Judge sides with state Senate GOP in lawsuit challenging extended payroll, DMV taxes
A judge has ruled that Nevada lawmakers violated the state Constitution by approving extensions of more than $100 million in set-to-expire taxes at the end of the 2019 Legislature, ruling in favor of state Senate Republicans who filed the initial lawsuit more than 15 months ago.
Carson City District Court Judge James Russell issued the ruling from the bench on Monday, saying that state lawmakers had violated the constitutional two-thirds vote requirement for tax increases in passing two bills during the last session that extended tax rates or fees that were set to expire. The two taxes included a higher payroll tax rate (expected to raise more than $98 million over the two-year budget) and a $1 per transaction “Technology Fee” for the state Department of Motor Vehicles.
Russell — who noted that he reviewed four separate dictionary definitions of the word “generate” prior to the hearing — said it was clear to him that the extension of a tax rate that would otherwise expire met the constitutional threshold for a two-thirds vote, which applies to any bill that “creates, generates, or increases any public revenue in any form.”
“That was revenue that was there and would have gone away with respect to this particular matter,” he said on Monday. “But for the deletion of the tax computation mechanism, these taxes would not have produced. This amount of money wouldn’t even exist.”
Russell also ordered the state to pay back tax revenue collected through the higher tax rates. But he noted that the matter is likely to head to the state Supreme Court, and the issuance of a stay could delay any repayment of tax fees for several months to more than a year.
He also agreed to remove four named defendants — Senate Majority Leader Nicole Cannizzaro, Senate Secretary Claire Clift, Lt. Gov. Kate Marshall and Gov. Steve Sisolak — from the case, leaving just the DMV and the Department of Taxation as defendants.
Still, Republican Senate Minority Leader James Settelmeyer — who attended the hearing — said the ruling was a “slam dunk” victory for affected businesses and state taxpayers. While he wished a decision had come sooner, Settelemeyer said, the court’s ruling backed up the original complaint of Senate Republicans that they were not included in discussion around a potential tax (state Senate Democrats hold a 12-8 seat advantage but need one additional vote for a two-thirds majority).
“They should have done it right to begin with,” he said. “We weren't, as Senate Republicans, saying we were against taxation. We weren't saying no. We're saying we needed to have a discussion, we had to be involved in it, we had to make some decisions together. And that wasn't being done. It was all being decided one way.”
In a joint statement on Tuesday, Senate Majority Leader Nicole Cannizzaro and Assembly Speaker Jason Frierson said they "wholeheartedly disagree" with the court's decision and planned to appeal.
"We intend to appeal the decision to the Nevada Supreme Court on an expedited basis to provide clarity on this matter before the start of the next session," they said in an emailed statement.
During oral arguments on Monday, attorneys largely re-litigated the final days of the 2019 Legislature and ultimate passage of the bill extending the life of a set-to-expire payroll tax rate, as well as constitutional definitions of the words “generate” and “create.”
The hearing stemmed from a lawsuit filed by all eight state Senate Republicans in July 2019 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 a two-thirds majority, constitutionally required for any tax increase.
Legislative Democrats, in part relying on a legal opinion from Legislative Counsel Bureau lawyers, argued that removing a scheduled decrease in a tax rate was not the same as voting to raise an existing tax or enact a new one.
That argument was reiterated by LCB General Counsel Kevin Powers, who said during oral arguments that there was a clear and important distinction between operative and effective dates of when laws were enacted. As nothing changed for the businesses in terms of the tax rate, he said, it shouldn’t be considered an increase in revenue.
“There was a maintenance of the current level of collection,” Powers said. “Nothing changed from before the bill passed, to after the bill passed. The amount collected and the computation base remained the same.”
The first hearing on the merits of the case came nearly 16 months after the initial lawsuit was filed, owing to a lengthy legal dispute over whether legislative attorneys could participate in the case.
Earlier this year, the Nevada Supreme Court issued a 5-2 ruling allowing attorneys with the nonpartisan Legislative Counsel Bureau to represent Cannizzaro and Clift in the case, even though they also represent the Republican senators during normal legislative sessions.
That decision reversed an earlier decision by Russell, who ruled last November that the LCB attorneys could not represent Cannizzaro and Clift as the case involved one group of lawmakers suing another group of legislators.
An estimated 22,000 businesses pay the Modified Business Tax, a 1.475 percent payroll tax assessed on businesses with more than $50,000 in taxable wages per financial quarter. Finance and mining businesses pay a 2 percent rate.
Updated on Sept. 22 at 12:10 p.m. to include a joint statement from Senate Majority Leader Nicole Cannizzaro and Assembly Speaker Jason Frierson.