Spending limits or bust

Nevada must look at both sides of the boom-bust issue.

By Patrick R. Gibbons
  • Wednesday, October 1, 2008

Assembly Speaker Barbara Buckley (D) hosted a town-hall forum Monday, ostensibly to discuss challenges facing Nevada and hear residents' ideas about solving our problems.

Her central message was that state government's tax inflow is highly susceptible to larger boom and bust cycles. With over 60 percent of the state's general fund revenue coming from gaming and sales taxes, Nevada government relies on a strong global economy – in other words, the high disposable incomes that allow tourists in Las Vegas and Reno to shop, dine and gamble.

Buckley, of course, wants to ensure that during slim economic times, Nevada will not seek to cut back or end government programs created during fat times.

She cited a recent Tax Foundation study (NPRI disputes some of the methodological approaches by the study's author) that pegged Nevada's state tax burden at 6.6 percent of per-capita income, second-lowest in the nation. That catapulted Buckley into a laundry list of Nevada spending rankings in areas including education, health care and corrections, where, it's asserted, Nevada ranks near the bottom in spending.

Nevada's low tax burden ranking results from its relatively low taxation of residents, thanks to gaming and sales taxes paid by tourists, coupled with Nevada's relatively high personal income (seventh in the nation). Relatively low taxes on relatively high incomes result in Nevada's residential tax burden being comparatively low.

This does not mean that the government is inadequately funded or that taxes could or should be raised. In fact, the Tax Foundation study reported that Nevada's tax intake per capita ranks 25th in the nation – right smack in the middle.

Nevertheless, Buckley suggests state government's current need to cut budgets results from its unwillingness to tax residents more. If spending levels correlated with higher-quality government services or better performance, this might be a valid point.  Budget cuts almost always result in fewer services offered by the state, but rarely do they result in fewer state workers (labor is the most expensive part of any business).

When government services are cut, the "victims" of the cuts are always trotted forward – children without textbooks, elderly without care, or the mentally ill without help. These images make excellent anecdotes to drive home the "importance" of those services and protect agencies from cuts.  In market-driven businesses, on the other hand, service is what creates the revenue, so service is the last thing cut. The fact that in government, services are cut first and labor costs are cut last reveals the grubby footprint of politics, and indifference to the taxpayer.

Buckley had three proposals to stop the boom-bust cycle: 1) "restructure" the tax code (no actual plan was ever offered), 2) create a rainy day fund to mitigate the effects of economic downturns, and 3) create spending priorities.

But while Buckley explicitly stated she wants to end the boom and bust cycle of government revenues, that is neither realistic nor what she really wants to do. Her real desire is to stop the bust but keep the boom.

While a large rainy day fund is a must for a state dependent on a strong global economy, this approach only fixes the "bust" part of Nevada's revenue problem.

It was pointed out to Buckley that after the 2003 tax increase, Nevada's general fund revenue per capita spiked 22 percent (general fund revenue increased 28 percent) and overall government spending ramped up 17.6 percent. Buckley was asked what she planned to do about the "boom" part. Does she support spending limits?

"Thank you for your question" was her response.  She then stepped back from the microphone.

When pressed to actually answer the question, she said that setting "spending priorities" would solve that problem.

Nevadans should not be comfortable with this.  After all, past "priorities" led the state to spend every dime from FY 2004 onward.

In order to cope with boom-bust revenue cycles - stopping them would be impossible without control of the world economy – Nevada will need a rainy day fund and spending limits.  Simply raising taxes will not work.

In fact, the Tax Foundation study that Buckley cited notes that the corporate income tax is the most volatile of major revenue sources.  Nationwide, corporate income tax collections rose 24 percent in 2007 and fell 6.6 percent in 2008.  In comparison, Nevada's gaming tax revenue increased 13 percent in 2007 (a record-setting year) and fell 12 percent in 2008. Having a corporate income tax instead of a gaming tax would have left Nevadans no better off.

The whole idea that Nevada needs a diverse tax code is simply nonsense.  Of the states in America without personal or corporate income taxes, Nevada is the only one that recently faced a major revenue shortfall.  The difference?  Nevada politicians went on lavish spending sprees during good times and assumed the astounding growth rates would continue indefinitely.

Without spending limits, Nevada is doomed to only more vigorously repeat its booms and busts. If Buckley sincerely wants to deal with the state's boom-bust revenue cycle, she'll have to lead the fight for spending limits as well.

NPRI would welcome her to that fight.

Patrick R. Gibbons is a researcher for the Nevada Policy Research Institute.


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