MINUTES OF THE ASSEMBLY COMMITTEE ON TAXATION Sixty-Eighth Session May 16, 1995 The Committee on Taxation was called to order at 1:15 p.m., on Tuesday, May 16, 1995, Chairmen Bob Price and 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. Morse Arberry, Jr. Mrs. Maureen E. Brower Mrs. Joan A. Lambert Mr. John W. Marvel Mr. P.M. Roy Neighbors Mr. Brian Sandoval Mr. Larry L. Spitler COMMITTEE MEMBERS EXCUSED: Mr. Michael A. (Mike) Schneider, Vice Chairman Mr. Mark Manendo GUEST LEGISLATORS PRESENT: Mr. John Carpenter STAFF MEMBERS PRESENT: Mr. Ted Zuend, Deputy Fiscal Analyst OTHERS PRESENT: Mr. James J. Galloway, Ph.D., representing N.A.I.B. and various chambers Mr. Alan L. Duewel, Elko Chamber of Commerce OTHERS PRESENT, CONT. Mr. Glen G. Guttry, President of Good Morning Furniture in Elko Mr. Charles G. "Chuck" Gardner, Community Development Coordinator, Mineral County (Hawthorne) Mr. David A. Read, D.A.R., Inc., Reno Mr. Archibald B. Lovell, Sparks Mr. Larry Osborne, Executive Vice President of the Carson City Chamber of Commerce Mr. M. K. "Ike" Yochum, I.A.P. Mr. David Horton, Nevada Freedom Coalition Mr. R. L. "Jack" Giacomazzi, Security Pacific Development Mr. Phil Stout, Executive Director, Nevada Association of Independent Business Mr. Michael A. Pitlock, Executive Director, Nevada Department of Taxation Mr. Charles M. Weis, Northern Nevada Adjusting Service Mr. Ken Lange, Executive Director, Nevada State Education Association Mr. Lysle Winchester, A.I.M., Inc. Mr. Brad Lawrence, Representing State Treasurer Bob Seale Mr. Bob Seale, Nevada State Treasurer Mr. Roy E. Clason, N.F.I.B. and Director of Travel Systems Ltd. Mr. Lou Lane, N.F.I.B. OTHERS PRESENT, CONT. Mr. Tom Johnson, Nevada Freedom Coalition Mr. Jim Richardson, Nevada Faculty Alliance Chairman Bob Price opened the meeting by requesting the Committee Secretary call roll; a quorum was present. Mr. Price announced he would chair the first part of the meeting, but would depart to a Senate committee hearing and Chairman Jeannine Stroth would then preside. . ASSEMBLY BILL NO. 490 - Gradually reduces and prospectively repeals business tax. To set the stage was Assemblyman John Carpenter, Assembly District 33, the sponsor of A.B. 490. Mr. Carpenter explained A.B. 490 would phase out the business tax over a five year period. There was no question the tax most people were concerned about (maybe even the most hated) was the business tax. He felt it should be repealed or phased out while there was a surplus. The people believed government was too big and we should start to cut back some of the programs. "It should not be too hard to save this amount of money in a budget of over $2 billion," Mr. Carpenter asserted. "I think we could save money in the regulatory process, in education (class size is out-of-hand), etc." Further, he thought "campaigning was on a conservative platform but, when we got to Carson City, things seemed to change: there was no willingness to take the same stance taken when gathering votes." Mr. Carpenter declared we had a large surplus now and the taxpayers expected relief. The business tax was hard on people with small businesses. People had to cut down on monies they donated to charities in order to come up with the necessary money to meet the business tax. In addition, many small businesses were not hiring employees they would if the business tax was not there. The sales tax and property tax on the local level would be able to "take up the slack." "If I had the power of the red pencil, I could find the money to save to phase this business tax out," concluded Mr. Carpenter. Chairman Price commended Mr. Carpenter for getting the dialog started by having A.B. 490 drafted. "In the large picture of the revenue generated into the state government," commented Mr. Price, "there have been many studies over the years by various people about the tax system. One of the criticisms was, if one looked at a pie chart of the money coming into the state, the two big slices are from gaming and the sales tax. Most states had at least three major income revenue streams. The Governor had proposed a business activity tax. The business tax -- as the `third leg of the stool' -- ended up having the most support and votes; hence, that was what was implemented." Mr. Price asserted he agreed with Mr. Carpenter. There were only about three areas he was aware of where they used small business tax as an income. Mr. Price wanted to find a better answer to the problem. Regardless of how one tried to cut back, one could hardly take $80 million out without finding some major ways to reduce and/or find substitutes. Mr. James Galloway testified next, addressing numbers first: the opinions he expressed were his own, but the numbers he cited were from the Nevada Taxpayers Association. The problem was $36 million, NOT $80 million. A.B. 490 was a phase out and $36 million was the impact over the first two years. There was further revenue reduction later on, but it would be easier to deal with because, after the first two years, the Governor would have to take the tax phase out into account when he prepared the next budget. The money would not get promised to anyone. It could be dealt with as part of the whole budget process and, therefore, not impact one place. The Governor could select where to spread out the reduction. The business tax, also known as the B.L.T. (Business License Tax) should "truthfully be called the state job tax," asserted Mr. Galloway. It was a head tax on employees. Every business paid $25 a quarter on every employee; this was a tax on jobs. It represented 4.8 percent of state revenues (or $120 million) over the next two fiscal years. The phase out would reduce the revenue by $36 million, compared to a state total budget of $2,500 million. The gross surplus was $390 million. The surplus could be used for the rainy day fund and used for minimum funds balance on certain one-shot projects. However, the $44 million increased revenue project by the Economic Forum would make the job easier to help finance the phase out. In the total pie, adjustments needed to be made. Mr. Galloway suggested slowing the growth of the public payroll, not the total number of public employees. He suggested moderating the growth of the number of public employees. The point Mr. Galloway wanted to make was we did not want to create new government at the expense of the private sector jobs. A moderate growth in government jobs would not do that. Private sector jobs created new wealth, such as construction on the production of goods. "It is the private sector goose that lays the golden egg. We do not want to kill it! Let us face it: very few government jobs actually produce wealth," Mr. Galloway colorfully illustrated. "Our high standard of living is really produced by workers and businesses in the private sectors. We want to help them keep on doing that." Mr. Galloway proceeded to quote from and elaborate on his prepared testimony (Exhibit C). He declared people were leaving California because of high taxes. Nevada should not be imposing the B.L.T. and "for good measure," Nevada needed to keep the corporate registration fees low and cut small business a break on regulations, such as the accident and illness prevention program. If Nevada did that, Mr. Galloway contended that Nevada's economy would continue to grow and diversify, and some of the most desirable new-comers would be hard-working, small business people and their employees from other states, such as those who were now leaving California. If the business tax was retained and Nevada followed California by taxing and regulating small businesses "to death," then these valuable assets would go elsewhere. Speaking next was Mr. Alan L. Duewel from the board of directors of the Elko Chamber of Commerce. They, as the Chamber of Commerce of Elko, felt the business license tax should be repealed. The tax was detrimental to small business. It stymied growth and wealth creation by adding an unnecessary burden on all business. To promote growth of the business community and to keep Nevada an attractive place for businesses to operate and expand, we needed to "get rid of this unnecessary tax." Mr. Glen Guttry spoke next and identified himself as a local businessman and also former chairman of the government affairs committee for the Elko Chamber of Commerce. He employed an average of 25 people at any given time. The impact for one or two employees was not a "big deal" to him. But, with 25 employees, $2,500 a year was a big impact. Further, Mr. Guttry believed the tax would and had slowed down economic diversification in Nevada. If the state wanted to attract new jobs, the business tax was not the way to do it. "Competition was tough," he said. "It was tough enough without having to raise prices to cover the business tax. We have, instead, cut back on donations to local charities and individuals and sponsorships." In his opinion, Mr. Guttry thought to be penalized for expanding business -- growing a small business and adding job -- was ridiculous. He thought we should probably be adding incentives and tax breaks to encourage growth to create a larger tax base (local property tax and sales tax). Testifying next in favor of A.B. 490 was Mr. Charles Gardner, a certified economic developer (the only one working in rural Nevada). He read his statement (Exhibit D) into the records. In addition, he said he was currently working with a prospect from out-of-state. Mineral County was poor; they had not had a new industry in over 10 years. Based on the amount of employees his prospect would employ, in five years he would have paid as much in the small business tax as he paid for the land he came to purchase to build his company building on! Chairman Price commented he counted approximately 29 people on the guest list in favor of A.B. 490, and about three people who were opposed. Mr. David Read testified next. He owned a small business comprised of his wife and himself. In 1991, he had one employee. The business tax was not the reason he did not have the employee now, but it was just "one more straw" that entered into their decision NOT to have that employee today. He understood the Committee on Taxation had a very tough job. "Your job is to extract the maximum amount of feathers from the goose with the least amount of hissing!" (This colorful illustration drew a lot of laughter.) He capitalized on the attention by saying he was going to "hiss just a little bit today." "This is a VERY BAD TAX!" he exclaimed. "About 90 percent of small businessmen in this country go belly-up in the first three years. Why do we need to pick on that individual? This is a country of free enterprise. We do not have enough jobs. My challenge to jobs is real simple: if you do not have a job, go create one. That is what the United States is all about." His testimony continued in a colorful style, with gestures and examples that were very witty. Speaking next was Mr. Archibald Lovell, a retired businessman and a "John Q. Citizen." He opposed A.B. 490 and read his written testimony (Exhibit E). Chairman Price excused himself from the hearing and Chairman Jeannine Stroth took the helm, calling forth Mr. Larry Osborne, the Executive Vice President of the Carson City Chamber of Commerce. His board of directors had sent him to the hearing with strong support of A.B. 490. Their 850 members vigorously opposed the business tax; they believed it was a detriment to economic growth. It was a barrier to expanded small business development and the hiring of additional employees. By eliminating the tax, it would send a strong message across the country that Nevada was still open for business. Mr. M. K. ("Ike") Yochum, who represented the Independent American Party, spoke in support of A.B. 490. To make up for the revenue loss, he suggested looking back a few years ago when Nevada ran into a problem with finances: the Governor let a few people go. He did not see anyone who noticed any real drastic problem as far as cut back in services was concerned. Another method for consideration to make up for the shortfall was enact the silver token bill and/or the silver coin bill, which would bring in millions of dollars. Mr. David Horton spoke in support of A.B. 490 and recited from his written testimony (Exhibit F). His opinion was repealing the business license tax made good economic sense because it would restore the capital base of Nevada businesses that had been destroyed by its passage. He suggested the lost revenue could be made up by applying revenue from the Nevada silver token bill (A.B. 257, which had been indefinitely postponed). He elaborated upon the merits of the silver token bill, as described in (Exhibit F). His testimony included a letter from Speaker Dini to the U.S. Treasurer regarding the silver token bill. Mr. Jack Giacomazzi identified himself as a "dumb contractor and a small business owner in Nevada." He built high-end condos in Lake Tahoe. In a humble way, he expressed his irritation about the tax; he found it offensive because it taxed people who worked for a living. Also, it drove up the cost of housing and disqualified some people -- adding as much as $500 to a house. He supported A.B. 490. Chairman Stroth called Mr. Phil Stout up to bat. He identified himself as the Executive Director of the Nevada Association of Independent Business. N.A.I.B. was very much in support of A.B. 490. He recited from his written testimony (Exhibit G). He had many letters from businesses from around the state and the major concern regarding the tax was the "chilling effect" it had on job creation. Mr. Stout pointed out a letter from Kim Chandler to Speaker Joe Dini, which he included in (Exhibit G). The letter basically said that, when the B.L.T. was enacted, it was the final straw that caused Union Carbide not to renew their option to purchase ERMI (a business in Yerington). But, six months earlier, the company had decided to make Yerington their main west coast service and distribution center. The projected employment had been 50 people. But the business tax made Nevada very unattractive to Union Carbide and they went to another state. Another letter in (Exhibit G) that Mr. Stout cited was from Doris Willson of Baskin- Robbins in Las Vegas, which stated they were unable to hire help because they could not pass the cost on to their consumers due to the fact of the business they were in; it was not competitive because it would make an ice cream cone go up $3.00 and people would chose not to buy one! He urged the Taxation Committee to vote yes on A.B. 490. Chairman Stroth invited Mr. Michael Pitlock to speak next. As the Executive Director of the Nevada Department of Taxation, he testified against A.B. 490. His prepared testimony is (Exhibit H). He summarized the high points. Two basic decisions had to be made. The first was to decide if the system could absorb the fiscal impact associated with the bill. Based on the most recent estimate from the Economic Forum, the total loss of general fund revenue would be approximately $63.3 million on an annual basis once the phase-down was complete -- and an equal amount would be lost over the five year phase-out. Mr. Pitlock mentioned the Fiscal Agenda for Nevada. He thought it was helpful guidance to deal with the second big question: if you made the assumption you could absorb the revenue loss, what would be the best tax to modify? Mr. Pitlock's opinion was the business tax was NOT the first tax. He highlighted some ways in which the business tax stacked up against criteria setforth in the Fiscal Agenda. Based on the policy considerations he outlined in (Exhibit H) and the overall need for continued funding from the business tax in order to maintain the current financial condition of the state, he recommended A.B. 490 NOT be passed. Chairman Stroth asked Mr. Pitlock if he thought a tax that penalized businesses for creating jobs was good tax policy. Mr. Pitlock replied, "The answer to that is yes and no: it depended upon the burden." A tax that created such a burden that it actually influenced those decisions was a tax that could have detrimental effects on economic development. The information Mr. Pitlock had examined indicated the business tax did not create the level of burden that influenced those kind of decisions. If it was viewed as a significant burden, there would not be a significant growth in employment relative to national figures. Nevada was competing very well with the other states. Speaking next was Mr. Charles "Chuck" Weis, owner of a small business in Reno. He asked the Committee how a small business was defined -- not the interpretation, but the ACTUAL definition. Was it one person doing $100,000 of business a year? Was it five people doing the same business? Or was it based upon 100? With that, he referred to the Department of Taxation: he believed they based their growth in Nevada on the $12.00 an hour business: he wanted to know how they based the $12.00 an hour and what part of that percentage created the growth in Nevada. Mr. Weis did 92 percent of his business outside the state of Nevada, with corporations that contacted him directly. The other 8 percent was done with third party contacts as a consultant. He spoke with many high level company officials regarding their potential moves to Nevada. In many instances, 80 percent of the time was spent talking about structure and taxes, and the involvement of employees within that structure in Nevada. Unfortunately, many of them (one of the most recent with 275 employees) decided NOT to move to this state. In the measurement of cost, based upon the Department of Taxation's $12.00 an hour, did the actuary studies show the indirect cost of doing business -- not based solely upon growth as a relationship of an increase? Small businesses, on a greater part of the percentage, provided more employment in Nevada than large corporations. In closing, Mr. Weis asked, "Why should we be responsible for the legislation and their absence of moderate spending, or looking at programs that should be modified in order to provide that growth?" He thanked those who listened to his comments. The Executive Director of the Nevada State Education Association, Mr. Kenneth B. Lange, testified in opposition to A.B. 490. His written testimony, which he cited from, is (Exhibit I). He urged the Committee to vote NO on the bill. Speaking next was Mr. Lysle Winchester, who owned a small independent insurance agency. Many other industries could pass the cost of taxes on to the people who purchase from them. But the insurance companies could not; they were regulated. And there were other businesses, as well, that could not pass on an expense to the customer. Their product became unavailable to the customer because it became too expensive. Most small businesses were concerned about survival today. I.R.S. was taking a very big toll on small business. According to Mr. Winchester, what was cut in the way of deductions was beyond belief! "Unless you have a small business, YOU CAN HAVE NO EMPATHY WHATSOEVER AT ALL to the situation!" exclaimed Mr. Winchester. When you work for a governmental entity, for a large corporation, the ramifications of the B.L.T. were not actually felt or seen. There was no concern for something that was not felt or seen. Assemblywoman Joan Lambert asked Mr. Winchester about the larger share of state revenue which came from insurance premium taxes (at 3.5 percent premium): did that tax have a more adverse impact than even the B.L.T.? "That is a can of worms," Mr. Winchester replied. To begin with, 3.5 percent premium tax was something the general consumer had no knowledge of. But the people who did see the 3.5 percent DID NOT LIKE IT! It could be larger than what was paid on one or two employees with the B.L.T. He was very loquacious with his reply. Chairman Stroth called forth both Mr. Bob Seale, Nevada State Treasurer, and Mr. Brad Lawrence. Mr. Seale did not talk about the bill per se; he spoke about the revenue and revenue replacement, which he felt should be considered carefully. He had listened to silver token introduced as a possible revenue replacement. Aside from the potential legal problems, there was an issue of "marketability." Assuming you sold the silver token for $5.00 and they cost a couple of bucks to produce, you would have to sell over 18 million coins per year in order to replace the revenue. Was that viable? He did not think so. Already available were the silver medallions sold to the public by private enterprise that did not sell in that quantity. The other issue that bothered Mr. Seale is it was an intrusion of government into an environment which was clearly private sector. Private sector should be making, producing, and selling those coins. He did not think it was a role for state government to involve itself in. Testifying next was Mr. Roy E. Clason, as well as Mr. Lou Lane. Mr. Clason informed the Committee he was a retired airline pilot and a director of a small business in Lake Tahoe. He wanted to know how many on the Committee were parents. Because the company he was a director for was the M.S. Dixie and he hired young people -- kids in high school. They hired them because it was good public service. But the tax was very brutal! It discouraged the hiring of the inexperienced, young people for minimum wage when he could get other people who could do the same job more efficiently. Also, because of the equivalency that Mr. Pitlock addressed, it was a terrible accounting burden when they hired 75 or 80 high school kids and they could do it 20 or 30 full-time people. They had to derive the number of hours to find an equivalent person each month. Mr. Lou Lane, the Human Resources Director for Mr. Clason's company, emphasized there were a number of youth that had to be turned away because of the small business tax. Speaking on behalf of the Nevada Freedom Coalition and himself was Mr. Tom Johnson. He announced he had a total of 55 employees in his small business a few years ago. He related to what Messrs. Clason and Lane discussed because he, too, hired untrained people. As well, he helped injured SIIS workers. If the tax had been in existence at the time he was doing that, it would have represented 20 percent of everything Mr. Johnson made for a year. He would have ceased all of his activities in hiring people straight out of high school, as well as working with agencies to help people retrain in other trades. It would have had an enormous, negative impact. He urged the Committee to think carefully about the impact the tax had on getting people started. Regarding the Nevada Token Bill, he said the organization he belonged to, which had 35 member groups and a total membership of about 10,000, was enormously behind the idea of raising some non-tax revenue in the state of Nevada. He urged the Committee to consider some ways to overcome objections to the Nevada Token Bill and/or silver bill. Because the amount of money that could be raised could exceed the shortfall the repeal of A.B. 490 might create. In addition, if it should fall 20 percent short, it was still a good idea. The groups behind the token bill would help publish and push the concept at no cost to the state of Nevada. Speaking next was Mr. Jim Richardson, Nevada Faculty Alliance. He was concerned about stable revenue. "We have the fastest growing system of higher education in the country," pointed out Mr. Richardson. "It takes money to keep up -- and we were not keeping up!" He felt very strongly we had come a long way in terms of stabilizing and broadening the tax base; he did not consider the average "hit" on a per hour basis to be a huge burden in terms of the statistics that had been cited. When the idea was first raised many years ago by Governor Miller, it was for a much larger amount of money and a much different form. The initial run- through was going to be a percentage of gross revenues. It was a bit unusual to have a tax of this nature. But it was certainly not unusual to have a tax on businesses. In fact, it was quite unique NOT to have some sort of tax on either gross revenues, net profits, or something for them to carry their fair share of the tax burden. He urged caution about repealing A.B. 490. The bill worried him; he did not like tinkering with the funds he thought the B.L.T. brought. Assemblyman Marvel commented on Mr. Richardson's choice of word "stability." He thought everyone was looking for a tax stability. Where would we search for a stable tax? Mr. Richardson thought we had slammed the door on the most stable tax: income tax. He thought there should be some sort of business tax, probably a net profit tax. And a lower dependence on the sales tax, which put Nevada in a vulnerable place. Mr. Marvel brought up property tax and tax shifts. And what he termed the property owner's "rebellious state of mind." That was one reason there was dependency on the sales tax. Mr. Richardson said there was an odd impact when there was economic downturn; sometimes enrollment in higher education was driven up because if people could not find the kind of job they wanted, they would go back to school and try to improve themselves. Actually, this strange negative correlation exacerbated the problem. When the bill was passed and the tax on net revenue had been looked at, Ms. Stroth wondered if Mr. Anderson recalled if it had been a compatible amount of revenue brought into the state. Without hesitation, he declared it was a lot more: $300 million. Mr. Zuend added the fact that the major bill proposed by the Governor was a 1 percent tax on wages -- with a 1 percent tax somehow trying to get it from sole proprietor income, which raised a red flag with everyone! It looked like an income tax to them and it was a smaller rate for casinos in the original bill. Mr. Zuend thought the figure was more in the neighborhood of $250 million over the biennium. The tax package the legislature put together, because revenues were dropping during that time, ended up being a little bit over $300 million in total. Assemblyman Joan Lambert commented she served on another committee that dealt with three collective bargaining bills for state employees. She appreciated everyone who had appeared to deal with the revenue side of the budget; she saw one person in the room who was also on her committee to deal with the expenditure side. While there had not been a lot of talk about pay raises dealing with the actual hearings on collective bargaining, like the call she had received from a constituent who complained the Governor was proposing a 7 percent raise for state employees -- they were 12 percent behind on cost of living -- and they needed collective bargaining to just make their ways. Ms. Lambert declared no one in the room, except for one person who left, was on the expenditure side. But there had been testimony today where people had said, in effect, "Those legislators just do not know how to save any money!" She would hope some in the audience would extend the interest they had in the revenue side, which she knew directly affected them and she certainly understood why they were interested in that, to the expenditure side and to help the legislators find ways to be more efficient in state government. Ms. Lambert noted there was a lot of expertise in business that the legislators could use and would appreciate. Mr. Jim Galloway wanted to rebut Ms. Lambert's dissertation, but Ms. Lambert suggested they talk together privately later. For the record, Mr. Kress Cave arrived too late to testify, but asked the Committee Secretary to record him in opposition to A.B. 490. His scribbled notes are included with (Exhibit J). Other concerned citizens had written letters or called regarding A.B. 490: their collected opinions appear as a package, which constitutes (Exhibit J). The guest list (Exhibit B) revealed the names of other guests who had signed in to testify, but for one reason or another, did not when the Chairman called on them; therefore, Chairman Stroth closed the hearing on A.B. 490. There was no action taken. Ms. Stroth announced two new requests for bill draft introduction to the Committee. BILL DRAFT REQUEST NO. 51-2029 - REPEALS ASSESSMENT ON GROSS RECEIPTS FROM SALE OF AMYGDALIN AND PROCAINE HYDROCHLORIDE WITH PRESERVATIVES AND STABILIZERS. ASSEMBLYMAN SANDOVAL MOVED TO INTRODUCE B.D.R. 51-2029. ASSEMBLYMEN BROWER AND ARBERRY SECONDED THE MOTION. THE MOTION FOR COMMITTEE INTRODUCTION CARRIED UNANIMOUSLY BY THOSE PRESENT. The second request was read by Chairman Stroth. BILL DRAFT REQUEST NO. 32-966 - REVISES FORMULA FOR ALLOCATION TO COUNTIES OF PROCEEDS OF ADDITIONAL EXCISE TAX LEVIED ON MOTOR VEHICLE FUEL. ASSEMBLYMAN MARVEL MOVED TO INTRODUCE B.D.R. 21-966. ASSEMBLYMAN NEIGHBORS SECONDED THE MOTION. THE MOTION CARRIED UNANIMOUSLY BY THOSE PRESENT. There being no further business to come before the Committee, the meeting was adjourned at 3:15 p.m. RESPECTFULLY SUBMITTED: Carolyn Grabski, Committee Secretary APPROVED BY: Assemblyman Bob Price, Chairman Assemblyman Jeannine Stroth, Chairman Assembly Committee on Taxation May 16, 1995 Page