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NPRI analyst: Tax Foundation report shows Nevada should avoid margins tax



The margins tax proposal currently being advanced by some members of the Nevada Legislature “should not be used as a model of tax reform for Nevada,” according to a new report from the Washington, D.C.-based Tax Foundation.

The study, titled “Nevada May Consider New Business Taxes,” reveals inherent structural problems with the margins tax, said Geoffrey Lawrence, deputy director of policy at the Nevada Policy Research Institute.

“The main structural problem is that the tax builds on itself, or ‘pyramids,’ as the tax applies at every stage of the supply chain,” noted Lawrence. “This leads to a higher effective rate of taxation on complex goods and services, like those produced within high-tech industries with long supply chains.”

What’s more, said Lawrence, a margins tax has relatively high compliance costs, which would impose onerous financial burdens on businesses.

“The Tax Foundation’s report could not be more clear,” continued the NPRI analyst, “a margins tax is a modified gross receipts tax and the structural problems with any gross receipts tax make it an unwise tax instrument regardless of how many tax dollars lawmakers want to collect.”

The Tax Foundation report itself warns that: “There is no sensible case for gross receipts taxation, or modified gross receipts taxes such as a Texas-style margin tax. The old turnover taxes — typically adopted as desperation measures in fiscal crisis — were replaced with taxes that created fewer economic problems. Gross receipts taxes do not belong in any program of tax reform.”

Lawrence noted that Texas is already facing significant problems with its margins tax, which served as Nevada lawmakers’ model for the current margins tax proposal. The study reports that “[w]ith the Texas margin tax collecting far less in revenue than expected, causing significant confusion and compliance costs, resulting in significant litigation and controversy over ‘cost of goods sold’ definitions, and facing calls for substantial overhaul and even repeal, it should not be used as a model tax reform for Nevada or any other state.”

Said Lawrence: “Nevada’s tax structure does need fundamental reform to move away from unstable taxes like the Modified Business Tax. NPRI’s tax reform proposal, as detailed in its ‘One Sound State’ study, would offer lawmakers a revenue-neutral tax reform plan that would lower the sales tax rate to around 3.5 percent while expanding it to services.

“As the Tax Foundation report notes, sales taxes do not have the same pyramiding problems as a margins tax, which makes sales taxes more ‘economically efficient.'”

The Tax Foundation also reports that if lawmakers passed the proposed margins tax, Nevada’s business-climate ranking would fall from fourth to 11th, and the state would also fall from first to 45th in the Corporate Income Tax Sub-Index Rank.

“At a time when Nevada’s private-sector unemployment rate is over 13 percent and its ‘effective’ unemployment rate is close to 24 percent, lawmakers should not be making Nevada a less attractive destination for potential employers,” said Lawrence. “Long-term economic growth only occurs in the private sector, and lawmakers should not institute taxes that have a proven history of harming the economy and hampering job creation.”


Tax Foundation report: “Nevada May Consider New Business Taxes” (http://taxfoundation.org/publications/show/27286.html)

NPRI tax reform study: “One Sound State, Once Again” (http://www.npri.org/publications/one-sound-state-once-again)

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