Economic Forum: Lombardo, lawmakers will have $11.4 billion for two-year budget
Gov.-elect Joe Lombardo and Nevada lawmakers will have $11.4 billion in projected tax revenues to construct the next two-year general fund budget covering July 2023-June 2025, marking a nearly $2.3 billion increase over the current two-year budget set in 2021.
That amount comes via the state’s Economic Forum, which projected on Monday a 2.9 percent increase in state tax revenues over the next two years, beginning in July 2023. The forecast increase in tax revenues also comes despite concerns from national economists that a recession could be on the horizon in the next year.
“Today’s economic forum shows Nevada’s economy is continuing our steadfast path toward recovery,” Gov. Steve Sisolak said in a statement Monday. “We are where we are today because of the actions we’ve taken over the last two years in the State to weather and recover from the COVID-19 pandemic, diversify our economy, get people back to work, and invest in education and affordable housing.”
The major increase in the size of the budget was driven by soaring collections from sales and gaming taxes, which have boomed amid an ongoing period of high inflation and relatively strong consumer spending.
Those factors have already driven up tax revenues in the past year. Collections reported in the last fiscal year and updated projections for the current fiscal year set Monday indicate the state will bring in more than $11.1 billion in tax revenues during the 2021-2023 biennium, a significant increase from the Economic Forum’s May 2021 projection of less than $9.2 billion in general fund revenues over the biennium.
The Economic Forum is a five-member panel of private sector business experts appointed by the governor, and the group is responsible for forecasting tax revenues for the state’s two-year budget cycles in December prior to legislative sessions and in May of years when the Legislature is in session.
The governor is required to submit his recommended budget to the Legislature in January of odd-numbered years shortly following the Economic Forum’s forecast for the size of the budget. Budgets requested by state agencies in October, totaling $10.8 billion in general fund dollars, reflect the large increases in tax revenues.
On the campaign trail, Lombardo promised no new taxes, meaning he would not approve any new sources of tax revenue. His promise came as strong tax collections bolstered the general fund budget significantly ahead of a legislative session in which Lombardo will have to work across the aisle with Democrats, who control both houses, to approve his desired budget.
"These numbers demonstrate there is no need for a tax increase of any sort, and I look forward to making my administration’s budget priorities fit within these projections while still acting fiscally responsible and saving money for a rainy day," Lombardo said in a statement Monday.
Though Lombardo will be recommending a budget to the Legislature, Sisolak said in a statement that his office “has been hard at work in developing the budget for the next biennium.” He added that that budget “reflects my administration’s priorities and continues to make investments in the health, safety and wellbeing of all our residents.”
The Economic Forum approved the new tax revenue projections after deciding between predictions submitted by individual state agencies, state fiscal analysts, the governor's budget office and, for select taxes, Moody’s Analytics. The projections include forecasts of the state’s major tax sources — including the Sales and Use Tax, Percentage Fees Tax on gaming revenues, Insurance Premium Tax, Modified Business Tax, Live Entertainment Tax, Real Property Transfer Tax and Commerce Tax — as well as a slew of smaller sources, such as business license fees.
In May, the Economic Forum will set a final revenue projection used to determine the two-year general fund budget. Lawmakers are constitutionally required to balance the state budget — spending no more than incoming tax revenue.
The projections approved by the Economic Forum Monday reflect the strong growth and recovery of the Nevada economy since businesses and the state budget were initially decimated by the COVID-19 pandemic in spring of 2020.
Despite concerns from some national prognosticators that the U.S. economy could enter a recession in 2023, Emily Mandel, an economist at Moody's Analytics, told members of the Economic Forum that she expects the economy to instead enter a slow growth period. That period could see layoffs and unemployment tick up, and she did not rule out the possibility of a recession.
But as Mandel and various state fiscal analysts walked through their projections for different tax revenues, they generally indicated that economic activity would remain strong enough to sustain gains made in revenue collections since the pandemic.
The projected tax revenues listed above reflect total general fund revenues after tax credits are applied. General fund revenues compose just one portion of the state budget, which also relies on billions in federal dollars and from other funds, including the State Highway Fund. Below, we further explore projections for several individual tax revenue sources.
Sales and Use Tax
The Economic Forum projected that the state’s Sales and Use Tax will generate more than $3.7 billion over the biennium, a 12.7 percent increase over the last budget cycle. Revenue from the sales tax is the largest single source for Nevada’s general fund, making up about one-third of general fund revenues.
The amount reflects a significantly heightened level of collections over the past two years that far exceeded previous projections, as inflation and booming consumer spending have resulted in record levels of taxable sales in Nevada.
For example, in the 2022 fiscal year ending in June 2022, Nevada collected more than $1.6 billion from the Sales and Use Tax, a significant increase from the $1.3 billion the Economic Forum projected to be collected that year when the Forum made its May 2021 forecast. Such excess revenue collections in the past two years — which have brought in more money than the state is legislatively approved to spend — have also triggered a major deposit into the state’s “Rainy Day Fund,” which can be used during emergencies to help fund state government operations.
Mandel pointed to a combination of “plusses and minuses” that she expects will contribute to “moderate growth” in sales tax revenue over the next couple years, which include continued wage and salary growth and a strong labor market that provide workers with funds to spend, as well as cooling demand from the higher cost of credit.
Gaming Percentage Fees Tax
As Nevada’s gaming industry has experienced a record streak of months with $1 billion or more in state gaming revenue, forecasters expect a slight dip in revenue over the next couple years as gaming spending is expected to decline.
The Economic Forum projected the state will collect $1.8 billion from the Gaming Percentage Fees Tax over the 2023-2025 biennium, a 3 percent decline from the current two-year period, based on actual collections for the 2022 fiscal year and revised projections for collections in the 2023 fiscal year.
Mandel pointed to several factors that could weaken gaming spend beyond 2022, even as the state’s casinos have raked in record amounts of money in the past year as consumers have had more cash to spend and as tourists have returned to Las Vegas en masse in the wake of the COVID-19 pandemic.
That included a fading level of vacation demand and the strong value of the U.S. dollar that could hurt international travel. Still, she noted there are multiple major events on the horizon that could bring in more tourists who will visit casinos.
Live Entertainment Tax
With a Formula 1 Grand Prix scheduled for next November in Las Vegas and a Super Bowl set for February 2024 in Las Vegas, the Economic Forum approved a projection of nearly $382 million from the Live Entertainment Tax over the 2023-2025 biennium, a nearly 17 percent increase over the current biennium.
That includes a spike in revenue from the non-gaming Live Entertainment Tax in the 2024 fiscal year, stretching from July 2023 to June 2024, as both major sporting events are expected to draw millions of dollars in ticket sales.
Christian Thauer, a state fiscal analyst, told members of the Economic Forum that he expects the two events could together generate more than $18 million in revenue from the Live Entertainment Tax.
But millions of those dollars could potentially be wiped out if the Las Vegas Raiders make the Super Bowl in 2024. Nevada-based professional sports teams, including the Raiders, do not have to pay the 9 percent fee on tickets that other large events are required to collect.
Aside from those major events, forecasters expect Live Entertainment Tax collections to remain broadly consistent over the next few years, as a widespread number of events, including Las Vegas shows and major concerts, are expected to continue bringing in revenue even in the face of economic headwinds that could limit spending from tourists.
Modified Business Tax
The Economic Forum projected the state will bring in nearly $1.6 billion from the state’s Modified Business Tax — a tax businesses owe on the wages they pay workers — over the two-year budget period, a decrease of about 6 percent from the last two-year budget cycle.
The decline comes as the rate of the tax will be permanently reduced beginning in July 2023, following a year in which collections of the tax exceeded projections by more than 4 percent, triggering the rate reduction under state law. The tax applies to workers’ wages, excluding the first $50,000 and health-care deductions, with higher rates charged to financial institutions and mining industries than all other businesses.
The tax brings in about 14 percent of Nevada general fund revenue.
Insurance Premium Tax
The Economic Forum projected Nevada will collect $1.24 billion in taxes on insurance premiums over the next two years — an 11.6 percent increase over the current biennium.
Jason Gortari, an economist with the Governor’s Finance Office, described the tax as a “relatively stable revenue source,” which “is not subject to fluctuations as much as the taxes that are closely aligned with tourism and spending.” The tax has generally risen as insurance costs for health care and homes rise.
Insurance premium taxes account for about 11 percent of Nevada general fund revenue.
Real Property Transfer Tax
One revenue stream expected to see a significant drop in the upcoming biennium is the Real Property Transfer Tax — generally regarded as a tax on property sales. With rising interest rates and declining home sales, the Economic Forum projected the tax to generate about $241 million in the upcoming biennium, a nearly 20 percent decline from the current biennium.
Revenue from the tax surged in the 2022 fiscal year, as home prices across the state surged and low interest rates saw home buying spike. But as the Federal Reserve combats inflation by raising interest rates, mortgage rates have hit a 20-year high.
“It appears the higher interest rates have spooked builders a bit,” Gortari said. “But it didn't discourage them enough to drop to those -2012 low levels.”
Gortari added that the forecast expects home sales to decline in the next year because of the higher mortgage rates.
For one of the state’s newer revenue sources, the Commerce Tax — a gross receipts tax on business revenue exceeding $4 million, with different rates based on industry — the Economic Forum approved a projection of $661 million in revenue from the tax over the two years of the next budget cycle.
That forecast reflects slight increases in collections each year, from $302 million in the 2023 fiscal year to nearly $322 million in the next fiscal year and nearly $340 million in the following year.
Unlike other major revenue sources, forecasts for the Commerce Tax are set as a consensus among the budget division in the governor’s office, the Department of Taxation and legislative fiscal division. The tax operates differently than most other tax sources, as it is collected at a different time and involves tax credits against other taxes.
The Commerce Tax generates about 6 percent of state general fund revenues.
Update: 12/6/2022 at 8:00 a.m. - This story was updated to include a statement from Joe Lombardo.