Commentary - June 7, 2018 - by Ray Hagar
By Ray Hagar
When Mike Willden, Gov. Sandoval's chief of staff, recently appeared on Nevada Newsmakers, the conversation turned to the Commerce Tax -- a tax on the state's largest businesses, those with gross revenues of $4 million annually or more.
The tax, the centerpiece of a record $1.4 billion tax hike championed by Sandoval in the 2015 Legislature, has drawn the ire of many conservatives.
Adam Laxalt, the Republican front-runner for governor, has said he would like to repeal it, even though one of his top consultants said that could be difficult, with a clear possibility of a Democratic majority in the 2019 Legislature.
Clearly, the Commerce Tax has become a political issue.
If it was repealed, Nevada's next gubernatorial administration would need to find a way to plug a large gap in the state's biennium budget, Willden said.
"As I always say to people (if Commerce Tax is repealed), well, then you are going to have to figure out how to take $350 million out of the revenue stream," Willden said about the state's current $8.2 billion general-fund budget.
"That is about what the Commerce Tax is making on a two year period," he added. "Maybe close to $400 million when the new person (governor) gets here."
Later, when Democratic gubernatorial candidate Steve Sisolak was on Nevada Newsmakers, he said that he would not lower Commerce Tax payment thresholds to boost the number of business required to pay. His Democratic primary opponent, Chris Giunchigliani, also said she would not seek to lower Commerce Tax thresholds in a Nevada Newsmakers interview.
In writing a story for this website about the Sisolak interview, I added, "State officials said repeal of the Commerce Tax could result in a $350 million to $400 million hole in the budget." I felt it accurately conveyed the numbers Willden and his number crunchers had come up with.
Las Vegas Review-Journal political columnist Victor Joecks took exception. He tweeted: "you're wrong about how much the Commerce Tax nets for Nevada. Commerce Tax includes a 50% MBT credit. Look forward to your correction."
Alas, I had not asked about the tax credit. And yes, when the Commerce Tax was enacted in the 2015 Legislature, those who paid it could take a 50 percent credit on their Commerce Tax payment and apply it to their Modified Business Tax obligation.
That potentially could cut the state's revenue on the Commerce Tax in half.
It also hints that Willden's estimate of a $350 million to $400 million hole in the budget due to a potential Commerce Tax repeal may be overstated.
Yet if Commerce Tax revenues continue to increase like they did from 2016 to 2017, Willden's assertion could come close.
The key point here is all the businesses that are seemingly eligible for the MBT tax credit don't take the credit. Many Nevada businesses that have $4 million in gross revenue and pay the Commerce Tax don't have a employee payroll large enough to qualify for the credit.
That only increases the revenue for the state.
"A lot of the employers or companies that pay the commerce tax don't have enough employees to get the MBT credit," Willden said. "Everybody also thinks that it is a 50-percent deduction. But it has not always demonstrated to be that way."
In 2016, the state collected $144 million with the Commerce Tax with just $43.7 million given back as the tax credit from the MBT, according to state documents.
In 2017, the state collected $198 million with the Commerce Tax, $54 million more than the previous year.
About $51 million was returned to businesses with the MBT credit for 2017, according to state documents. So the net revenue for the Commerce Tax in 2017 is $147 million.
So for two years, the length of a state budget cycle, the Commerce Tax has produced almost $250 million in net revenue for the state with a majority of that coming in the second year.
It is plausible the Commerce Tax revenue could get close to Willden's projections for the next administration, considering how revenues jumped in just one year.
"You need to project that into the next biennium," Willden said. "That is what we have been saying.
"If you are collecting nearly $200 million a year now and people are only taking about 51 million in credit now, when you project that out, that's generating about $150 million a year to the general fund.
"So whoever, if they want to eliminate it, they will be eliminating roughly, on current numbers, a $300 million (two-year budget) revenue stream," Willden said.
"We're saying that they (next administration) would probably have to make up a $300 million hole," Willden said.