How Nevada Should Raise $800 Million a Year Without the Margins Tax

There is no denying that education funding in Nevada is woefully inadequate. It is time to fix that.  Some groups have proposed a 2% tax on margins to raise $800 million per year.  It is not the solution.

The margins tax initiative would force companies to pay 2% of one of the following:

  • 70% of gross revenue
  • Gross revenue minus cost of goods sold
  • Gross revenue minus cost of employee compensation

This means that there is a minor deduction.  Most businesses do not run higher than 30% on either product or labor costs, so for simplicity sake, I will just use the 70% of gross revenue number.

This makes the true tax rate 1.4% of total receipts, regardless of actual profit.  A company could have made a large investment that made it unprofitable, but it will still pay 1.4% of its gross revenue to Nevada.  There could have been a catastrophic event in that year for a company, but it will still pay the margins tax in full.  The enormous increase in insurance costs affecting all businesses right now is not deductible, nor is rent, interest, depreciation, expansion, or anything else not directly tied to the cost of the product or the labor to produce it.

This Creates a Sales Tax on Groceries

Walmart’s profit margin is about 3%.  Its competitors profit at about half that rate.  Grocery stores run margins of about 1%. The margins tax will wipe out the entire profits of these businesses.  It is naive to think that these companies will operate in the red for the good of Nevada education.  They are going to raise prices to offset the new taxes.

The margins tax will be passed on as a cleverly disguised sales tax.  This will affect the poor disproportionately.  There are far better solutions to raising this money.

How Nevada Should Raise $800 Million a Year Without Margins Tax

There are so many segments of the Nevada economy that are not paying their fair share in taxes.  It is time to fix that.  Some will require residents to pick up some of the burden, but most of it will be at the expense of tourism and mining industries.

Raise the Gaming Tax Rate 

Nevada casinos make less of their income on a percentage basis from gaming than ever before due to the diversification of the Nevada tourism industry.  The numbers are returning to prerecession levels, meaning that casinos are actually generating more revenue now more than ever when taking amenities into consideration.

Nevada unrestricted gaming licenses won $11.1 billion in 2013.  That generated about $750 million in taxes at the 6.75% rate, which is the lowest in the country.  Only two other states (SD and NJ) are even below 10%.  Most are 20% and higher.

The casinos will fight any increase in gaming tax rates.  They will come up with a million excuses as to why it will hurt their business, but there is one fact that refutes their entire argument. Virtually every one of them is paying more in other jurisdictions and doing just fine.  Unlike those other states, they are not paying income taxes on nongaming income in Nevada, making their effective tax rate even lower.

The new Massachusetts gaming market has a 25% rate.  Three Nevada operators fought to enter that state.

Macau has an average tax rate of 39%.  That is still lower than some states. Pennsylvania is the number two gaming market in the country.  It taxes slot revenue at 55%.

The casinos can afford a 1% increase in gaming tax rates in Nevada.  That would raise $100 million.

Here is a list of all state gaming tax rates.

Tax Resort Amenities

More people are visiting to Las Vegas without gambling at all.  The state needs to get a bigger chunk of the money spent by these tourists that goes virtually untaxed.  A $2.50 increase per room in the hotel/motel tax would generate $81 million from the 125,000 Las Vegas area rooms, assuming a 90% occupancy rate.  This is about identical to what the margins tax would be, it is just more transparent.  Throw the rest of the state in there and that number easily exceeds $100 million.

Tax Restricted Gaming Licenses Similar to Resorts

Restricted gaming licenses are taverns and grocery stores that do not offer full services but have video poker and slots.  The maximum number of machines in a restricted gaming establishment is 15.  There is a tax and licensing fee of about $730 per machine each year.  A tavern with 15 devices pays about $11,000 per year in taxes. Some taverns make that in a day.

Let’s not pretend that these taverns are anything more than small video gambling establishments.  Tax them at the standard rate paid by unrestricted licenses, based on monthly win:

  • 3.5% of the first $50,000 during the month, plus
  • 4.5% of the next $84,000 plus
  • 6.75% of revenue exceeding $134,000

Tax Mining More

Nevada is the largest gold producer in the country.  There is only a 5% mining tax in the state.  That raised $236 million in the last fiscal year.  A 7% tax rate would put it in line with other major mining states.  We just found another $100 million.

A ballot initiative to remove the 5% cap on mining taxes will be voted on by Nevadans in November.  It would authorize the legislature to raise the mining tax.

Brothels

It is not often that a legal business comes along and begs to pay taxes, but that is what is happening in Nevada.  It seems that most politicians want to ignore that legalized prostitution even exists.  It is not going anywhere.  A majority of Nevadans either support it, feel it is a local issue, or simply do not care.

The live entertainment tax does not currently apply to brothels.  Setting the 5% LET tier on the industry would generate $365 million, based on numbers provided by the brothel owners in 2011.  Taxing it just 2% would bring in $146 million.

Cliffs

  • Raise gaming taxes 1%
  • Add $2.50 per night state tax on hotel rooms
  • Raise mining taxes 2%
  • Stop ignoring brothels, which are begging to pay taxes

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