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Economy & Business | State Government

Attorneys spar before Supreme Court over legal division’s role in payroll tax lawsuit

The Nevada Supreme Court building in Carson City as seen on Monday, Aug 14, 2017. (Jeff Scheid/The Nevada Independent)

The legal fight between Republican senators and Democratic lawmakers over a controversial payroll tax extension has made the first, but likely not last, stop in the state’s Supreme Court.

Oral arguments in front of the seven-member Nevada Supreme Court on Tuesday didn’t deal with the primary issue of whether state lawmakers can extend an expiring tax rate without the two-thirds majority vote usually required for an increase in taxes.

Rather, it focused on whether attorneys employed by the nonpartisan Legislative Counsel Bureau can represent select legislators named in a lawsuit brought by another legislator. An attorney for Republican senators, Karen Peterson, said the nonpartisan legal staff intervening in the lawsuit was an obvious conflict of interest, while LCB attorney Kevin Powers staunchly defended the legal division’s involvement in the case.

Justices did not rule from the bench but said they would attempt to deliver a decision “expeditiously,” which would clear an important hurdle in the lawsuit brought by state Senate Republicans over a pair of bills — one removing a scheduled decrease in a payroll tax and another extending a $1 per transaction DMV technology fee — passed during the 2019 Legislature with less than the two-thirds majority constitutionally required for any tax increase.  

In total, the extended tax rate is worth roughly $98 million over the two-year budget cycle, largely directed toward education spending.

The matter before the state’s Supreme Court is an appeal of a District Court decision to bar LCB attorneys from representing Senate Majority Leader Nicole Cannizzaro and Senate Secretary Claire Clift, both of whom are named in the lawsuit. Approval for the appeal came from the state’s Legislative Commission — an interim body that reviews and approves regulations by state agencies — during somewhat contentious meetings both last week and in December.

The court issued a temporary stay of the district court decision in January, but a final ruling on the question of continuing the tax rate will likely appear before the Supreme Court in the future.

Powers said that legislative attorneys were exempted from the normal conflict of interest rules because of provisions in state law that allow government lawyers a wider breadth of activity than normal attorneys, and he accused the Republican senators of intentionally naming Cannizzaro and Clift in the lawsuit as a means to invite conflict of interest questions.

“This is a strategy that the plaintiff senators chose, to sue their organization but to bypass the actual organization and sue the members in an official capacity, which essentially created this conflict of interest,” he said. “Had they just simply followed the rules of the game where the taxpayers sue the department that administers the law, this would've never come up. They chose this path.”

Powers also said that it was functionally irrelevant that the LCB’s legal division had during the 2019 legislative session issued an opinion finding that lawmakers could extend the payroll tax without a two-thirds vote, saying that the agency’s only role was to defend the organization and Legislature regardless of the majority party.

“We (would) provide the opinion,” he said. “The Legislature (could) act contrary to it but it's their right to pass legislation, even if it's contrary to our opinion.”

Peterson, who noted that several Republican senators including Minority Leader James Settelmeyer were in attendance, said that the arguments made by Powers and the LCB were “very dangerous” and had the effect of essentially rendering the minority party out of ever being considered a “constituent” worthy of legal representation as long as it was on the losing side of any majority vote.

“If you don't agree with LCB legal or you don't agree with a measure that was passed by the Legislature, which is deemed valid until proven otherwise or ordered otherwise by the court, then you're not a duly authorized constituent of the organization,” she said.

She said that the LCB’s arguments against the alleged conflict of interest violations had an absurd result and essentially required the legal division’s “client” (lawmakers named in a lawsuit) to tell their “lawyer” that they had a conflict of interest — a reversal of usual practice.

“I'm going to ask you to look at this as practicing attorneys, when you had clients, and put yourself in our client's shoes where they're sitting behind this counter table, and their LCB attorneys are sitting over here on this side of the courtroom,” she said.

But Peterson faced pointed questions from justices, including James Hardesty who pushed back on her assertion that the LCB’s legal division had decided to “pick and choose” sides in the case. 

“I don't want assumptions,” Hardesty said. “Is there an affidavit? Is there testimony? Are there memos? Where in the record does it demonstrate that (LCB Legal Division employees) Brenda Erdoes or Kevin Powers chose to appear and represent the Legislature in this case, before the Legislative Commission voted to do so?”

“There isn't anything, your honor,” she replied. 

An estimated 22,000 state businesses are required to pay the Modified Business Tax, a 1.475 percent payroll tax assessed on business entities with greater than $50,000 in taxable wages per financial quarter. Finance and mining businesses are required to pay a 2 percent rate. 

Although the tax was created in 2003, the percentage rate was set in 2015 as part of a move by former Gov. Brian Sandoval to raise more than $1.1 billion in new and extended taxes for education funding. As part of the tax increase, lawmakers included a provision automatically lowering the rate if other tax revenue streams brought in more than projected by the state’s Economic Forum.

That “buy-down” was triggered in late 2018 and was set to take effect in July 2019, but Gov. Steve Sisolak and legislative Democrats stated out the outset of the 2019 Legislature that maintaining the tax rate was a priority. Attorneys with the Legislative Counsel Bureau’s legal division issued an opinion in early May 2019 declaring that a two-thirds majority was not required to nix the scheduled tax rate decrease, leading lawmakers to pass the bill on the last day of the 120-day legislative session.

Unless struck down by a court, the extension of the existing payroll tax rate is expected to generate about $98 million over the biennium and is earmarked toward school safety initiatives ($16.7 million), teacher raises ($72 million) and the Opportunity Scholarship program ($9.5 million).

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