Wednesday, June 1, 2016

Supreme Court Commerce Tax Decision Was Political

By Ron Knecht and Geoffrey Lawrence – 31 May 2016

In our last column, we explained that the defeat of efforts to repeal the commerce tax shows that Nevada’s political establishment – controlled by Big Gaming and Big Unions – owns not only many officeholders of both political parties, but much of state and local government.

We said that Nevada’s supreme court justices, as loyal members of the establishment, manufactured a bogus excuse to upset the referendum effort.  Today we explain why the court’s decision was political.

By statute, each signature page of a referendum petition must “[s]et forth, in not more than 200 words, a description of the effect of the initiative or referendum if the initiative or referendum is approved by the voters.”  This description of effect and the whole petition were drafted by the general counsel at the Nevada legislature to meet all required standards.

The court did not take issue with the description of the effect of passing the proposed referendum.  That text described the tax and noted that if it were approved, it would remain in effect and could not be changed by the governor and legislature.  Instead, the court complained that the description did not specify in enough detail the effects if the referendum were disapproved – that is, if the tax were repealed by the voters.

By its terms, the statute doesn’t require a description of the effects of voter disapproval of a referendum.  But the justices’ contention that such a description is required might be reasonable if those effects are substantial but not obvious.  So, are they?

The court states: “Eliminating the commerce tax thus will unsettle the balanced budget for this biennium, fiscal years 2015/16 and 2016/17, causing financial uncertainty for the government and thus the people of this state.”  For FY2015/16, this statement is absolutely false.  The referendum could not be passed by voters before November 8, 2016, and it could not be retroactive.  By the end of September, the books on FY2015/16 will be closed and all the commerce tax revenues will be collected and made available to spend. There’s no possible effect.

But for people who understand the budgeting, tax collection and spending process, the court’s claims are also substantively false for FY2016/17.  The court references the net $74.9 million that will not be collected for that year, as estimated by the Legislative Counsel Bureau.  We take no issue with that estimate.  However, the court misunderstands the budgeting impact of it.

If the commerce tax were repealed this November by voters, the fact $74.9 million would not be collected for FY2016/17 would mean only that the ending fund balance for that year would be reduced by that amount – not that any change would be required or made in any currently budgeted state spending.  Since the projected ending fund balance is more than three times that amount, the state could easily absorb such a revenue reduction.  In fact, it sometimes absorbs even larger reductions when actual revenues collected fall short of expected levels.

The only real consequence of the repeal would be that, due to the reduced ending fund balance, the dollars expected to be available for the following year, FY2017/18, would be reduced by that amount.  But no budget has even been set for that period, nor will one be set until the legislature meets next year.  So, there will be no “hole in the budget”, no “shortfall”, nothing “unsettled.”

Moreover, the $74.9 million reduction in revenues is less than 0.7 percent of total state spending in the most recently completed fiscal year.  Even with that reduction, total state spending is likely to rise about four percent.  So, the referendum’s effect is well-known and small, not substantial.  Everyone knows that when voters repeal a tax, the state will have less revenue than if they didn’t repeal it.  The description is not at all “deceptive”.  Especially contrary to Justice Nancy Saitta’s concurring opinion, the description is not “materially misleading” and petition signers have not been “both deceived and materially misled.”

Had the justices stuck to the numbers, one could assume they just misunderstood a very convoluted process in concluding there was a need to labor the alleged impact in the description.  But when they started larding their decision and concurrence with false and loaded rhetoric – “unsettled … financial uncertainty … deceptive … materially misleading” – they showed they were politically motivated.
Ron Knecht is Nevada State Controller.  Geoffrey Lawrence is Assistant Controller.

Ron Knecht
Economist &
Nevada Controller
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775-684-5777