MINUTES OF THE ASSEMBLY COMMITTEE ON TAXATION Sixty-Eighth Session February 2, 1995 The Committee on Taxation was called to order at 1:15 p.m., on Thursday, February 2, 1995, Chairman Jeannine Stroth presiding in Room 332 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Mr. Bob Price, Chairman Ms. Jeannine Stroth, Chairman Mr. Pete Ernaut, Vice Chairman Mr. Michael A. (Mike) Schneider, Vice Chairman Mr. Morse Arberry, Jr. Ms. Maureen E. Brower Ms. Joan A. Lambert Mr. Mark Manendo Mr. John W. Marvel Mr. P. M. Roy Neighbors Mr. Brian Sandoval Mr. Larry L. Spitler COMMITTEE MEMBERS ABSENT: None GUEST LEGISLATORS PRESENT: Mr. Joseph E. Dini STAFF MEMBERS PRESENT: Mr. Ted Zuend, Deputy Fiscal Analyst OTHERS PRESENT: Mr. Howard Barrett, Nevada Taxpayers Association Ms. Ana Aebi, American Counsel of Life Insurance Mr. Robert L. Crowell, Attorney, Farmers Insurance Company Mr. Scott Craigie, Central Telephone and NV Bell Dr. Jim Richardson, Nevada Faculty Alliance Ms. Debbie Cahill, Nevada State Education Association Presiding Chairman Ms. Jeannine Stroth opened the meeting at 1:30 p.m. The roll call was called. All were accounted for; a quorum was present. Ms. Stroth pointed out that the first item on the agenda was S.B. 122, but in difference to Speaker Joseph Dini, testimony on A.B. 114 was discussed first. ASSEMBLY BILL 114 - Delays first prepayment of insurance premium tax and requires one quarterly payment. Speaker Dini, who represents Assembly District 38, introduced himself and stated that he supported A.B. 114. He said that it was not his intent to engage in a debate about the need for revenue in Nevada. People could not argue that education and crime prevention programs had been forced to the end of the line as a result of economic uncertainty. Speaker Dini asserted that Legislators had been elected to serve constituents in manner which balanced the choices. To balance the choices, two things were needed: information and time. The passage of A.B. 114 provided time, Speaker Dini said, to receive much needed information regarding Nevada's revenues and to balance the State's interest in a responsible fashion. The choices would be balanced in various ways; each Legislator would impact the budget by the action taken on the Committee on which they served. The action taken in the Judiciary Committee on prison and parole reform, for example, would impact the budgets. Speaker Dini assured that we would avoid spending money for unnecessary projects. He expounded that there had been "periods of minor neglect" and that we needed to serve the population of Nevada in a responsible fashion. Areas of education, crime prevention, and mental health needed immediate attention due to the rapid development of Nevada. To continue to attract new businesses and to continue economic growth, Speaker Dini asserted that Nevada must offer a safe and desirable environment. Education and crime prevention measures should be allowed to grow and flourish. A crime- ridden state with an underdeveloped, neglected education system would not allow Nevada to grow, nor allow its citizens to prosper. Speaker Dini emphasized that, whether one agreed or disagreed with this particular tax policy, the prudent course of action was to carefully evaluate the impact of the $35 million gap that would result from repeal of the insurance prepayment provision. He proposed the time be extended when the first insurance prepayment was made from March to June. This course would allow one to make the choices as to how the gap could be closed and which programs, if any, would bear the burden of such closing. The solution considered by most was a transfer of money from the "rainy day fund." This may well be an appropriate solution, Speaker Dini said, but there were citizens who would ask if borrowing from the "rainy day fund" would place Nevada in a situation similar to that experienced in the past. It seemed that every eight to ten years, Nevada had down-cycles and programs had been cut. Then the programs had to be put back. But simply because Nevada was in a period of economic prosperity and growth did not mean that Nevada would not experience another economic downturn. Speaker Dini maintained that, in a county dependent upon gaming and tourism, it was important to have a cushion upon which to rely on in the event of fiscal emergencies. He contended that borrowing money from the "rainy day fund" in hopes of recovering it later may not be sound fiscal planning for the future of Nevada. Delaying the date of collection until June 15, 1995 would have no effect on Nevada, Nevadans, or those in the insurance industry. Elimination of the insurance premium tax prepayment was an alternative for the future; however, to preserve the future of Nevada, it was necessary to act with caution in the present. Assembly Bill 114 gave Nevada time to explore alternatives; delaying the repeal of prepayment temporarily provided time to fill gaps and seek alternative sources for funding programs critical to the future of Nevada. Speaker Dini urged passage of A.B. 114. He thought it was premature to repeal the prepayment. Assemblyman John Marvel agreed with Speaker Dini. He realized that many people had bills forthcoming to Ways and Means that would have fiscal impact and felt that it was prudent to delay the repeal of the insurance premium tax until it could be seen exactly how the budget was to fall into place. Speaker Dini added that much work had to be done in the "money" committees. The budget needed to be "opened up" to ascertain what was in it. There had to be addition and subtraction as "we went along." At the end, appropriate decisions in the best interests of the people in the State could be made. He thought if we were going to be prudent, the budget needed to be examined before the revenue stream was changed without knowing what the expenses were. Assemblyman Price was acknowledged by the Chair; he commented that the next economic forecast from the Economic Forum came out May 1. He wondered if it would make a difference, since it was not known how long the session was to last, if it were some time after the forecast came out in May (as opposed to June). Speaker Dini thought it had to be assumed the budget was not going to be done before May 15 and that the session was going to go into the first part of June. He thought there was enough time to deal with the overall issue from May 1, when the new economic forecast was received. Speaker Dini was certain that was plenty of time in the 30-40 day period to take care of the issue. He thought that June 15 was the date of the second payment; hence, nothing would be paid until the second payment and then both could be made at once. Assemblyman Joan Lambert requested clarification about Speaker Dini's position of delaying to ascertain what the economic forecasts were and to get a handle on the budget. She believed this was one-time money in this budget year and not an ongoing source of revenue. Speaker Dini concurred. The problem he saw, if repealed now, a hole of $35 million might be formed. People talk about "pork," Speaker Dini said, but thought the Governor's budget was a well-prepared document that took care of much of catching-up from the bad times of 1991 and 1993. There were many programs the Governor was attempting to put back in, as well as "one-shot" monies to help education and universities. The "money" committees needed to appraise these things, to see if they were valid. It was in the best interests of all concerned to examine it. The budget committees had not yet had time for good perusal; the session had just begun. There being no further questions for the Speaker, Chairman Stroth returned to the order of business, the first item being S.B. 122 pertaining to the prepayment of insurance premiums. For the benefit of new Committee members, she asked Legislative Counsel Bureau Representative Ted Zuend to provide historical perspective on this piece of legislation. SENATE BILL 122 - Repeals requirements for prepayment of insurance tax. Mr. Zuend referenced his memorandum to Mr. Price dated February 1, 1995, "Insurance Premium Tax Bills" (Exhibit C), along with tables (Exhibit D) prepared by Jeanne Botts, who was also from the Legislative Counsel Bureau and present in the audience. The basic facts are S.B. 778 was approved last session which essentially created a different payment schedule for insurance premium taxes. Prior to that date, insurance premium taxes were paid the last day of each quarter; the payment had been one-fourth of the amount of the actual liability for the prior year. In March of the following year, a reconciliation payment was due. Because insurance premiums are growing, it was usually a net gain to the State. In the case where the insurance company overpaid, credit was applied to future liability. A.B. 778 created a prepayment schedule (which took effect January 1, 1995) and required that insurance companies pay a prepayment as of March 1 and then on June 15 of each year, which was effectively an estimated payment of the liability for that current year. There are certain rules in the statutes, one was the payment had to be equal to the prior year's liability and also the two prepayments equaled at least 85% of the current year's liability. The first prepayment was due March 1, 1995. The effect was to move the collection of insurance premium taxes two quarters forward, because now we were collecting a full year in the first half of the year rather than spread over the four quarters of the year. This affected fiscal year revenue. Speeding up collections would add $35.5 million to the State's revenue stream for this fiscal year, a one-time gain. Mr. Zuend referenced the chart "Comparison of Estimated Collections of Insurance Premium Tax Under Various Bills" (Exhibit D). Jeanne Botts' chart detailed how the collection system worked under four different scenarios, including the effects of Speaker Dini's bill (A.B. 114). Mr. Zuend explained in detail each column of data. The third column of data highlighted the change if S.B. 122 were approved. The basic effect of S.B. 122 was to return the collection schedule to how it existed prior to the passage of A.B. 778. The fourth column showed the effects of Speaker Dini's bill alone (A.B. 114), which simply delayed the collection of the prepayment this fiscal year. Taken by itself, the bill would result in no difference in revenue for the current fiscal year. Chairman Stroth called for testimony from the proponents of the bill and called Howard Barrett, Nevada Taxpayers Association (N.T.A.), who distributed a hand- out, (Exhibit E), to the Committee. Mr. Barrett stated that N.T.A. supported S.B. 122 basically because it was bad tax policy to require a business to pay taxes on income not yet received. Prepayment of the insurance premium tax was imposed by the 1993 session as a means of balancing the budget. It was a one-time income that should not be used to balance the budget or to offset operating income because it was not going to re-occur. It could be done only once, unless there was a "scheme" to have them pay two years (then he supposed it could be done again, if desired). If repealed before March 1,1995, when the first collection was due, no monies would have been collected. If repealed, there would be $35 million not collected as planned in the budget. Mr. Barrett's handout displayed a chart that showed income had risen well-beyond that anticipated by the last session. The 1994-95 operating income figures taken from the executive budget (which did not include the one-time income because of the change in the sales tax, the entertainment tax, or this insurance premium) was $1,156,163,602. The 1994-95 operating appropriation was $1,103,408,185. The operating income as opposed to operating expenditures showed an excess of $52 million. Mr. Barrett summarized N.T.A.'s position that the insurance premium collected in advance should be repealed, it was bad business policy, the money was not needed to balance the operating budget. N.T.A. believed it was very bad business policy to "put on" one-time income in order to have additional monies for capital improvements, etc. If cuts could not be elsewhere, there was always the "rainy day fund" for $100 million. The "rainy day fund" was good fiscal policy. But one could not build good fiscal policy based upon bad tax policy. N.T.A. believed collecting taxes before the taxpayer had to pay them, based upon the income, was BAD POLICY. Mr. Ernaut wondered if Mr. Barrett was a budget analyst before he worked for N.T.A. Mr. Barrett stated yes, he had been a budget director for twenty-one years. Mr. Ernaut then questioned if Mr. Barrett saw repealing the prepayment effecting operating income. The answer from Mr. Barrett was an emphatic "NO!" The income category monies was separated from operating monies that are called "one-time income money." One-time income money should not be used to balance a continuing budget. Mr. Price wondered if Mr. Barrett saw, after listening to the initial remarks of the Speaker on S.B. 114, any positive element to the approach of delaying decisions to see where the budget was going, was that a good technique? Mr. Barrett replied he did not see the need for delay, he did not see anything in the budget which took precedence over good tax policy. Mr. Barrett pointed out Speaker Dini talked about economic development. A good business climate was important to the State, Mr. Barrett said, and it was a bad message to any business- -regardless of whether it was insurance business or any other business--if they think the State does not have good policy and the State was likely to tax their revenues or tax their collections before they actually received them. Assemblyman Marvel asked if Mr. Barrett was aware of any exodus of insurance companies from Nevada because of the prepayment of the insurance premium tax. Mr. Barrett was not, but stressed that N.T.A.'s opposition was not based upon the fact that it was insurance; their opposition was based upon the fact that it was bad policy regardless of the industry involved! For example, taxing receipts of cattle before the cattle were sold was bad policy. Assemblyman Neighbors questioned if N.T.A. had taken a position on the net proceeds tax that been going on for many years that paid in advance both the State and the counties and also in the area of revenue with 75-80% of monies coming from gaming sales tax...was there revenue projection to share with the Committee that Mr. Barrett was satisfied there was not going to be a downturn in the economy over the next two years. There was not any separate revenue projections, Mr. Barrett replied. N.T.A. had attended the Economic Forum and listened to their debate, and listened to the technical committees' information provided, and saw no reason to disagree with the estimates of the Economic Forum as presented. Mr. Neighbors had mentioned the net proceeds of mines. That again was the tax collected in advance and that was causing problems. And that was reviewed by an interim committee during the last session (chaired by Dean Rhodes) and they recommended a change from a collection in advance on a quarterly basis to, over a period of five years, a payment based upon actual rather than estimates. Mr. Neighbors thought it was true that a lot of the problems with the net proceeds was only when those entities used money in operations as opposed to capital outlay. Yes, Mr. Barrett agreed, that had been a problem. But it was an ongoing one that had been collected in advance for three or four years; the insurance one was not yet collected. It was bad policy that had not yet been put into effect; it would not go into effect until March. The net proceeds of mines had been in effect for many years. Yes, it was causing problems. For example, a mining company in Humboldt was due a refund because they had overpaid based upon an estimate. Humboldt county and school district had already spent the money and had no funds to pay it back! There was a present bill dictating school districts hold the money collected in advance to be spent the following year when the actual amount was known. That was a lot of gyrations to go through: to take the money from the mining company in advance, let the school hold it for a year, and then spend it when it was known it was an actual! Why not just let the taxpayer pay on actual in the first place and cut out all the necessary work for the accountants and attorney in the interim? Initially, that left quite a hole for those rural areas, Mr. Neighbors noted. But Mr. Barrett said the proposal was for over a five year period; we had not seen the fiscal note on that yet. Chairman Stroth then recognized Robert Crowell, who appeared on behalf of Farmers Insurance Group Companies. Mr. Crowell stated they supported S.B. 122 based upon the tax policy positions presented by Howard Barrett. There was concern about the existing law with respect to penalties and because if premiums were underestimated, a fine for a substantial amount of money could be imposed. For those two reasons, for tax policy and for penalty provisions in the existing law, they supported S.B. 122. Ana Aebi represented the American Counsel of Life Insurance and testified in support of S.B. 122 for the reasons espoused by the previous speakers. Chairman Stroth inquired if there were others present who wished to testify for or against S.B. 122. There were none and the hearing on S.B. 122 was closed. ASSEMBLY BILL 114 - Delays first prepayment of insurance premium tax and requires one quarterly payment. The Chair returned the discussion to the next order of business, A.B. 114. (NOTE: This Assembly Bill had been discussed out of agenda order in the beginning of the meeting.) Dr. Jim Richardson, representing the Nevada Faculty Alliance, was recognized by the Chair. He was nervous about the concept of leaving a hole in the budget. He appreciated remarks made about tax philosophy and thought A.B. 114 was an ingenious temporary solution to allow a better look at the budgets, as Speaker Dini said. Dr. Richardson represented campuses and faculty groups all over the system that made up the Nevada Faculty Alliance. He informed that it had been very difficult in the last few years. There were problems of access. Clark County Community College had the highest student-faculty ratio of any urban comprehensive community college in the country: over thirty-to-one! (It is supposed to be a twenty-to-one ratio, but the recession caused the formula to be suspended.) At UNR, an institution that tried to compare itself to places in the U.C. system which had student-faculty ratios of sixteen or seventeen to one, currently had a ratio of twenty-four to one. It was difficult to meet the demand of a rapidly growing State; classes are larger. Dr. Richardson thought a hole in the budget that impacted the operating budget would put the Governor's educational fund recommendations in jeopardy. If the thought of taking money from the "one-shots" was being entertained, then Dr. Richardson wanted to point out how it could impact education. The Governor had recommended $61 million in capital improvement for the higher education system. Dr. Richardson stated that if those buildings were built today, they could be filled with students tomorrow. If any buildings were jeopardized by putting a hold on the budget, it would constitute another setback for education. Also, there was a $20 million recommendation from the Governor for badly needed equipment. There had not been an equipment allocation from the State Legislature for several years. The higher education system had to return $38 million in the 1991 and 1993 budget period because the money was not available. The system turned in what was believed to be a conservative estimate of $40 million required to develop new technologies for distance education and networking, but the Governor cut it to $20 million. If that $20 million was jeopardized, Dr. Richardson urged the Committee to consider the possible very negative impact on education! Mr. Ernaut was unsure if it was fair to characterize the repeal of the prepayment tax as being detrimental to higher education. It had been testified to his satisfaction that there was a $53 million cushion between operating expenses and operating appropriations. He was certain it was not the will or intent of anyone on the Taxation Committee that S.B. 122 be detrimental to higher education! As far as the "one-shots," there was the Legislative building for $16 million and funding for that, Mr. Ernaut ventured to guess, would be jeopardized before the university. Dr. Richardson informed he had not seen the figures presented by Mr. Barrett; therefore, he could not make an assessment of them. He had been told things were "tight" and there was not much flexibility in the Governor's budget. When there was a problem in the past, education had been hit very hard. He wanted to remind the Committee of that fact, and added he was appreciative of Mr. Ernaut's remarks for the need to preserve the higher education budget. What Mr. Ernaut said was quite valid, Mr. Marvel declared. Those on the "money" committees recognized this as being "one-shot" money. No operating budgets for schools or university systems would be attacked. He advised each member of the Taxation Committee to review the second year of the biennium wherein appropriations would exceed the estimated income. The Chair called for those wishing to speak for or against S.B. 122 and next recognized Ms. Debbie Cahill with the Nevada State Education Association. She testified in opposition to S.B. 122 and, although NSEA did not have a formal policy or issue statement about whether or not prepayment of this particular tax was good or bad policy, they tried to raise the concern that they would like to know where the money might come from. It was their understanding the actual impact in the first year of the budget would be about $16 million. Pending in the Governor's proposed budget was a "one-shot" appropriation called "education technology funds." If the "money" committees had to cut, she stressed that this fund not be eliminated. They were in support of A.B. 114 because they believed it provided time necessary to review the funding situation and perhaps prevent cutting the computers out. Chairman Stroth inquired if there were others who wished to testify on A.B. 114. There being no further testimonies, the hearing was closed. ASSEMBLYMAN ERNAUT MOVED TO DO PASS S.B. 122. ASSEMBLYMAN MARVEL SECONDED THE MOTION. Mr. Price questioned Messrs. Ernaut and Marvel that, since there had been two bills with two various versions of how to deal with this, if there were any objections to sending both options to the "money" committees to allow them to decide. Mr. Ernaut said no, he thought the bills were compatible from the standpoint that, whomever voted for them, made a point that they supported the repeal of the tax but they also understood there was a budgetary question that needed to be taken care of. With that in mind, Mr. Price said he supported the bill. THE MOTION CARRIED UNANIMOUSLY. *************** ASSEMBLYMAN ERNAUT MOVED TO DO PASS A.B. 114. ASSEMBLYMAN NEIGHBORS SECONDED THE MOTION. Assemblyman Lambert remarked that she planned to support the bill as insurance against the hope the more public policy of prepayment of a tax can be repealed; it was unknown as to what would happen with S.B. 122 in Ways and Means; therefore, delaying the payments until June would provide a chance for S.B. 122 to be passed and eliminate this bad tax policy. Assemblyman Brower said she concurred with Ms. Lambert and had the same feelings on the matter. Mr. Ernaut did not want his vote to be construed in any way as support for not repealing the insurance prepayment tax; however, he understood there needed to be time to review the matter in Ways and Means as it related to the budget. In no way did this undermine his resolve to see S.B. 122 processed and passed. Assemblyman Sandoval joined in the comments of Ms. Lambert and Mr. Ernaut. As well, Mr. Marvel agreed with the foregoing remarks. Chairman Stroth also concurred with the remarks of her companions--her vote in NO WAY signified any support for not repealing the bill. THE MOTION CARRIED UNANIMOUSLY. *************** The Chair announced there were two Committee bill introductions. First, was a summary authorizing tax for parks in existing residential communities (BDR 22- 692). ASSEMBLYMAN ERNAUT MOVED TO INTRODUCE BDR-22-692. ASSEMBLYMAN MARVEL SECONDED. THE MOTION CARRIED UNANIMOUSLY. *************** The second proposed Committee Bill introduction authorized nonprofit organization to acquire land held in trust by country treasurer for delinquent taxes for development of affordable housing for low-income families (BDR 32-342). ASSEMBLYMAN PRICE MOVED TO INTRODUCE. ASSEMBLYMAN NEIGHBORS SECONDED. THE MOTION CARRIED UNANIMOUSLY. *************** Chairman Stroth reminded the Committee of the Las Vegas meeting on Monday, February 13 at 6:00 p.m. It was understood the meeting was to be video conferenced. There being no further business to come before the Committee, the meeting was adjourned at 2:30 p.m. RESPECTFULLY SUBMITTED: Carolyn Grabski, Committee Secretary APPROVED BY: Assemblyman Jeannine Stroth, Chairman Assemblyman Bob Price, Chairman Assembly Committee on Taxation February 2, 1995 Page