MINUTES OF THE JOINT SENATE AND ASSEMBLY COMMITTEES ON TAXATION Sixty-eighth Session May 30, 1995 The Committee on Taxation was called to order at 1:50 p.m., on Tuesday, May 30, 1995, Chairman Senator Lowden presiding in Room 119 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. COMMITTEE MEMBERS PRESENT: Senator Sue Lowden, Chairman Senator Ernie Adler Senator Kathy Augustine Senator Ann O'Connell Senator Jack Regan Senator Dean Rhoades Senator Randolph Townsend Mr. Bob Price, Chairman Ms. Jeannine Stroth, Chairman Mr. Pete Ernaut, Vice Chairman Mr. Michael A. (Mike) Schneider, Vice Chairman Mr. Morse Arberry, Jr. Mrs. Maureen E. Brower Mrs. Joan A. Lambert Mr. Mark Manendo Mr. John W. Marvel Mr. P.M. Roy Neighbors Mr. Brian Sandoval Mr. Larry L. Spitler GUEST LEGISLATORS PRESENT: None STAFF MEMBERS PRESENT: Mr. Ted Zuend, Deputy Fiscal Analyst Mr. Kevin Welsh, Deputy Fiscal Analyst OTHERS PRESENT: Mr. Keith Ashworth Mr. John W. Riggs, Sr. Mr. Denis Austin, Dept. Of Motor Vehicles/Public Safety Mr. Randy Day, Veterans Affairs Mr. Bob Campbell, Nevada Geothermal Council Mr. Stephen Schumacher, Oxbow Power Services, Inc. Ms. Janice Wright, Department of Taxation Ms. DeeAnn Parsons, State Energy Office Ms. Carole Vilardo, Nevada Taxpayers' Association Mr. Michael Pitlock, Executive Director, Dept. Of Taxation Chairman Sue Lowden called the joint meeting of the Senate and Assembly Taxation Committees to order at 1:50 p.m. She has asked former Senator Keith Ashworth here today to talk about the Tax Commission, exemptions and what that means to the Tax Commission in terms of policy and the difficulties of trying to deal with exceptions in general. She thanked Mr. Ashworth for being here and turned the floor over to him for his testimony. Mr. Ashworth pointed out he had the dubious distinction of being the former chairman of the Senate Taxation Committee who chaired the committee when they reduced the property tax and increased the sales tax. He wanted to make a couple of disclosures before he makes his statement, specifically, he is not speaking on behalf of the Tax Commission as the Commission has not taken action on these items. The Tax Department is here prepared to make statements as to how exemptions affect the Department, but as a former State Senator and member of the Tax Committee he wanted to express some of his personal views. First of all, years ago when pollution was the big item on the agenda, the legislature, in its wisdom declared that pollution control equipment of any nature is exempt from taxes. He wanted to disclose he now represents Nevada Power Company which has a lot of pollution control so his company does benefit from that exemption. Speaking as a private person and as a tax commissioner, it has been his experience as time has gone on, there have been more, and more emphasis on our citizenry trying to get tax exemptions. Secondly, he feels our tax rate of $0.364 for ad valorem is fairly low and a lot of the jurisdictions are not up to the maximum. What happens with tax exemptions, however, is every time you give a tax exemption to someone, someone else has to pay. It tends to not make the playing field level for the particular industry where an exemption is given and another facet of that industry does not get an exemption. Additionally, it creates a problem with the Tax Department and the Tax Commission in trying to regulate and grant these exemptions after the legislature goes home. They have to analyze what the legislators have done and explain that to the people who feel they have an avenue for that exemption. It erodes the tax base and as he noticed, our agenda today carried upwards of ten bills asking for tax exemptions. Soon, if everyone has an exemption on something, you are going to have to start looking for additional revenue. Tax exemptions are taking up a great deal of our revenue and we are losing a lot of money he does not feel the legislature had in mind. It is easy for a legislature to say, well we will give this little exemption and at this point it is not going to hurt too much. When you look at the total, overall exemption, the financial affect this is going to have on the state of Nevada and the ability of the Tax Department to try to collect these revenues, it adds up. He feels the legislature should be careful in setting policies in granting too many exemptions as he pointed out, in the long run it does more damage than good. We are still having a lot of people coming into the state of Nevada and our tax structure is not prohibitive just the way it is without having to give a lot of exemptions. He feels it is dangerous to start eroding our tax base with a lot of exemptions. The Tax Department does not have the personnel and budget sufficient to do all of the work we have now. You may want to keep that in mind as you may need to augment that Department if you are going to continue giving tax exemptions. He volunteered to answer any questions anyone may have. Chairman Lowden thanked Mr. Ashworth and stated she was now asking the Tax Department to come forward to discuss their concerns. In particular about having to augment their Department with additional people due to the possibility of more exemptions. Speaking for the Department of Taxation was Mr. Michael Pitlock, Executive Director, who stated he supports the comments made by Commissioner Ashworth. Each time you pass an exemption, you are adding an additional complication to the administration of that tax as you are providing for an exception to a general rule. That creates a problem not only for the Department in terms of being able to administer the exemption, identify who is eligible for it, make certain only those people who are eligible are taking advantage of the exemption, but they also have resources expended in explaining that to other taxpayers who are not qualified for that exemption and want to know why. They want to know why this person in certain circumstances gets an exemption and another person does not. In terms of the overall administration of the tax laws, it increases that burden without any corresponding increase in revenue. You are actually increasing the burden of the Department and taking away the revenue from the state in total. A couple of other things to keep in mind is that all of these exemptions have fiscal notes associated with them and as Commissioner Ashworth said, when you look at them one at a time, they may appear to be relatively small but when you start adding them all together it can come up to a significant amount of money. He emphasized they should be looked at in total. One concern of his, is why the exemption is being granted. Many times, most of those exemptions are being described as incentives in an attempt to get the taxpayer to do something. That is, either trying to get an employer to hire more people or to hire a particular class of people. If that is the intent behind the exemption, you have to look at the best way to provide the incentive and, is the incentive large enough to bring about the actions you are trying to provide the incentive for. He does not feel that kind of analysis is done; we come up with somewhat arbitrary levels of exemptions and assume that is going to be the appropriate incentive to cause some action to take place. Before the legislators grant exemptions an economic analysis is necessary to determine if, that is the right level of incentive and if you are providing it in the right manner. He volunteered the assistance of his Department in providing the fiscal notes associated with any of the bills under consideration today. Senator Townsend asked if his department has the software capability of projecting the fiscal impact of these measures over a five to 20 years period. Mr. Pitlock responded doing a fiscal note is a very labor-intensive process and, his biggest concern is the lack of sophistication in data processing capability. They have made some improvements with the new revenue system but that capability is not in place now, which makes administering exemptions more difficult. Mr. Spitler asked Mr. Pitlock if he knows of any existing document where we have taken a hard look at our tax policy in order to be less reactionary to either political demands or constituencies that band together. A lot of exemptions come from that perspective and we do not always have the time nor the means to analyze the ultimate impact. He asked what documents exist now that define the state's tax policy. Mr. Pitlock replied the comprehensive study he has seen is study done by the Urban Institute and Price Waterhouse which he feels contains valuable guidance, however, that study has not been completely digested and acted on by the legislature, to date. He pointed out it was a good study, but in terms of reading the study and analyzing the recommendations contained in it, he does not see where a lot of analysis has gone into it once the study was completed. Rather than looking at one exemption at a time we should look at the revenue system in total and determine whether it is doing what it is supposed to do. Following up on Senator Townsend's question, Mr. Spitler asked, if all of his Department's requests are approved during this session on upgrading the computer software and hardware requirements, will they be able to do the revenue projections we expect. Mr. Pitlock replied if the one-shot appropriation pending before Ways and Means is approved in its amended form, with the much higher number than what was in the original appropriation, it will be a very significant first step. He feels this will give the Department the tools it needs to carry out the mandates from the legislature. In response to a question from Senator Lowden on how many exemptions we currently have, Mr. Pitlock replied he would estimate it is probably in the area of 15 or 20 and advised those present he has fiscal notes for the bills we have on the agenda today. Mr. Spitler asked that copies of all exemptions be provided to members of both committees and then asked if, during the interim, there had been a study on exemptions and was advised by Mr.Pitlock he did not know. Senator Regan pointed out Mr. Pitlock mentioned the inability of his department to do fiscal impacts but asked if he could do cross-benefits and possibly incentives. He pointed out several examples of circumstances which might accrue benefits to the state of Nevada. Mr. Pitlock responded his department can do fiscal notes, they are just more difficult to do than they should be. With respect to doing the overall economic analysis as to whether or not the exemption would provide a net benefit to the state, they are nowhere near having the resources available within the Department to provide that kind of analysis. He explained that became very obvious as they were developing some of the fiscal notes for the exemptions to the business taxes. Many of the proponents to those exemptions came in and said, we will save money on welfare, prisons, here and there, however, the way the system is set up now with respect to doing fiscal notes, the Department of Taxation does only one piece of the analysis. They determine the amount of revenue lost to the state, the rest of the analysis is not being done. He does not see how we can make informed decisions without having all the information in front of you. Senator O'Connell spoke up with a response to Mr. Spitler's question, stating there was an interim study on taxing districts that touched on exemptions. They not only touched on exemptions but also on non-profits and we have about 3,500 listed people who have a non-profit status which you might also include as an exemption. She explained they found , in the brief time they had, there is no review process. Once you are on that list, you just remain on that list forever. The members of the committee felt that was an extremely important thing. That any time exemptions were going to be looked at, there should be some kind of review process on it as well. Assemblyman Price explained there were two tax studies going on. One that Senator Dean Rhoades was chairing and on the Assembly side, former Assemblyman Garner. He pointed out, as well, he has a list of exemptions we are allowing both in and out of Nevada that is very surprising to see. Senator Lowden advised those present, when the Assembly receives S.B. 144, you will see the Senate has really closed the gap on many of exemptions for so- called charities and other organizations trying to get exemptions. The Senate has done their best to pass the bill to the Assembly so they can compare the list currently in existence with the information they gained at the public hearing held in Las Vegas. With the input they received they have been able to draft a bill that will really close the gap. No one in the audience wished to testify, therefore, Senator Lowden began the published agenda. She announced the committee would not be hearing S.B.520 today, but it will be rescheduled. Chairman Lowden opened the hearing on S.B. 106 and asked if there was anyone wishing to speak in favor of this measure. SENATE BILL NO. 106: Proposes to exempt from taxes on retail sales auditory devices and appliances. A bill explanation, prepared by Mr.Zuend was distributed and included herein as (Exhibit C). Speaking in support of S.B. 106 was Mr. John Riggs, Sr. who pointed out he was wearing two hearing aids. His audiologist had asked him to speak in support of this legislation as it is badly needed by Nevada citizens. He pointed out, even with the rebate, we are not talking about a great deal of money that would be involved. Mr. Riggs explained he relies on the use of auditory devices with his set costing $1,200.00 for two hearing aids. They are not the most exotic on the market but the best he could afford. Senator Adler explained this is his bill which is the result of many complaints he received from his constituents most of whom are elderly people on fixed incomes. Currently we exempt prosthetic devices, glasses, etc., from sales tax, however, auditory devices and similar appliances are not exempt. Some of the hearing devices run between $850.00 to $900.00, therefore, the 6% on some of the more elaborate devices really does have an impact on senior citizens. They do not understand why they do not get an exemption for auditory devices. Senator Lowden asked if there was a fiscal note on this and was advised by Mr. Pitlock, from the Department of Taxation, he did not have a fiscal note at this time , but stated he feels the information is available. Mr. Ernaut added in relation to Senator Adler's comments that a lot of auditory devices now are substantially more expensive and the mean average can go as high as $3,000 to $4,000.00 per pair. The tax could run between $140 to $280.00 which would be rebated so it is a very substantial amount of money. Mr. Spitler addressed his question to Senator Adler and inquired if this measure includes batteries and equipment necessary to continue the devices working. Senator Adler explained, in his reading of the bill, batteries are not included but it would be difficult to determine which of the devices require batteries so he does not believe we could exempt them. Mr. Neighbors explained about six months ago he purchased two hearing devices and paid $1,000.00 each so he concurs they are not an inexpensive item but something that many senior citizens do need and he shares their concerns. Senator Augustine called attention to Section 9, page 3, items 33 and 34 and asked for comment from Mr. Pitlock. She stated that section does not relate to auditory devices but she thinks it may relate to glasses. Responding to her question was Ms. Janice Wright, from the Department of Taxation, who explained the language in the bill also mirrors what is currently in the statute. It defines "medicine" and which medicine is exempt. Then it explains what medicine is not exempt. Not exempt is any ocular or ophthalmic device, therefore, glasses and items of that nature are currently subject to taxation. Senator Augustine corrected Ms. Wright by pointing out her question was not relating to medicine, under item F, but under item D, lines 33 and 34. Ms. Wright explained those are currently taxable. Ophthalmic and ocular devices would be eyeglasses and similar health devices and they are currently taxable. The statutes defines those items as not being medicine, therefore, they are subject to tax. Senator Augustine questioned that statement by quoting from the statutes, "there are exempted from the taxes imposed by this chapter, the gross receipts from sales, storage use or other consumption of . .". Ms. Wright interjected that is the 2 1/4% tax rate and is for the Local School Support Tax. That is the only provision they are exempt from and you pay taxes on all other portions. The sales tax proponent applies to all other portions. Senator Lowden asked if there was anyone wishing to speak in opposition. There being none, she stated we would be taking action on these bills at the end of the hearing. She closed the hearing on S.B. 106. Senator Lowden explained S.B. 310 and S.B. 311 are companion bills and will be heard together. SENATE BILL NO. 310: Provides exemption from property tax for property used as facility for production of electrical energy from renewable energy resources. SENATE BILL NO. 311: Proposes exemption from sales and use tax on sale of equipment and materials used in production of electricity from renewable resources of energy. She explained these bills came out of the interim study committee on energy and asked Senator Townsend if he had served on that committee. Getting no definite response, she asked for anyone wishing to testify on either or both of these bills. Testifying first was Mr. Bob Campbell, representing the Nevada Geothermal Council on both bills. He concurred with the Chairman these measures are part of the SCR 35 recommendations. The Geothermal Council was involved and monitored that process during the last interim and while he has submitted some written testimony (Exhibit F) on these bills, he has some additional points he would like to make. Coming from a public management background himself, he can empathize with former Senator Ashworth's testimony as he recognizes the dilemma we are faced with when looking at issues like this. He suggested, from his perspective, one of the rare instances in which tax exemptions can be and perhaps should be seriously considered is when you are dealing with issues which have an impact beyond simply the tax exemption issue itself. Speaking in particular not only in behalf of the geothermal industry but the renewable industry as a whole, Nevada has tremendous potential in both of those areas. We are about to see a number of things, hopefully, at the test site and the solar arena, there are many efforts going on with regard to wind-power energy. Geothermal Council participated in a study done by the University of Nevada several months ago which they will make available to the committee. It is a two- part study and basically indicates Nevada is second only to California in the resources of geothermal energy and while we are now producing about 200 megawatts of geothermal power in Nevada the opportunity or potential is there to do that ten times over. At some point Nevada could become a net exporter of energy as opposed to importer. The problem the geothermal industry and other renewable industries are facing is what all new industries and technologies are facing. That is they are having a difficult time becoming competitive when they are dealing with industries such as coal, natural gas and industries that have been subsidized over many years and are well entrenched both in the utility and the regulatory arenas. They see S.B. 310 and 311, from the geothermal perspective, as one tool which could give an edge to what may be a new and rapidly expanding industry in Nevada. This could very well be one part of the puzzle which allows renewable energy to realize its potential in the state. He then introduced Mr. Steve Schumaker of Oxbow Power which is a geothermal industry in Nevada. Mr. Schumaker explained he is Project Manager for Oxbow Power on the geothermal projects they own and operate. Oxbow presently holds a significant number of geothermal leases in Nevada. They have explored these leases to some extent and are ready to develop them. The challenge they face is being competitive against what is now the fossil industry, the low gas prices, subsidized coal energy that is presently being developed in the state. Oxbow and other geothermal industries in the state offer a clean, renewable energy resource that is fairly unique to the western United States and very unique to Nevada. There is a great deal of untapped potential here. In response to one of Senator Ashworth's comments regarding tax exemptions already in place, as they relate to pollution abatement equipment, he concurs this is something the geothermal and renewable energy businesses need as a helping hand in this direction. They are asking the legislature to put the word out that this is the way we want to go. We want to see this renewable energy resource developed, that is clean renewable energy as well as a diversification in energy resource. This state has the potential right now and they need a boost to help develop that potential, to diversify our energy resources. The day is going to come when the costs on gas, coal, etc., are going to go up, and it is not going to be available. If these pieces of legislation are passed, we will have had the foresight to support this resource, that is a native resource, in the state of Nevada. He believes there is a great deal of cost benefit, as was previously pointed out, that this industry can provide to the rural communities in this state. The majority of the geothermal sites are located in the rural areas. He urged this committee give favorable consideration to these two bills and set the direction for the state in helping diversify the energy resource and exploit the renewable energy that is available here. Mr. Spitler asked how they are taxed now and was advised they have a property tax as well as paying taxes on the purchase of any equipment. Mr. Spitler pursued his line of questioning by asking if this legislation were enacted, how much money would they then redirect to further perpetuate renewable energy resources. Mr. Schumaker explained what he sees happening is they could become competitive in bidding their energy to the utilities when they come out with requests for proposals. By not having the property tax cost in there, it would make them more competitive and that is what they are looking at. Mr. Spitler then asked, if the people he would be competing against, be relieved of the tax, or would they still be paying it. Mr. Schumaker responded the competition they cannot meet right now is natural gas and he cannot respond to Mr. Spitler's next question as to how that industry is taxed. He speculated right now they are the only fossil fuel provider in the state. Mr. Price pointed out the speakers had mentioned currently there are about 200 megawatts of power being generated by geothermal in the entire state. He asked if this were one unit and was advised by Mr. Campbell there are probably 10 or 11 different units in the state that cumulatively can produce about 200 megawatts. Mr. Price speculated then the unit is pretty small with Mr. Campbell advising they generally vary from 10 megawatts to 25 megawatts. Mr. Schumaker pointed out Oxbow owns and operates the largest facility at 60 megawatts and that is considered pretty large in the hydro geothermal business. They range down to 15 to 20 megawatts. Mr. Price advised, as a member of the Committee on High Level Waste, he visited the Rancho Seco Nuclear Power Plant which is not currently operating, but it was built as a 900 megawatt. Expanding his previous statement, Mr. Schumaker, replied the typical geothermal operation in Nevada is in the range of 20 to 25 megawatts. Mr. Price recalled some sessions ago when we made some changes to the net proceeds of mines, the geothermal people that year were added into the net proceeds of mines so they are taxed from that level and then the county tax rate is assessed against them. He explained in most states it is more common to be taxed on severance tax but we do it a little bit differently here. He then asked where the geothermal plants are located and was advised between Carson and Reno you pass three small ones, (12 megawatt, a 20 megawatt and a 7 megawatt). Mr. Marvel asked Mr. Campbell if the majority of utilities are required to buy a certain percentage of their product and was advised they were not. Most of the production from the plants south of Reno is sold to Sierra Pacific and they have generally had a very good relationship with Sierra Pacific over the years. He reminded those present SCR 35 would have set forth some requirements but at this point there are none. Mr. Marvel pursued his questioning by asking if they are selling some of their product to Sierra Pacific and was advised in the affirmative. He pointed out he does have Valmy Power in his district which is coal fired and asked how coal is being subsidized. Mr. Campbell explained, each year in the federal budget, there are funds set aside for coal research and subsidies that span out through the system. The latest number he has checked in the current federal budget was a little over $200-million in that area. Mr. Schumaker pointed out that the current project that is 50% subsidized, according to his understanding by the Department of Energy, is the Pinion Pine Project at the Tracey Power Plant with Sierra Pacific Utility area. That is a tremendous example of subsidized power by the federal government of fossil power. Mr. Neighbors stated, as a point of clarification, he was under the assumption they did have to pay a net proceeds tax in addition to property and sales tax and asked if that was correct. Mr. Schumaker agreed they do. Mr. Neighbors informed those present we do not have a severance tax in the state of Nevada; it is a net proceeds tax. Mr. Price asked if it is necessary for the Geothermal Council to go to the Public Service Commission when they build a new plant in order to have a new rate approved or is it a one time deal. Mr. Schumaker responded they have to apply to the Public Service Commission if they are going to negotiate a contract with a utility. Those contracts have to go before the Public Service Commission for approval, as he understands it. Mr. Price pointed out he is bringing this up only for information to the committee inasmuch as two or three sessions ago, the legislature passed tax breaks for solar companies. The company, at that time, was the largest solar company in the world and they ended up going bankrupt. Last session the legislature passed a bill giving tax breaks to a company that was going to shred tires, build a plant in Moapa and sell power to Nevada Power. They thought they had passed the needed legislation only to find out last year the Public Service Commission turned down the tire company's application to sell power for the reason they felt the power would be too expensive. It would appear even though the legislature may do all these things, that may or may not be the end of the story for people involved. Mr. Campbell added the members of the Geothermal Council he represents are all here in Nevada. They are in business and have already invested hundreds of millions of dollars in Nevada. They are producing a good product which, in most cases, is being sold to one of the major utilities in Nevada. He would feel confident this will be a very different venture and would not be as speculative as some we have had in the past. Senator Lowden advised members of the committee the Senate processed another bill that deals with the tire group as a bigger policy issue so we do not end up looking at each individual plant. With the help of this interim committee the Senate has a bill coming out of Economic Development which the Assembly will be getting soon. She then asked if there were any surrounding western states using this type of policy, that is, tax exemption. Messrs. Campbell and Schumaker stated they could not answer that. Mrs. Lambert asked, when the Public Service Commission reviews the contract, if you were to sell your power to a regulated utility, do they have access to your financial information. This could insure that a tax break, if it were given, could be passed through in lower energy costs to the customer of the public utility. Mr. Schumaker replied he was not certain if they have access to all the financial data that goes into the pricing in the bid proposal but you would see it in the bottom line proposed rate they propose to sell the power to the utility. That is the number they are trying to make competitive and he does not think it would necessarily be a line item they would look at nor really care about. They would be looking at the bottom line price they are going to pay for the power. Senator Adler pointed out he feels the tax benefit would be a pass through but suggested we address that question to Mr. Pitlock as he used to handle those matters. He added one of the things the geothermal has had over the years is, if you think of one of those plants, it probably has a long-term stable fuel cost. This, in the future, would transfer to lower rates as opposed to coal or natural gas where you might get price fluctuations. This way you have a resource or fuel that will not go up in price. In addressing the size of the plants, he feels the advantage to geothermal is they have small unit plants. You can put more plants on line as the demand increases rather than building large plants where you may then have to figure how to sell the electricity generated to other states. There are a couple of advantages to this. Mr. Campbell concurred with Senator Adler's comments stating this is just one small edge they feel can tip things in favor of getting any renewable industry going in Nevada. Mr. Neighbors called attention to the fact that Mineral County has spent a lot of money on the plant going towards Fishlake Valley and he understands they finished the construction but decided not to bring it on line. He asked what happened and was advised by Mr. Schumaker he has heard several versions, that is the contract was bought back by Southern Cal Edison, also, that it did not look financially feasible to move ahead or there was a financial alternative that looked better to them than generating the power. In response to Senator Lowden's request for further testimony, Ms. Deeann Parsons, Chief of the Nevada State Energy Office, spoke next and read her written, prepared testimony, included herein as Exhibit G. Senator Lowden asked if she had been present at any of the hearings on this subject during the interim study on energy. She responded she had been present and they had suggested the "biomass" which is one of the smaller areas which sometimes gets overlooked. Since the study they have become involved in several major biomass possibilities and note it is coming for the fore even more since then. Senator Lowden pursued her line of questioning as to whether any of the other western states have this kind of legislation and was advised that a lot of them do. Her main question pertains to solar power and whether there is a lot of incentive on solar power. Many states throughout the country have established grant programs, etc., to encourage this business inasmuch as the businesses and manufacturing that come in and follow the renewables have been very beneficial. Senator Lowden asked Ms. Parsons if it would be possible for her to share some information with the committee members at her convenience and was advised she would get that information as well as the `biomass' and geothermal projects. Mr. Price reminded those present, if this bill were passed, sales tax would be an exemption for equipment and that when you talk about exemptions for these plants you are talking about a lot of money which will be money coming out of the general fund. This would be 38% of our budget. Ms. Parsons pointed out we should keep in mind though realizing the money comes out now, but the returns in the future would be of benefit to Nevada and they are already running a little behind. This could make a huge difference in the future. Mr. Spitler, following up on Mr. Price's question, asked if she was speaking for the total Business and Industry Department, and was advised she was speaking from the Energy Office but definitely affects the entire Department. Mr. Spitler pointed out this really directly relates to two areas: #1 this is the direction we should go in terms of generation of heat, etc., as it is clean burning and renewable. The other, however, is a rather profound statement on what the tax policy should be and he was wondering whether the Department of Business and Industry was going on the record that their tax policy would be built up against exemptions. Ms. Parsons emphasized she cannot speak for Rose McKinney-James who is head of the Department and is also head of SeaStar, the Nevada Enterprise Zone. Looking at it from the business aspect as to what that can bring in, she would be supportive. Mr. Spitler thanked Ms. Parsons for her response. He then asked Senator Lowden if she was going to ask the fiscal notes attached be brought in at this time or was she going to do that later. Senator Lowden explained the Senate has them and she would ask for them on behalf of the Assembly. Mr. Spitler pursued his line of questioning as it relates to the fiscal note. Chairman Lowden relayed the information as to S.B. 310 was $1.7-million and for S.B. 311 it is $333,000 per year, according to the notes they have been given. Mr. Pitlock, Executive Director for the Department of Taxation, explained as he was sitting here he had to keep reminding himself that he was no longer on the Public Service Commission but after listening to some of the comments, he cannot resist making a few comments that will reflect his past. This legislative body must understand we are being asked to provide an exemption to help an industry become a little more competitive and, at best, they would end up being at the high end of the expensive power in the state. The current contract that Sierra Pacific has for geothermal power is among its most expensive sources of power. They pay a premium of about 50%. This is one of the situations that he discussed earlier. Is the incentive that you are providing really the appropriate incentive to bring about the action that they want. If you want to provide for more renewables, less pollution, less reliance on fossil fuel there may be better ways of going about doing it. Maybe funding research that is aimed at controlling the costs of these new technologies as opposed to just giving them a gift that makes them appear to be more economical than their competitors. As a word of caution, obviously, the Department of Taxation has provided the fiscal notes associated with these and he volunteered to answer any questions the committee members may have. Senator Lowden pointed out the information Ms. Parsons is going to provide will show other states do what he is suggesting with the research and funding in other areas. It would not be unusual to help with this energy exemption but maybe we could do it in a different way. Mr. Pitlock reiterated he feels we have to look beyond whether it is a good idea to help and move to the point of, will the help really bring about the results we want. He has serious concerns, after 15 years in the business of regulating utilities of whether or not renewable resources will ever be able to economically compete with some of the fossil fuels. At the same time there is research underway to make the cost of renewables come down, there is also research underway to make the fossil fuels more clean burning and more efficient. One of our earlier witnesses testified about the Pinion Pine Project in Washoe County. That is a project 50% funded by the Department of Energy from clean coal technology funds geared at trying to show that coal can be burned in an efficient manner. In a manner that does not pollute. Here we have a very abundant resource throughout the whole northern hemisphere if we can find a way to make that useable in an environmentally-benign manner maybe that is the better direction to go. But, again, this is a situation where you are being asked to make a decision where you have only one small piece of the puzzle. The Public Service Commission goes through long, extensive hearings to determine the appropriate resource mix. Those decisions are made based on 20 year projections of what the costs are. There was a discussion about whether or not the fuel costs were projected out into the future and they definitely are. All of those figures are based on 20 year projections or the life cycle costs of the facilities. Senator Townsend interjected, having debated this issue for the past sixteen years, he feels it is appropriate to make a statement with regard to this particular proposal. The Pinion Pine Project is a .50-cent, dollar project in Washoe County that deals with clean burning coal technology that is currently being debated on whether or not it has value. Had Pinion Pine been juxtaposed against these kinds of resources, then the commission would have been in a better position to make a determination with regard to Nevada's overall value. Meaning, do we accept .50- cent dollars from the Feds, which we know are our dollars anyway and therefore, they are substantially discounted as they have an administrative fee out of Washington that is rather large. Or do we take all of the geothermal that is a potential in western Nevada and subsidize it. We do not have coal in Nevada. We have geothermal, so are we, in fact, doing the right thing with regard to Pinion vis-a-vis the potential for geothermal. That is a huge policy question and is one this body may have to debate in helping the Public Service Commission determine what is in the best interest of all Nevadans. These questions are not as simple as they appear to be. Each of us would like to exempt all of these wonderful things but when you do and we go back to our regular jobs, the regulators, whether it is Public Service or Tax Commission, have to determine their impact. The disappointment for many of us who have been here a long time is we do not have the resources to figure out the complete implications and that is what is really hard. Something that might affect Washoe or Clark County where you have lots of people might not have a very big impact, but if that very same project were located in the rural community where it would have huge impact, we would have a tough time dealing with those results. It is very difficult to debate some of these issues without the complete picture. Mr. Pitlock referred to a comment alluded to earlier, that is the knowledge that the electric industry, in general, is going through a very significant restructuring. We are not going to be talking about a geothermal facility in Nevada competing with Pinion Pine, we will be talking about nation-wide competition amongst all generators of electricity. Geothermal is going to have to compete with combined gas cycle, gas turbines and a lot of other technology which they are not even close to when it comes to the economics of it. The competition we are talking about is national if not global in its scope and using the numbers he has seen in the past, he doubts very much if $1.7-million is going to make the geothermal industry competitive against all other sources of power. Speaking next was Ms. Carole Vilardo, of the Nevada Taxpayer's Association, who wanted to raise a couple of points. She pointed out she sat on the Revenue and Taxation Committee and wanted to address the policy issues resulting therefrom. She referred specifically to when the committee looked at the LUZ project in the 1991 session that Mr. Price referred to, Northstar from last session and Moapa Tire Generating Plant. The adjustments made in the Statute, actually not only addressed energy but exemptions which were allowed on the basis they were economic development. That seemed to be a relatively clear-cut policy of the legislature having adopted and created an Economic Development Commission, having funded it, etc. She admitted she does not know, nor did she track the committee on renewable energy resources. She does not feel we have that broad of a picture on energy resources or a policy statement we have made. She is addressing this measure as economic development and a general statement. Generally speaking, any of the exemptions we look at from paying a revenue, whether it is an assessment, sales tax, property tax is going to fall into one of three categories, all of which are on the agenda today. She stated she would be addressing S.B. 310 rather than 311. If you take the policy issue and you accept economic development then this bill is missing necessary criteria if you chose to process it. That is the criteria that fits in the policy of economic development which has been relatively well established. She referred to S.B. 337, which she believes the committee heard a week ago, where we took this section of law and another section of law which dealt with the three businesses she previously mentioned between 1991 and 1993 and they were `married' into one section. Criteria was established that said the Department of Economic Development or Economic Development Commission would determine if, in fact, the business met that criteria. The importance of doing that before the exemptions were granted is the fact that any exemption whether it is business or individual erode your tax base and we levy taxes to pay for government services. In eroding that tax base, as we do, at least having Economic Development Commission certify to these business-type exemptions at this point, if you feel they fall within that policy, you are assured that the business that qualifies for that exemption does certain things. It pays their employees the state average wage which is $11.00 and change, provides medical insurance for its employees and, because you are eroding this part of the tax base by the exemption, at least you try not to lose revenue for those social services you might otherwise have to provide. It is generally accepted that if a company is providing medical insurance and paying the state average wage that you then have a group of employees who will not need social services from the state, who are capable of qualifying to buy houses and they in turn will pay property and sales taxes. She feels it becomes a very important consideration in looking at any exemption for business unless you are dealing with another stated policy and, as she pointed out, the only policy she is aware of that she feels has been very clearly stated since l985 has been the policy dealing with economic development for the state. Her board has established a policy of looking at that aspect but that is a decision the legislators will have to make. If this fits into that policy frame or any policy frame and if it does it should be general enough that any business can fall under this category within this sphere. That was the problem with the other statutes. The other two provisions were written in such a way that they dealt with those specific companies. So the Assembly will be receiving the bill and it will be S.B. 337 which tries to clean that up to work within the policy framework. Those are the concerns they have in looking at S.B. 310. In S.B. 311 you have a similar type of concern and yet different. In this bill as soon as you get into any exemptions on sales tax you have to go to referendum and it gets interesting because if you are doing that as part of economic development, your hands are really tied. You have no way of knowing if the voters are going to understand it or not. The sales tax exemptions for business very much become a "betting on the come" proposal. At some point you are going to have to go to the voters and try to convince them you are an honorable enough body that some changes can be made without having to take everything to the vote of the people. She speculated she could not predict that would happen in her lifetime. Mr. Zuend has prepared a bill explanation for use by the committee members, identified as (Exhibit D). There was no further testimony to be heard on this measure therefore, Chairman Lowden closed the hearing and opened the floor for testimony on S.B. 354. SENATE BILL NO. 354: Increases amount of exemptions for veterans from certain taxes. Senator Lowden invited Mr. Randy Day to speak first. Mr. Day introduced himself and stated he was the State's Commissioner for Veterans Affairs. He began by explaining this bill accomplishes two things. The original veterans' exemption was granted in 1953 so it is over fifty years old and the amount of the exemption has never changed. What his organization is attempting to do is increase the exemption by $1,000 which would bring it up to $2,000. The other thing this bill would accomplish is to allow that exemption to go to the Persian Gulf Veterans which currently is not the case. It is going to some of them but only to those who served outside of the United States unlike World War I, II and Vietnam. Those are the two items the bill would accomplish. Senator Rhoades asked if someone from the Department of Taxation could explain the fiscal note. Mr. Michael Pitlock, Executive Director for the Department of Taxation, responded to this request and explained the fiscal note was calculated on the number of exemptions that are currently active. There are 15,736 exemptions currently granted. If those are increased by $1,000 each and multiplied by the average rate in the state, we come up with $451,000.00 per year. In response to a question by Mr. Marvel, Mr. Pitlock stated that would be a hit on the General Fund. The impact would be on property tax revenues not necessarily the general fund. Mr. Day advised the committee there is another bill pending that would allow veterans to waive this exemption and have that amount go into a fund to build veterans homes. Senator Augustine interjected she does not understand the veterans' exemption on assessed valuation and the property tax. She knows it is one or the other that is, you can take the property or the vehicle but what is the difference between the $1,000 or $2,000 as it deals with the property. Mr. Day explained you reduce your assessed valuation by $2,000 or $1,000 as it is now. Senator Augustine pursued her line of questioning by stating the dollar amount on the exemption is really minimal and was advised by Mr. Day that most counties is $50.00. Senator Augustine then asked what the difference in that particular rate would be and was advised by Mr. Pitlock this is basically doubling the amount of the exemption by going from $1,000 to $2,000. The choice you would have to make will now become a more difficult choice because the one option is now being increased by 100%. Senator Augustine then pointed out it applies 100% on vehicles as stated on page 2. Mr. Day responded the potential is for a $100.00 exemption versus $50.00 as it is now. Senator Augustine referred to the property tax saying she does not think it is $50.00. Mr. Pitlock volunteered they could work back into that on the fiscal note, noting for the committee you are basically looking at about a $28.00 exemption on that thousand dollars. Mr. Neighbors explained in response to Senator Augustine's question, that would depend on each particular county's local tax rate. Ms. Carole Vilardo, representing the Nevada Taxpayers' Association, testified this bill now starts the second category of exemptions she previously mentioned. She explained this one gets slightly interesting inasmuch as up until 1983 the exemption was allowed for people who entered service from Nevada. And the Nevada Attorney General at that time, Bryan McKay found that it was unconstitutional to do that. It has to apply to the entire category of people. When you look at exemptions like this, it is usually a gift to somebody. It is a gift for having served as a veteran. And then you look at the time these were put in during the 50's for the most part, and some earlier than that, we were a very small state, these were very minuscule amounts. With the expansion of the wars we keep adding exemptions. With the Attorney General's opinion of l983, we have expanded these exemptions out to a larger point and as we grow we continue to expand it out. She feels we have the question, "is there a compelling public policy need for this?". If you answer the question for a public policy need you would find that, if you said, "yes", you would be addressing the social need. As a social need, such as the renter's rebates which are made out of the general fund, they are not a tax exemption. They are made out of the General Fund and have a needs test to them. You might be looking at something we think fits into some sort of rational reason for doing it. We are getting too big, the exemptions cost state and local governments and will continue to cost them more and more money. When you look at the fact that an exemption can cost you a million to two-million dollars, that's the difference on some of the programs that some legislators would like to fund. You have to ask at what point do you limit exemptions. Do you start to eliminate existing exemptions, or only consider future exemptions. And, again, that becomes the other policy question for this committee. On its face, she would have to oppose this exemption because it is increasing and further eroding a base that is in a constant acceleration of erosion. And, of course, the state has needs to fulfill. Senator Townsend stated this was the first time he has ever heard this phrase used on an individual exemption that it becomes a gift as opposed to something that can be utilized to change social policy or change behavior. That takes an exemption and moves it to a new level. It certainly separates it dramatically from something like the geothermal effort an indigenous resource we are trying to use for economic development. Should they be mixed at all based on that? An individual exemption as a gift as opposed to a social policy in encouraging policy to develop something else? Ms. Vilardo stated, emphatically, that is the question that has to be answered and so far it hasn't. That is absolutely what we have come down to. As we have grown, there have been more and more requests to expand exemptions, add new individual exemptions, etc. That is one of the reasons she tries to distinguish between that which is government, that which is business and that which is individual. You have to look at the basis for which the revenue is that we are exempting. It is taxes. She declared she did not care what you call it, whether it is called an assessment or a fee, it is a tax and the tax, somewhere along the line, was levied to provide a service at a service level. In our instance, it is the members that sat on the money committees that are making the determination now. It is the local governments that appear before the Government Affairs Committees and the money committees and do not want mandates that come to you for additional taxes because of needs. We look at taxes on this hand and then we erode the tax base on another hand without any compensating factors. The compensating factor for individuals should be, are we doing something with a social policy? Or, is this just a gift. Are we at that point? She pointed out we could do those things in the 1860's in the 1910's even in the 1950's, but she emphasized we are growing too fast. This state is identifying too many needs. You have a greater and greater number. Keep all exemptions static, do not add another one and they are constantly growing just by nature of the amount of people moving into this state. We need to look at how much more we can do. These are your policy decisions. These are the concerns you have because when you want to raise the tax, she vowed she would be before you saying don't do that. Close up your loopholes. Make sure you are getting the revenue that is out there. When you do that, you are very cautious about the degree to which you extend exemptions or you allow them to exist. She volunteered to answer any further questions. Senator Augustine referring to the fiscal note on this bill asked if this exemption is a known factor of those who are currently exercising this exemption. A lot of people do not even know this exists. She disagrees with Ms. Vilardo when she refers to this as a gift. She feels this is something that is owed to these veterans. Ms. Vilardo emphasized that is the policy decision. When she uses this as a gift, she does not know how else to characterize this as it does not change social policy and it does not help someone because they have a low income such as using the means test with the renters rebate, or the citizen refund for the property tax where you set up incremental levels based on income. This has none of those therefore she has no other way to go other than calling it a gift, however, it is the committees policy decision. The hearing on S.B. 354 was closed and Chairman Lowden opened the hearing on S.B. 438. SENATE BILL NO. 438: Extends to widowers benefit of tax exemptions granted to widows and orphans. Speaking in behalf of the bill was Mr. Dennis Austin, Assistant Chief of Registration, Department of Motor Vehicles. He explained he is here not to support the bill nor oppose it, but to answer any questions the committee members may have. Chairman Lowden asked Senator Rhoades if this bill had come out of his committee and he replied in the negative but stated he supports it. This does have a $51,000 hit each year of the biennium but feels it is long over-due and men should be included in this exemption. Senator Adler pointed out he had introduced this bill once before so he is familiar with the issue but stated, on this one, he would have to agree with Carole Vilardo. We are giving an orphans and widows exemption to people who could be multi- millionaires and it would make more sense to take the same hundred thousand dollars and give it to kids in foster homes who really need the money or elderly women whose husbands have died who really cannot support themselves. This is bad social policy, because it is not targeted at all. He can understand the equity argument but even the Menendez brothers could qualify under this exemption. He declared he was not supporting this bill. Opposing the bill was Ms. Carole Vilardo, Nevada Taxpayers Association, who explained she is opposing this bill on the same grounds she gave on the previous bill. It is inequitable to have widowers get this benefit and not widows. We would rather see the exemption eliminated totally for the previous reasons, but if you are going to keep it, fairness and equity would rather demand that you expand it. Why should a widow be granted the exemption and the widower not; that is inequitable. They both have spouses who are deceased. Her Association opposes the exemption. They would rather see it removed from the books including widows and orphans. She stated she checked and the last report from the Department of Taxation does not show any exemptions on orphans that have been granted. Senator Adler interjected this bothers him inasmuch as every budget year we are looking for a little amount of money to do one program or another and this morning they had a bill from RSVP to get $32,000 per year for volunteers to go visit our senior citizens in rural counties by making a phone call for them or bring in food, etc. Many of these people are widows or widowers, in fact all of them are. These are people who live alone and for $320.00 each, per year we can provide necessary services. One of the problems of the finance committee is they did not have the $32,000 per year to help these poor senior citizens. This legislation is a more expensive exemption than paying the $32,000 to help those homebound seniors. This is a bad expenditure of funds when we have people out there who cannot get services for a very minimal cost. He strongly opposes the bill. Ms. Vilardo brought up one point of clarification that we have on these, is we are dealing mostly with property tax so the State General Fund would not receive that much money. It would be distributed back to the local governments but, again, you have the local governments coming before the tax and government committees looking for additional revenue sources because of the impacts to their revenue sources. There must be a lot more scrutiny and some criteria that is set down to distinguish if they are social programs and if so, maybe recommendations need to be made to the money committees. Rather than exempt a tax and erode a base, you should be funding it as a straight out program that competes for money like everybody else. Senator Lowden explained one of the reasons we are holding these joint meetings is that if any of them are to be changed or repealed, the Assembly has already heard some of the arguments and they will know why. It is almost sacrilegious to repeal something that has already been exempted but she feels the point is well taken. Due to time constraints, the hearing was closed on this bill and the hearing on S.B. 466 was opened. SENATE BILL NO. 466: Authorizes certain persons to waive their exemptions from motor vehicle privilege tax and designate additional amount paid to be credited to veterans' home account. Speaking first in support of S.B. 466 was Mr. Randy Day, Commissioner from Veterans Affairs who explained this bill was introduced last session and ties in with the veterans' home legislation currently pending. It is a means for veterans who are taking advantage of the exemption to be able to waive their exemption and have that amount go into the Treasurer's Office into a veterans home account. Senator Lowden asked if the Treasurer has been told of this proposal in the event it would mean a great deal more work for his office. Mr. Day explained they currently have the account set up and inasmuch as it was the chairman's bill last session that got the license places for Nevada veterans' license plates issued, the account is already set up. The same account would be used. Mr. Manendo spoke up with support for this issue but stated it appears we are nickel and dimming this and so he is taking this opportunity to plug the appropriations he instituted for this. As Senator Augustine mentioned, she felt a little offensive the exemption was being called a gift - she feels it is our responsibility to our veterans. We are here with the freedoms we have due to our veterans. Nevada is one of only four states that does not have a veterans' home and it is rather degrading to knock on the door of a veteran who would love to be in a home and we, in this state, do have the responsibility to build one. The way Mr. Day is proposing will take forever and he feels we have to set our priorities. Mr. Day added he very definitely appreciated Senator Augustine's comment. And while there are a lot of other programs that could be called a gift, the GI Bill that helped people with their education, a home loan, low down payment, etc., the reason those programs were put in place is to help people get caught up with their peers while they are gone three or four years or more, it is a set back and these programs help you. That is why they support these issues. Senator Lowden asked if there was anyone present who wishes to testify against this bill and acknowledged Ms. Carole Vilardo, representing the Nevada Taxpayers Association. Ms. Vilardo questioned why this has to be mandated by law. If this is in the law and someone feels that strongly, why can you not just take your exemption. Why do we have to create another set of regulations and paperwork saying that you now want this transfer. Why create all this paperwork. She feels the authority to accomplish the transfer is already there. Senator Lowden thanked those who testified and adjourned the hearing, explaining due to the time constraints we will not be able to hear the rest of the bills today. She pointed out that S.B. 520 will be heard on Thursday (June 1st) and the rest of the bills scheduled for another time. There being no further business, the meeting was adjourned. RESPECTFULLY SUBMITTED: Nykki Kinsley, Committee Secretary APPROVED BY: _____________________________________________ Senator Sue Lowden, Chairman Assemblyman Bob Price, Chairman Assemblyman Jeannine Stroth, Chairman Assembly Committee on Taxation May 30, 1995 Page