The Nevada Supreme Court has ruled in favor of state Senate Republicans in a 2019 dispute over extended payroll taxes and DMV fees, setting clear limits on legislative efforts to avoid the constitutional two-thirds majority requirement for tax increases while also blowing a substantial hole in the state budget.

The order issued Thursday affirmed a lower court ruling, finding that the bills were unconstitutional and the District Court was correct to bar their enforcement.

The ruling came just 10 days after attorneys squared off in oral arguments over the case, but more than 21 months since the initial lawsuit was filed by state Senate Republicans.

In the order, members of the court wrote that the broad language of the Constitution would “plainly encompass” a bill that brought more revenue into the state than it would have realized without it. 

“Because both bills create, generate, or increase public revenue such that the plain language of the supermajority provision applies, the district court correctly determined they were unconstitutionally passed in the Senate with less than a supermajority vote,” the decision read.

The court also wrote that it found arguments made by attorneys for the Legislature “unconvincing,” saying that adopting their arguments would result in a part of the Constitution being rendered “superfluous, as it would require us to ignore the constitutional provision’s use of the word ‘any’.”

“...Accepting the state’s argument that the provision only applies to bills that directly bring about new or increased taxes would require us to read language into the provision that it does not contain — a task we will not undertake,” the order states.

Sen. Keith Pickard (R-Henderson) said he was disappointed in the lawmakers involved in passing the original bills.

“I'm mostly saddened. We knew this was coming. We knew that what they did was wrong. They knew what they did was wrong. And they did it anyway. And I think that speaks volumes as to their attitude,” he said in an interview on Thursday. “They swore an oath to defend and protect the Constitution. And they jettison that for political purposes, and deliberately. Personally, I think they should be removed from office for it. But that's not how we do things.”

Pickard’s razor-thin, 24-vote victory in 2018 is what blocked Democrats from securing two-thirds supermajorities in both the Assembly and Senate.

In a joint statement, Senate Majority Leader Nicole Cannizzaro (D-Las Vegas) and Assembly Speaker Jason Frierson (D-Las Vegas) said they would "call on our colleagues" to work on "meaningful revenue legislation this session," while blaming legislative Republicans for pushing the lawsuit to "protect the bottom lines of some of the state’s largest corporations at the expense of Nevada schools."

"It is disheartening that Nevada families must pay a price for a lawsuit from colleagues who were unwilling to stop playing partisan politics with our children’s education dollars," Democratic leaders said in a statement. "Despite their misguided decision to push forward, even in the face of unprecedented shortfalls to our state's budget this past year, we will continue to seek ways to require large, profitable corporations to pay their fair share and support Nevada families."

Beyond answering a constitutional question, the decision will have substantial ramifications for the state budget, with just days to go before the end of session. Republican Senate Leader James Settelmeyer (R-Minden) said in a recent interview on Nevada Newsmakers estimated that the state would need to pay back around $107 million in unconstitutionally collected payroll tax, and wipe out a similar amount off the books for the coming two-year budget cycle.

But Settelmeyer brushed aside concerns that the development would do serious damage to the budget, pointing to higher-than-expected revenue projections from the Economic Forum.

"Economic Forum came in with over $900 million of money we did not anticipate. So how this creates a major hole is just a joke," Settelmeyer said in an interview. "What this means is they shouldn't have stolen the money from the citizens of the state of Nevada in the first place. They should have followed the Constitution."

He added that the decision means Democrats "might actually have to talk to the minority party and have discussions and work in a bipartisan way, rather than the pathological way they've been operating."

In an interview, Cannizzaro said the positive news from the Economic Forum helped, but do not solve all the budget cuts the Legislature has been making. She also said it's "simply not true" that Democrats were not reaching across the aisle.

"At some point you can't just keep hiding behind two thirds to not step up and do the thing that we have to do," she said. "We should be working in a bipartisan fashion ... When we get up and we say, we care about education, we want to support education, we want to support teachers, support students — if you're willing to make those statements, you should also be willing to back that up with a vote to put money into those places."

In a statement, Gov. Steve Sisolak said his office will “continue to work with legislative leadership on budget implications and State officials will analyze the decision to determine next steps.”

The legal dispute emerged when the Democrat-led Senate passed a bill in the 2019 session that extended a higher rate for the modified business tax (payroll tax) that was otherwise set to revert to a lower level. The proposal initially failed to garner a two-thirds majority when all Republicans opposed it, but Democrats then amended the bill by removing the two-thirds requirements and passed it.

Tax increases in the state require a two-thirds majority vote, and Democrats were one member shy of that threshold in the Senate in 2019. Attorneys with the Legislative Counsel Bureau had issued an opinion beforehand saying a two-thirds majority was not required to nix the scheduled payroll tax decrease.

A Carson City judge sided with state Senate Republicans in a 2020 decision. 

When the payroll tax rate was implemented in 2015 as part of a tax package backed by then-Gov. Brian Sandoval, it included a provision that automatically reduced the rate if tax revenues overperformed projections. Republicans said preventing the mechanism from working would effectively increase revenue and thus should be subject to a two-thirds vote.

About 22,000 businesses pay the levy, which is a 1.475 percent tax on businesses with more than $50,000 in taxable wages per financial quarter, and a 2 percent tax for businesses in the finance and mining sectors.

Republicans also pushed back when Democrats extended a $1-per-transaction “technology fee” at the Department of Motor Vehicles without two-thirds support. The proceeds of the fee support a modernization project that has been taking longer than expected.

The court’s decision also denied a request by the plaintiff Republican senators for attorney’s fees and costs, finding that the defendant lawmakers were broadly protected by the principle of legislative immunity — a doctrine that protects legislators from being sued for actions taken “within the sphere of legitimate legislative activity.”

Updated at 8:57 a.m. on May 13 to add additional information from the court's order. Updated again at 9:17 a.m. to add a quote from Sen. Keith Pickard and Gov. Steve Sisolak. Updated again at 9:42 a.m. to add a statement from legislative Democratic leadership. Updated again at 1:52 p.m. to add statements from Sens. James Settelmeyer and Nicole Cannizzaro.