MINUTES OF THE SENATE COMMITTEE ON TAXATION Sixty-eighth Session April 6, 1995 The Senate Committee on Taxation was called to order by Chairman Sue Lowden, at 1:30 p.m., on Thursday, April 6, 1995, in Room 224 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 Kathy M. Augustine, Vice Chairman Senator Ann O'Connell Senator Dean A. Rhoads Senator Randolph J. Townsend Senator John B. (Jack) Regan Senator Ernest E. Adler GUEST LEGISLATORS PRESENT: Senator Raymond Rawson STAFF MEMBERS PRESENT: Kevin Welsh, Research Analyst, Fiscal Analysis Division Kathy E. Cole, Committee Secretary OTHERS PRESENT: Michael Pitlock, Department of Taxation, State Of Nevada Kathyrn McClain, Legislative Analyst, Clark County Manager's Office Brian Krolicki, Chief Deputy Treasurer, State of Nevada Kit Weaver, Assessor, Carson City Assessor's Office Alvin P. Kramer, Treasurer, Carson City Treasurer's Department Marvin A. Leavitt, Lobbyist, Legislative Coordinator, Las Vegas Senator Lowden called the meeting to order and opened the hearing on Senate Bill (S.B.) 319. SENATE BILL (S.B.) 319: Revises provisions governing collection of sales and use tax on property which is leased or rented. (BDR 32-595) Mr. Kevin Welsh, Research Analyst, Fiscal Analysis Division, was asked to give the committee some information regarding this bill. He said: Currently a rental company has the option of paying the sales tax on the item purchased, or to rent, or lease. If at the time of purchase, ...rental, or lease they do not collect the sales tax from the rental or lessee...anyone coming into the establishment [will] have to pay sales tax for the use of that piece of equipment... Most of the time...the people who rent large high cost items, like Carson Tahoe Hospital, [they] will rent a large tractor, they will choose not to pay sales tax on that item, and then, they will charge the sales tax to the consumer when they rent that vehicle from them. On the other hand, people...who rent VCRs will choose to pay the sales tax on the item...at the time of use...and it won't have to be collected [later]... This bill would say the sales tax has to be collected when the item is rented or leased. Senator O'Connell asked, "How much more do they make on the item if they do it this way, because now if you initially buy it you pay the sales tax. You might rent that item 462 times and you are going to collect taxes on it every time you rent or return the lease item. So, you definitely have an impact here." Michael Pitlock, Department of Taxation, State of Nevada, testified by saying: Depending on which option...at this point in time...it could make a significant difference in the amount of tax that is paid. As Mr. Welsh indicated a lot of times the election [to buy, rent, or lease] is driven by the cost of the item in the first place. If they pay tax on it when they purchase it, it will require them to pay all the money up front instead of having it spread out over a long period of time and collect it directly from the people [who they] lease the equipment to. Senator O'Connell asked Mr. Pitlock, "But how many times is the item overtaxed?" Mr. Pitlock replied, "I think it would depend upon the kind of item. If you are talking about a car that is rented, like Hertz, as opposed to a video tape that is rented by a video store, you could have a whole lot of differences there. In some cases it may be insignificant and in other cases it may be very significant. It depends upon the item." Senator O'Connell responded to Mr. Pitlock's observations by asking another question. She said, "So, your philosophy is that it will even out?" Mr. Pitlock said, "At this point, we believe, that there is nothing wrong with the current state of the law because it allows the taxpayer to make that decision. It allows the businessman to make his own decision based on the circumstances of his own business..." A discussion ensued among the committee members. Mr. Pitlock asked to make one final point. He said, "There are four other sections in the NRS (Nevada Revised Statutes) where this option is spelled out and so, if this bill were to pass, you would have to look at those other four sections and remove that inconsistency." Senator Lowden asked if anyone in the committee had any questions. She then asked, "Is there anyone else here who wants to speak to this bill?" SENATOR REGAN MOVED TO INDEFINITELY POSTPONE S.B. 319. SENATOR ADLER SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR AUGUSTINE WAS ABSENT FOR THE VOTE.) ***** Senator Lowden opened the hearing on Assembly Bill (A.B.) 337. ASSEMBLY BILL 337: Revises provisions requiring affidavit for business license. (BDR 32-707) Kathyrn McClain, Legislative Analyst, Clark County Manager's Office, testified by saying: This bill has been requested by our business license department. Currently, the NRS 364.110 requires the retail license to file an affidavit to certify that the applicant is in compliance with Chapter 104 of the NRS before the business license is issued. Our district attorneys ruled that because the business license has an expiration date, that renewals are considered as a new issue and thereby they need a new affidavit. [The] business license [department] processes about 8,000 of these affidavits annually. The intent of the bill is to eliminate the need of this affidavit upon the renewals [of the license]. Any type of location or ownership change will be considered a new business and they will have to file the affidavit, pay the $3.00 fee, and have it notarized. This will save about 8,000 small businesses those fees. Senator Lowden asked if anyone in the committee had any questions. She asked, "Is there anyone else her who wants to speak to this bill?" SENATOR ADLER MOVED TO DO PASS A.B. 337. SENATOR REGAN SECONDED THE MOTION. THE MOTION CARRIED. (SENATOR AUGUSTINE WAS ABSENT FOR THE VOTE.) ***** Senator Lowden opened the hearing on Senate Bill (S.B.) 315. SENATE BILL 315: Provides for establishment of allodial title to residential property. (BDR 32-1751) Senator Raymond D. Rawson testified regarding this bill, by providing the committee with some historical background (Exhibit C), a spreadsheet, and related information (Exhibit D). According to the senator, the bill took several years to develop as he tried to understand some of the problems the elderly have in the way of property taxes. Senator Rawson went on to explain the elderly couple's dilemma by giving an example: In essence a couple today, can buy a home, pay for it over the 30 years, [and] finally, [they] have that ceremony where they can burn the contract and feel like they have it all covered. If they miss their tax payments within a 2- or 3-year period it [the property] can be put on an auction block, and essentially be sold out from under them to pay the back taxes. In other words, we never fully altered or controlled the property that we paid for. In trying to get to the heart of that, I found that originally in this country we had a title that was called an allodial title. It is not a word you will find in the dictionary now... Senator Rawson then informed the committee the historical importance of the allodial title and of its relevance in today's land ownership (Exhibit C). The senator referred to the application of an allodial title as though "...it were a trust account that you could endow and once that is endowed, it would take over property tax responsibility, you would no longer have the obligation to pay property taxes..." Senator Rawson then asked the committee to please look at the spreadsheets (Exhibit D) which would give them some data with regard to how the trust fund would be established and how the taxes would be paid on an ongoing basis. Senator Rawson continued his testimony by saying, Look at the bill. It looks like a fairly long one, it's actually not a very complicated bill. It says in essence, that any person who owns their property...[a first or secondary resident]...without any encumbrances on it, with the exception of assessments for streets, sewers, and those kind of things, if they wish to apply for an allodial title they can do that in several different ways. Essentially, the assessor or the county treasurer establishes what their tax rates is and they apply for allodial title. There's a $25 fee for that, [which] is a simple processing fee. The state treasurer will determine the type of trust that they should choose to go into. I have set it up two ways in the bill. They can pay double their tax rate for 10 years or they can establish in a lump sum to pay up their trust account... There has to be a record of the formula used and the method for doing this and that is like a contract. The person will then be able to endow their trust account. Senator Rawson led the committee through some specific areas within the bill via his spreadsheets (Exhibit D). In particular he looked at the terms such as, lifetime, trust funds, tax obligations, limitations on the investment of the trust fund accounts, possible refunds, and so forth. The senator referred to what is part of the law already; that is he said, "...what is in the NRS right now, the state treasurer can use, [NRS] 355.140 and that classifies it [the trust fund accounts] as a low risk type of investment..." He then spoke about the "excess interests beyond what was calculated...[that] will go into a stabilization fund. It [will be] a pooling of excess interests... It allows the treasurer the ability to manage this fund without it going into default..." Senator Rawson also discussed the finer points of the measure with regard to homesteading and taxes. Further, he was asked to give an estimation of how long it would take for an allodial title to come into effect. Senator Rhoads asked Senator Rawson, "What happens, let's say the interest rates go down drastically or the property taxes go up drastically, and there's not enough funds in the account to pay taxes?" Senator Rawson replied, The state treasurer has an obligation to tell you the amount you will have to pay to be able to...indemnify your property... There can be changes to that [the allodial contract]... Let's take the best case/worse case scenario. If you received a figure, that your property would be frozen at [a certain rate] and you paid a lump sum, so that you endowed the fund, that fund would then go on and pay your property tax obligation. If your property fell in value, you would have ended up paying more [taxes] than you would like to have. If however, that happened today, the property tax adjustment would probably be slow...and you would probably pay more than you really should. [On the other hand,] if the opposite occurred you could end up underpaying your fair share... It [will be] the treasurer's responsibility to determine [how to set up] the best case scenario [for the taxpaying citizens]... Senator Rhoads asked, "What's the difference of me putting that money in a savings account every month compared to putting it into this allodial fund?...why would someone want to do this [the allodial trust account] versus that [private tax shelter fund]?" Senator Rawson responded by saying, "You could do that [put your funds into a savings account instead]...Some people do that today as part of their tax shelter... They will endow an account that will take care of inheritance taxes, property taxes, and other things...so, that their property will be [free] to go on to their children... But, there is less that 1 percent of the population who does that kind of tax planning... This [measure] would set up a mechanism for you to be able to do that." Senator O'Connell enquired further by asking, "Senator Rawson, isn't there... [greater] benefit...to doing this [at] the state [level], as opposed to the county [level]? [Wouldn't] you...get a much higher rate of interest...on your money...[as a result of] the way the state treasurer is planning on investing [your money]?" Senator Rawson answered by stating, "...as we look at the history of the state, [if] we have a much bigger pot to work with...[then] we could get a much bigger return on our investment...We have had counties [in the past,] who have done very well on their investments, but it is with [a] higher risk... So, we have tried to close those loopholes...[as] we don't want counties failing..." Senator Augustine queried, "...I did not realize that we were going to have to get a constitutional amendment [along with this bill]. Are you just trying to get this in [place first] so, that the state treasurer can start the regulation and then, are you going to develop another bill...[that will be] coming behind it...?" Senator Rawson said, "The constitutional amendment will be a part of this... It [will] need to go on the ballot next year... The bill allows for when the amendment would take place..." Senator Augustine also referred to Senator Rawson's spreadsheets (Exhibit D) and inquired further about the homestead exemption and how that would have to be changed too. Senator Rawson surmised that there wouldn't have to be any changes to it because another section of the measure "...lists it as another one of those things which is exempt from execution... [That is,] if you have an allodial title to your property than it is exempt." Senator Lowden asked if there were any more questions from the committee. Brian Krolicki, Chief Deputy Treasurer, State of Nevada, testified by stating, "Senator Rawson showed us this bill...and I must confess that in the treasurer's office, we are far better at numbers, than [we are at] words... We did try to look up allodial [title]...[it] took [us] a long time [to find information about it]... What you have today is the beginnings, in terms of, fixing some of the points in the bill...(Exhibit E)." Furthermore, Mr. Krolicki referred to his worksheet with suggested language that would either amplify or modify the bill as required (Exhibit E) and then, explained that "...there [would] be an impact, definitely...a fiscal impact...[when this bill is enacted]..." Senator O'Connell asked Mr. Krolicki, "In Senator Rawson's testimony he mentioned that there were several states that do bits and pieces of allodials. I wonder do you know anything or [do you] have any networking of any information that would give you any idea of how many people you would be needing to perhaps oversee a plan like this? Or do we have any idea how it works in other states?" Mr. Krolicki said, "We don't know how it works in other states. ...It is my understanding that this is a unique program where allodial references are made in other states. This is truly unique. Our best guess...[based on the 1 percent of the population that was quoted earlier, we would need] two people and $100,000 to start up..." Senator O'Connell asked Senator Rawson to explain to the committee whether or not this bill was a "pure allodial" as it was in the history that he had researched. Senator Rawson said, ..."a pure allodial title would have the full force of the federal law with it and we can't do anything to stop the IRS [Internal Revenue Service] from coming after someone...We probably can't stop the state tax...so, in that sense the person still would be beholding to a higher power, but... but it is as close to an allodial as I can find." Senator Lowden enquired, "Is there anyone else who wants to speak to this issue?" Kit Weaver, Assessor, Carson City Assessor's Office, stated, I am not here to speak for the bill, nor am I here to speak against the bill. I have talked to several assessors and we would just like to go on record with a few comments. We would have no trouble administering our part of this bill since it is a very minor part, that of receiving an application and sending it on to the treasurer's office... The problems that we see...were pointed out by the state treasurer in the wording... [Mr. Weaver referred to the state treasurer's worksheet (Exhibit E).] Mr. Weaver made it clear that there could be a problem in assessing a property at a frozen rate early on and in the end it would be likely that the property had either gone up in value or reduced in value. He suggested that there needs to be a base value established. As Mr. Weaver continued to analyze this bill he said, "...I want to remind everyone, we have a senior citizen tax refund program right now and it works very well in the counties. The requirements are you must be 62 years of age and your income cannot exceed $19,100 [a year] In Carson City, we have over 600 senior citizens who receive, in some cases a substantial part of their taxes back [each year]..." Senator Lowden asked, "Is there anybody else who wants to address this issue?" Alvin P. Kramer, Treasurer, Carson City Treasurer's Office, questioned in reference to S.B. 315, section 3, subsection 4, "Would we be treating this person differently than someone else who was forced to pay their taxes...?" Meaning, according to this allodial title bill, the county would have to absorb the losses, if the taxes couldn't be paid. "[We are, of course,]...realizing [that] this [bill] is expressly to keep the property from being sold. ...It seems [however,]...if [someone] is going to be short [on taxes,] because the calculations were done wrong, and [knowing that] the county didn't make the calculations, then, it shouldn't be the county suffering [due to the lack of taxes]." Senator Lowden asked if Senator Rawson wanted to address those comments. Senator Rawson said: I would just make a comment that the treasurer [state] expressed those same concerns which is why we expanded the bill out and included the stabilization fund in [there]. If you were to try and envision the circumstances [whereby,] the investment funds had nothing in it, [and] the stabilization fund had nothing in it, there wouldn't be [any] money for circulation. We would be talking about a total collapse of our monetary system [and] that's unlikely. [However,]...we can make some guarantees [which will be a back-up system]... Senator Lowden asked, "Is there anyone else who would like to address this bill for or against?" Marvin Leavitt, Lobbyist, Legislative Coordinator, Las Vegas, said: I think the concept is very interesting... We have property taxes assessed against us for a number of different purposes...they are not static... We would have to have a system that will accommodate these changing circumstances. [Even though,] you start out with a relatively low rate, [and] no one increases their rate, the number of ententes increases over time, so, you can see a gradual change. [Further, if] we have a situation...a debt side...[in which] we were to allocate...among the various entities...somewhere, [someone] would have to accommodate so that the payments of debt don't get allocated...[even if that would mean that] we take it from the operating side. We [would] have to have enough money to pay for [the] debt. So, I think we have to have some priority in the allocation for the payment of debt that comes against that particular piece of property... ...The constitutional amendment will have to address two things. One is, we would have to treat the residential property differently than other property. And two, that the payment of that money into [the] treasurer eliminates the liability for taxes even though the money might not be sufficient; otherwise, their guarantee [the state treasurer's guarantee] is sort of meaningless. When the trust fund runs out...[what will happen then?] Senator O'Connell asked Mr. Leavitt, "...How [can] we know how many people have already purchased their homes and own them outright? Is there any figure or data base in the state that would give us that information?" Mr. Leavitt said, he was not sure. "However," he said, "...there must be a way through the county records...to find the properties which have obligations recorded against them." Senator O'Connell asked Senator Lowden, "...Would it be possible to find this information...in order [for us] to get a handle on the figure [of what] we would be operating with?...Because, if we did indeed have to...freeze a payment, then, we would really have to know..." Mr. Leavitt was asked by Senator O'Connell to discuss with the committee the logistics of figures, trust fund returns, and the balance between outflow and income and so forth. He further said, "We need to...allow for some increases, based on the time of when you entered into the transaction...[in order to not] have a fairness argument [arise]. ...Let's get some actuary here and do some calculations... Let's do some projections...of what is likely to happen..." A discussion ensued with regard to this bill between Senator O'Connell and Mr. Leavitt and others. Senator Lowden asked Senator Rawson, "...Do you have a problem with us, if we explore this a little more?..." Senator Rawson concurred that would be fine with him. At the same time, he suggested that they put the bill into a subcommittee and work on some of the technical amendments while they waited for the data to come in with regard to property ownership and taxes. He also asked the committee to look at his last piece of paper from the spreadsheet packet (Exhibit D), and said, "[All] we have to [do is] put the right factors into the computer and we would have a decent schedule... It is just a matter of structuring an account..." Senator Lowden said, "I am hesitant to put it into a subcommittee, because so many of us are in them. I think we just need to have some questions answered..." Senator Rawson responded, "There needs to be a place where we can sit down with the various assessors and make sure that we can address their concerns." Senator Lowden asked, " Senator Rawson, could you be in charge of organizing this?" He affirmed that he could do this. Mr. Weaver asked to respond to Senator O'Connell's inquiry. He said, "There are about 10,000 residents in Carson City and the information is at the recorder's office, but it is only recorded chronologically and it has only been...since 1985. So, it would take a title search [to find out this information]. And the way I read the bill, when the person finally qualified for this allodial title, they would have to provide the title search to the treasurer's office... So, the only way we could find out who owns their property free and clear would be to do a title search..." Senator Rawson also wanted to respond to Senator O'Connell's question. He said, "I would think we could assemble a structure, for a proper sample...that would give us a picture or an idea...[of how many people own their properties]..." Senator Lowden said, "...That is all we are after... is a benchmark..." Senator Lowden closed the hearing on S.B. 315 and adjourned the meeting. RESPECTFULLY SUBMITTED: Kathy E. Cole, Committee Secretary APPROVED BY: Senator Sue Lowden, Chairman DATE: Senate Committee on Taxation April 6, 1995 Page