposal had been that their revenues from sales in Nevada would be taxed, and they had been comfortable with that. However, IGT derived significant amounts of revenue from sales outside the state of Nevada to other states and foreign countries that were taxed in those other states and countries. He pointed out that the way the language currently read, they would be taxed on all of those revenues under the unified business tax (UBT).
Mr. Alonso stressed that IGT would support the UBT or another broad-based business tax. They wanted to pay their fair share, but under the current language, they would be paying that tax on all of their revenues, even those that were exported outside the state of Nevada where they were paying other taxes on those revenues.
Mr. Alonso stated that he was also there on behalf of the Reno-Sparks Convention and Visitors Authority (RSCVA) to discuss the entertainment tax. He noted that the definition of what constituted entertainment was rather broad. He said a downtown events center was currently being built in downtown Reno and the RSCVA had just expanded the original convention facility, doubling its size, and they were having a very difficult time booking those facilities into the future with trade shows or other conventions. In fact, he stated that the RSCVA had recently laid off the majority of its sales staff because business was so slow. The RSCVA’s concern was that a 10 percent tax on entertainment that would include trade shows, when those trade show companies and trade show operators had so many locations to choose from, would be very detrimental to the events centers run by the RSCVA.
Assemblywoman Giunchigliani informed Mr. Alonso that, in the trade show testimony today, the Committee had heard that trade shows were intended to be exempt. She said the language simply needed to be clarified. She said she had not necessarily agreed about the earlier point he had made about the UBT, but his concern about the entertainment tax could be cleared up.
Joseph H. Edson came forward representing the Progressive Leadership Alliance of Nevada (PLAN). He expressed support for the Committee’s work on both the budget and the funding of the programs, and the tax package. He said PLAN felt the current tax package was very comprehensive and fair, despite the fact that there might have to be some tweaking of some of the language to avoid double taxation on the real estate transfer tax and unified business tax. Still, PLAN considered it a well-balanced and appropriate approach to funding the budget.
After listening to the testimony in the Senate on the tax, and the majority of the testimony in the Assembly on the current tax package, Mr. Edson noted there had been great concern about the pyramiding of taxes on different products and the cascading of tax burdens on different industries. He said what he had not heard, though, was much about the pyramiding effect of taxes on the average working Nevadan. In the Senate, there were proposals for a service tax that would be passed immediately down to those very working Nevadans and for a payroll tax that could cut pay raises and even job creation. Mr. Edson pointed out that the people who would be affected were not major business owners. They were not in the upper 1 percent. They were not out-of-state corporations. They were average Nevadans who were going to get hit with multiple concerns and sticker shock every day. Vice Chairman Parks thanked him very much for his comments.
Assemblywoman Giunchigliani said there was another tax that had not been on the list and that she thought ought to be discussed in the following day’s work session, and that was the satellite tax that had been recommended. She did not want the Committee to forget about leveling the playing field in that industry. She said she thought that had been presented to both Taxation Committees.
Ms. Giunchigliani stated that for the next day’s work session, there were several issues that would probably be discussed. The Committee had to decide how the franchise fee would work for banks and possibly look at a tiered concept. The Committee would also have to clarify exemptions, review the liquor and cigarette taxes, the restricted slot tax, the inclusion of escort and topless services, the definition of master developer, allowing public utilities to recover their rates, and how to clarify sole proprietors. She said sole proprietors should be exempt, but probably not their employees. Chairman Arberry said he wanted to add the mining tax to the list.
Vice Chairman Parks responded that those were already on the list, as well as trade shows and some of the other concerns that had been addressed by individuals, including Ms. Vilardo.
Assemblywoman McClain asked if they could include in the work session a short discussion of a ballot question for a lottery. She stressed that she was serious, because, down the road, tobacco money was going to go away, and they needed to start thinking about some kind of replacement fund.
Vice Chairman Parks said one of the other issues that might also be added was to get more input on Nevada Numbers that was currently a part of the Keno operations. He mentioned that an expanded version of that, while it would be done within a casino, could have outlets outside casinos. He thought that might be added to the list when the Committee discussed gaming.
As there was nothing further to come before the Committee, Vice Chairman Parks adjourned the meeting until the 8:00 a.m. work session the following morning. The meeting was adjourned at.
RESPECTFULLY SUBMITTED:
Mary Garcia
Transcribing Secretary
APPROVED BY:
Assemblyman Morse Arberry Jr., Chairman
DATE:
Assemblyman David Parks, Vice Chairman
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