Road to Recovery: Economic Forum finds tax revenues overperforming
Welcome to the fourth installment of “Road to Recovery,” a recurring feature that provides semi-regular updates on Nevada economic news and data.
The state’s economy has been hit hard by the COVID-19 pandemic. Restrictions on public activity have resulted in businesses closures and thousands of lost jobs, and many parts of the economy have yet to return to their pre-pandemic state. As Nevada’s recovery from the pandemic continues, this series will take a closer look at the most important economic indicators across the state.
You can find the latest data on our “Nevada Recovery Dashboard” data page and on Twitter. (Follow Tabitha Mueller for updates on housing data and Howard Stutz for updates on gaming and tourism numbers). Also, feel free to reach out to [email protected] with any questions.
On Tuesday, a state-appointed panel of private sector business experts heard presentations from government officials and financial analysts about the condition of the Nevada economy, including how tax revenues during the pandemic are outperforming expectations, the impact of federal stimulus dollars and a slow recovery in the casino and hotel industry.
Below, we take a closer look at the discussions of the panel, also known as the Economic Forum, which provides forecasts of tax revenue streams used to determine the state’s budget.
Federal aid bolsters sales tax revenue
In fiscal year 2021, which ended in June, state general fund revenues — including major tax revenues, such as the sales tax and payroll tax — brought the state $220 million more than it expected, surpassing projections from the Economic Forum’s May meeting.
That trend has continued in the 2022 fiscal year, which began on July 1, as year-to-date revenues have outperformed Economic Forum projections by more than $360 million.
Those higher-than-expected revenues were largely driven by sales tax revenue, which typically accounts for more than a quarter of the state’s tax base. Russell Guindon, a fiscal analyst with the Legislative Counsel Bureau, said the reported sales tax revenue was more in line with older forecasts made before the panel even knew there would be a pandemic and recession.
“When you look at the sales tax, it sort of really demonstrates how difficult forecasting can be and then the interesting results that can come out of it,” Guindon said.
Other state economic data shared during the Tuesday meeting explains how sales tax revenues outperformed projections, despite Nevada’s other economic struggles, including a nation-leading unemployment rate.
Guindon said that in 2020, personal income in Nevada increased by nearly $10 billion over 2019, even as income from wages and salaries decreased by $2.5 billion amid the pandemic and spike in unemployment. Although thousands of Nevadans lost their jobs last year, people earned more money through enhanced unemployment funds and stimulus payments directly from the federal government. With more money circulating in the economy, taxable sales increased.
The strong tax numbers even prompted Economic Forum Vice Chair Linda Rosenthal to ask whether the committee could redo its May forecast.
The Economic Forum typically meets in December before legislative sessions and in May during a legislative session to set the revenue projections on which the state budget is based. The panel also meets in June and December on off-years to discuss general economic trends and year-to-date tax performances.
However, Guindon noted that the Economic Forum convened multiple times during the Great Recession, as forecasts had to be lowered amid the economic downturn. Gov. Steve Sisolak or the Legislature could call on the Economic Forum to provide a revised forecast that “then could be used to make adjustments to the budget in a special session,” Guindon said.
“But clearly, when you don't have enough revenue to fund the budget that's put in place, that's a much different dilemma than when you have more than enough revenue to fund the budget,” he added.
State budget reduced when payroll tax struck down
Even with various state taxes bringing in more general fund revenues, a Nevada Supreme Court ruling from May that struck down an extension of a heightened rate for the modified business tax (also known as the payroll tax) ended up costing the state tens of millions of dollars in refunds.
Only days after the most recent economic forecast in May, the ruling required the state to issue more than $80 million in refunds and interest for collections made on the higher tax rate, which was extended by the Legislature in 2019 without a two-thirds majority needed for tax increases.
The ruling also reverted the tax back to its lower rate, meaning state lawmakers had to account for about $100 million less in its general fund budget in the 2021-2023 biennium than it would have otherwise collected with the higher tax rate.
But that loss was partially offset by actions and new taxes approved by lawmakers during the 2021 session, adding about $160 million in additional general fund revenues for the biennium. Those extra dollars were primarily the result of a new mining tax, enacted through AB495, which is expected to raise a total of $165 million pre-tax credits during the current budget cycle.
However, the money from that mining tax will only be deposited in the general fund through fiscal year 2023, and going forward will instead be deposited in the state’s education fund beginning in fiscal year 2024, per the provisions of the bill.
Between the court decisions reducing revenue projections and bills approved by the Legislature increasing them, state general fund revenues forecasted by the Economic Forum are expected to increase by a net $50 million for the 2021-2023 biennium, a change that does not account for the overperforming tax revenues.
Casino employment woes could facilitate diversification
Department of Employment, Training and Rehabilitation Economist David Schmidt highlighted that the good economic news has not fixed the ongoing struggles within the casino and hotel industry.
Schmidt’s presentation Tuesday showed that even as employment in many industries has returned or even surpassed its pre-recession peak — including employment in mining, transportation and retail trade — employment within Nevada’s casino and hotel industry is still at two-thirds of its recent peak in March 2019. That amounts to a loss of more than 60,000 jobs, and Schmidt said many of those jobs may not come back at all.
“I think there may be some ongoing or larger structural shifts in that industry to accomplish more with less,” Schmidt said.
In the past year, growth within that industry has remained relatively flat, Schmidt said, with only 5,000 jobs being added, as casino and hotel industry employment remains over 100,000. But that could have a positive side effect.
“The consequence of shrinking casino hotel growth and growth in other industries is more diversification,” Schmidt said.
Though Nevada still ranks first in the nation in terms of its share of employment within the accommodation sector, the state has seen that industry’s share of total employment fall more than any other state within the last ten years, and the drop-off accelerated during the pandemic.
During the same time period, Nevada has seen other industries, including the goods-producing, construction and transportation sectors, increase their share of the state’s overall employment.
“All of these other areas have been growing and increasing the overall diversity of employment that we see in the state,” Schmidt said.
Uncertainty about effects of federal relief dollars
A massive influx of funds is coming into Nevada via the American Rescue Plan (ARP), but uncertainty remains as to how those federal relief funds might affect the state’s economy.
Lesley Mohlenkamp, the coronavirus federal aid coordinator for the Governor’s Finance Office, said that it is still too early to tell how many jobs will be created by the ARP’s $136 million bucket of funding for capital projects — which covers infrastructure costs for new building construction, or maintenance and repair for existing properties.
And even though the Interim Finance Committee has allocated several billion dollars worth of ARP funds, state officials were unable to identify how much of that money has been expended (though they indicated that it is likely not a large share of the state’s ARP funds).
Shauna Tilley, from the Governor’s Finance Office, noted the difficulties of allocating the $6.7 billion Nevada agencies received from the ARP with varying requirements on how it can be spent and how its uses must be reported.
“This is a much more complex and comprehensive federal aid program than the previous coronavirus relief funds,” she said.
The state is working on building a “roadmap” for expending its share of general aid funds following a statewide listening tour, while at the same time determining how to implement more than $4 billion from the recently passed federal infrastructure bill.
Economic Forum Chair Craig Billings characterized the ARP dollars as a “multi-year stimulus,” as the state will have until the end of 2024 to allocate the funds and another two years to actually spend the funds.
With that timeline, Tilley noted that the ARP dollars may be flowing into the state economy at different rates, as some dollars are used for more immediate needs, such as rental assistance, while others are used for longer-term investments.
The outperforming tax revenues could also affect what ARP funds the state is able to dedicate as “lost revenue,” defined as revenue lost as a result of the COVID-19 pandemic that can be used to backfill and fund general government services. State officials previously used a U.S. Treasury formula to designate $1.1 billion of the state’s $2.7 billion in ARP general aid as lost revenue.
“Do we actually have $1.1 billion revenue loss? And I don't know, when you look at the numbers,” Guindon said. “Under the federal guidelines, we’ll be required to do that calculation three more times … to then be able to use these federal funds for revenue loss provisions.”
Correction: This story was updated on Friday, Dec. 10 at 11:05 a.m. to accurately reflect the composition of the Economic Forum.