It’s February of 2018 and we’re now less than a year away from the start of the next Nevada legislative session. Seems like a good time to talk taxes. State taxes, that is — we already looked at a version of the federal tax plan in our last Indy contribution.
The Tax Foundation has released its 2018 Business Tax Climate Index, and in it they found Nevada has the fifth most favorable tax environment for businesses. The index looks at five taxes – state income tax, sales tax, corporate tax, property tax and unemployment insurance tax – and weights them based on business impacts, then computes a score between 0 and 10 for each tax type and for the state overall (10 is the best possible score, achieved by not having the tax type in question).
Nevada’s 2018 score was 6.46, essentially unchanged since 2016. The passage of the Commerce Tax in 2015 knocked the state from the number 3 spot and dropped its index score by about one point. While the corporate tax structure is in the middle of the pack, its sales and unemployment taxes are near the bottom of the barrel. Nevada’s high ranking is due in large part to its absence of an income tax, which is given the most weight in the index, as well as relatively low property tax rates.
Tax climate is not the only factor that determines where businesses tend to locate, but large differences between neighboring states can have an impact. Nevada is fairly well-positioned in this regard, with California coming in at 48th place, and Idaho and Arizona coming in at 20th and 21st respectively. Oregon and Utah both fall in the top 10, but neither tops Nevada.
Let’s look a little closer at the areas in which our state is lagging, according to this analysis. When it comes to sales tax, the Tax Foundation looks at both the rate and sales base. Excise tax rates on items like alcohol, tobacco and gasoline are also included (marijuana is not). The foundation believes the ideal sales tax applies only at the final point of sale to a consumer, and covers all goods and services at a lower rate. This ensures a broad base and reduces the taxing of business inputs. Nevada only taxes goods, and with some exceptions. Also, just five states have a higher state sales tax rate. The state’s local sales tax and excise tax rates are also on the higher end.
Source: Sales Tax Index Map – Tax Foundation
Thankfully, while Oregon, Utah and Idaho have far better sales tax rankings, they aren’t positioned to siphon significant numbers of Nevada shoppers, with Mesquite and St. George perhaps being the exception. The Legislature could consider lowering the rate and broadening the base to improve its sales tax index. But there are also significant complications, as we noted in the 2016 sales tax on services study we prepared for UNLV.
Nevada performs worst when it comes to unemployment insurance taxes. These taxes often get less attention and are fairly complicated, with widely varying rates and bases. While Nevada’s top rate is tied for lowest in the U.S. and its minimum rate is also low, it has the ninth highest wage base on which the tax can be applied — $29,500. Compare that to “Taxachusetts” which only levies the tax on up to $15,000 in wages, or California which defies its generally dismal ratings to only apply its UI tax on the first $7,000 in wages.
Source: Unemployment Insurance Tax Index Map – Tax Foundation
Nevada is also one of the few states that charges for benefits even if an employee continues to work part-time. With the state having recovered from the Great Recession and paid off its bonds, one of its surcharges will go away and its rank should improve next year. Still, the state could look at streamlining its process and eliminating some of these surcharges and conditions to improve further. It could likely make some small tweaks to its base rate to cover any resulting shortfalls.
Overall, the state doesn’t need to rock the boat too much. The Commerce Tax doesn’t seem to be overly burdensome…yet, and the lack of a state income tax is a big boon – especially with the new state and local tax caps put in place by the feds. Still, election season approaches, and candidates will be talking about tax burdens and supporting business growth. This Tax Foundation report is one resource that might help voters separate real problems from rhetoric.
John Restrepo is an economist and the Principal of RCG Economics. He is an expert in regional economics and forecasting in Nevada and the Mountain West.
Disclosure: John Restrepo co-publishes the Stat Pack, a client of the communications consulting firm owned by The Nevada Independent’s managing editor, Elizabeth Thompson.