Rising from the Recession
By Michelle Rindels and Riley Snyder
On Sandoval's watch, Nevada has risen from hardest-hit to fastest-growing state, but some wonder if he's focused on business at the expense of workers.
On Sandoval's watch, Nevada has risen from hardest-hit to fastest-growing state, but some wonder if he's focused on business at the expense of workers.

Third of a five-part series examining outgoing Gov. Brian Sandoval’s legacy in politics, health care, economic development, education and the environment.

When Gov. Brian Sandoval was elected in 2010, the Nevada economy was still at rock bottom.

The unemployment rate reached 14.5 percent, worst in the nation, after the state shed more than 186,400 jobs from its pre-recession peak. An estimated 80,000 construction workers were out of work. The state had the highest rate of foreclosures and would maintain that dubious title until well into 2012.

“We made a decision that we were never going to look back, we were never going to feel sorry for ourselves, that we were indeed going to be relentlessly optimistic, that we were going to fight every step of the way,” Sandoval recalled about that dark hour during the October unveiling of his official portrait. “I’ve always believed in the people of this state. Always.”

Eight years later, Nevada has recovered all the jobs it lost and more, ending 2018 as No. 1 on an index of states’ economic momentum. Tax revenues are up, and the state lured high-profile businesses to move in, including a massive, coveted Tesla battery factory.

Sandoval led a reworking of the state’s economic development strategy, engaged in personal diplomacy with businesses around the globe and made decisions about when and when not to raise taxes. But how much credit does he deserve for the turnaround, and how much is simply a side effect of a national economy that’s seen 114 consecutive months of economic growth?

An analysis from the Governor’s Office of Economic Development indicates that in seven industry sectors that GOED has focused on, the number of jobs created since 2010 has been almost 53,000 higher than would have been expected based on national economic growth and industry-specific trends. The only focus sector with lower-than-expected performance was Nevada’s already dominant hospitality industry.

Observers say both national and state factors were at play, but that Sandoval’s steady management and moderate approach helped the state rebound more effectively than it would have absent his leadership. And some say that his decision to let go of a no-new-taxes pledge helped prevent the state hardest hit by the recession from falling too far behind.

“I think that the governor and the Legislature … did a pretty reasonable, decent job,” said John Restrepo, principal of RCG Economics. “Not that more can’t be done. A lot more can be done, but I think we have moved forward, maybe not at the speed that most would like, but I think at least we’re heading in the right direction.”

Others have an even sunnier outlook.

“I think it’s been a transformative decade in Nevada,” said Brian Krolicki, who served as lieutenant governor during Sandoval’s first term and was treasurer in the late 1990s and early 2000s. “I think Nevada has reached a new plateau, and if you ask people who are not from Nevada what you think about our state 10 years ago, 20 years ago, versus today, I think they’d have a very different story and perception of what our state means and what it provides.”

Steve Hill, chairman of the Las Vegas Stadium Authority Board, asks a question to members of the Oakland Raiders, while board member Lawrence Epstein, senior executive vice president for Ultimate Fighting Championship, looks on during a meeting at the Clark County Commission Chambers on Thursday, Aug. 17, 2017. Photo by Jeff Scheid.

Reworking economic development

One of Nevada’s greatest liabilities has been its heavy reliance on the hospitality sector, which consists of 429,000 jobs (or nearly a third of its total workforce). Nevada’s dependence on tourists spending freely on a trip to Las Vegas made the state especially vulnerable when the latest recession sapped discretionary income, but it was an issue well before that.

“When I was treasurer, one of the great arguments I would regularly have was with Wall Street rating agencies,” Krolicki said. “We were too reliant on gaming and hospitality. Riverboats and tribal gaming across the country — they were all threats. We were more limited and less sophisticated in our economy, although what we had was world-class.”

But Steve Hill, former director of the Governor’s Office of Economic Development, said there was still resistance to proactively diversifying the economy. Gaming and mining industry players worried that new jobs coming in wouldn’t pay enough, leaving those incumbent industries to pick up the tab on governmental services through higher taxes.

“Ten, twenty years ago there was concern that diversifying the economy would, frankly, cost the gaming industry and the mining industry more money,” Hill said. “Those industries felt that they would be subsidizing that effort. So there was kind of an evolution … from pushing back on economic diversification, to reluctant acceptance.”

Prior to the Sandoval administration, economic development was the purview of the lieutenant governor and a variety of regional development authorities worked on the issue, but there was not a centralized, statewide clearinghouse, much less a significant pool of resources that could be used to lure new companies.

“It was a very passive organization. It was more of marketing and waiting for the phone to ring,” said Paul Anderson, director of the Governor’s Office of Economic Development. “There was no toolset, there were no abatements, there were no scholarship programs like the WINN (Workforce Innovations for a New Nevada) fund, none of that existed.”

Instead, Restrepo said the state’s primary pitch to businesses was that Nevada wasn’t like its western neighbor.

“The best I could tell, particularly in Southern Nevada, our whole economic development strategy was, ‘California, you’re lousy; we’re not,’” he said. 

As the economy reached its nadir in 2010, a half dozen groups started working on a strategy to coordinate their economic development efforts. Hill, who had founded a concrete supply company and served on several state commissions, helped distill the ideas just before the election.

He also spent two weeks traveling to a handful of states including Utah, Georgia and Colorado, and talking to researchers at the Brookings Institute in Washington D.C. about the best methods of economic development. The ideas went to legislative leadership and ultimately informed a bill that emerged in 2011, creating a full-time Governor’s Office of Economic Development (GOED) that answered directly to Sandoval instead of the lieutenant governor. It also included a Catalyst Fund and a Knowledge Fund to help start-ups and commercialize new technology, respectively.

“We know that just being the cheapest doesn’t necessarily get us the wins that we’re after,” said Anderson, who served in the Legislature during much of the Sandoval administration. “So going from reactive to proactive was a significant shift.”

In the years since GOED was created, companies that received its assistance brought in 33,325 upfront jobs, and were expected to create nearly 62,000 jobs after several years in the state. In total, the companies GOED helped made $23 billion in capital investment; about $21 billion of that was from companies that received incentives.

GOED is perhaps best known to Nevadans for giving tax abatements as an incentive for expanding within or relocating to the state. But it does not give abatements to just anyone who applies — recipients have to meet a variety of requirements, most notably that the business exports at least 51 percent of the goods and services it offers out of state.

The export requirement aims to grow the size of the Nevada economy by spurring primary jobs such as manufacturing, as opposed to secondary jobs that offer goods or services to businesses within the state — such as accounting or law firms.

Out of the 624 companies that GOED assisted from 2010 through 2018, 270 — less than half — received monetary incentives. Businesses that don’t qualify for incentives can still receive help from GOED, which offers information that helps firms relocate and works with other agencies such as the secretary of state’s office to cut any red tape that may be preventing a business from growing in Nevada.

Anderson chafes at the criticism that his agency is picking winners and losers within the economy, pointing out that Nevada law lays out requirements for who qualifies and anyone meeting those benchmarks is eligible to receive them.

“Picking winners and losers is a situation where … I pick companies that don’t export products or services. That would be like incenting a restaurant on this corner but not on that corner,” he said. “All I’m doing is slicing the pie into smaller pieces. It’s the same size of a pie, I’m just making it into smaller pieces for everybody. My job here is to grow the pie.”

There are also wage requirements. Businesses must pay at least the average wage in Nevada — now $21.65 an hour — to qualify for incentives. So as unemployment dropped and Nevada has become less desperate for jobs, GOED has raised its standards.

“We needed to get people employed. So we had successes with call centers and stuff that wasn’t high wage, but they were jobs,” Sandoval said in an interview. “So now, we have essentially made the bar higher in terms of those companies that we consider for abatements.”

Restrepo credited Hill and Sandoval for being “relatively responsible” in approving tax incentive and abatement structures for relocating businesses, saying the wage and employment requirements helped combat the perception that the deals were “a big giveaway.”

Anderson said he understands the agency has been criticized on multiple fronts for the abatements. Some point out that the largest, most successful companies don’t need subsidies and are playing states in a “race to the bottom.” Others focus on how waived taxes could have otherwise supported cash-strapped schools.

“We shouldn’t be giving Switch, Tesla, Google, Apple, all these companies that have double-digit billions market capitalization rates, tax breaks so they can come here, drive up our rents, create billions of dollars of unfunded infrastructure costs,” said Bob Fulkerson, former head of the Progressive Leadership Alliance of Nevada. “We have a great quality of life in Nevada. This is a great place to live. They should be paying us to live here.”

But Anderson said that competition between states is fierce. Leaving things to chance is what Nevada had done for decades, and the result was spurring the incumbent casino and mining industries while not cultivating new industries.

Sandoval agrees Nevada should not sit out of the multi-state competition.

“If you’re a researcher and you’re in your cubby and on your computer, if you want to be pure, then it sounds really nice, but in the real world, you can’t,” he said.

Nevada Governor Brian Sandoval, center, prepares signs bills during an event inside the Tesla Energy Warehouse in Las Vegas on Thursday, June 15, 2017. Daniel Clark/The Nevada Independent Follow @DanJClarkPhoto

Tesla, Faraday and the Raiders

Despite the broad changes in the state’s economic development strategy, and the other work of GOED that includes frequent international trade missions and seeking to monetize expertise within the state on water conservation and gaming, Sandoval’s economic development legacy might boil down to the massive tax incentive deals offered by the state to Tesla, Faraday Future and the Raiders.

Sandoval and his team were closely involved in negotiations over the scope of each of the deals, from the size of tax incentives to the structure of obligations and physical location of each project.

The three special sessions convened by the governor to officially approve the deals marked the first of their kind in the state since 1984, when former Gov. Richard Bryan convened a special session changing state banking law to entice Citicorp to open a credit-card center in Southern Nevada.

Hill pushes back on the idea that the Tesla deal — which involved giving $1.3 billion in tax incentives over 20 years to the company on the condition it build a $5 billion factory and create more than 6,000 jobs — was a major giveaway. He speaks of dealmaking like a courtship: The arrangement needs to work for both parties, and shouldn’t be a matter of simply giving a company more than what another state will give.

“Know your boundaries,” he said. “The customer needs to want to be there. If the customer doesn’t want to be, you’re buying them, and that’s a mistake.”

In the case of Tesla, Nevada had analyzed the logistics of getting each battery component to Northern Nevada, laying out how the electric carmaker could save $300 million over 20 years by moving to the area. In one counteroffer that Hill said he thought at the time might sink the deal, Nevada declined Tesla’s request for a sharp drop in the electricity rate, and also rejected Tesla’s request for a major up-front investment from the state.

Tesla and the flock of workers it has attracted to the area have become a scapegoat for increasingly unaffordable housing in Northern Nevada and continuing budget crunches in the Washoe County School District. But economic development leaders consider it a win.

A recent report released by GOED shows the carmaker’s Gigafactory has surpassed most all of the projections lawmakers had before them when they approved the deal: There are 7,059 employees as of June 30, more than the 6,000 lawmakers projected; the company has invested more than $6 billion in the factory when it promised $5 billion.

An estimated 34,000 people survive on the wages flowing from the factory, including direct, indirect and induced jobs, and the dependents of those workers. Outside observers sometimes draw comparisons between Reno and Silicon Valley.

For Hill, the optimism in the Reno-Sparks area is an about-face from 2010, when the Reno Gazette-Journal ran an article with the headline “Is Reno the Detroit of the West?” At the time, competition from Indian casinos and elsewhere had turned Reno into an essentially locals gaming market, and the fear was that — like Atlantic City — it would shrivel.

“[Gaming] wasn’t in a position to drive the economy forward. What would pull that area out of the recession?” Hill said, adding that the headline in some way proved prescient. “Ironically, the auto industry has come into Nevada and a lot of things have followed it.”

Less successful was a company at the center of a 2015 special session: Faraday Future, a futuristic car start-up funded by Chinese billionaire Jia Yueting that planned to build a $1 billion manufacturing plant in a North Las Vegas industrial park.

Though lawmakers approved a $335 million package of tax incentives and abatements for the company, its much-heralded factory never amounted to more than a plot of land and some initial grading before the company announced in mid 2017 that it would cease its original construction plans amid mounting cash flow problems. Two months later, the project was “basically dissolved.”

State leaders including Sandoval and Hill said at the time they were disappointed with Faraday’s failure to launch, but that the state was held harmless thanks to a provision requiring all tax incentives for the aspiring car manufacturer to be held in a trust account until its total investments in the factory topped $1 billion. About $620,000 in abated taxes were returned to the state and local governments after the company officially backed out of Nevada in September 2017.

But the tax deal offered to the Raiders was and remains substantially more controversial. The final deal approved by legislators included a whopping $750 million in public funds for construction of a domed, $1.9 billion stadium near the Las Vegas Strip for the professional football team, funded by a 0.88 percent increase in the hotel room tax. Another $400 million in tax revenue was also included in the deal via another 0.5 percent room tax increase for a $1.4 billion expansion and renovation of the Las Vegas Convention Center.

Supporters of the stadium have said it was the only chance for the state to attract one of the 32 NFL football teams to the state, and that the taxes funding the stadium will be paid by tourists and not Nevada residents. But critics have said the $750 million in tax funds could be spent on better purposes than a football stadium, and pointed to the overwhelming body of research showing that government investments in professional sporting arenas rarely pay off.

Gov. Brian Sandoval in Carson City on Feb. 14, 2017. Photo by David Calvert.

An evolution on taxes

Sandoval’s economic legacy also includes a politically risky shift on tax policy aimed at both broadening the state’s tax base and funding improvements at schools.

In an uncertain Republican primary against Gov. Jim Gibbons, a staunch tax opponent who won his 2006 campaign in part by tagging his Democratic opponent Dina Titus as “Dina Taxes,” Sandoval repeatedly promised in debates and candidate forums to veto any tax increase.

It wasn’t unexpected against the backdrop of a recession-wracked state. Even his Democratic general election opponent, Rory Reid, had opposed new taxes — a promise he acknowledges now was in conflict with everything he knew about what it would take to improve education.

Still, Sandoval surprised some who thought the no-tax promise was just campaign rhetoric, introducing a budget in 2011 that allowed temporary taxes worth about $600 million to expire or “sunset” that year. The taxes were enacted in 2009, at the beginning of the downturn, and had only earned the requisite Republican votes then on the condition that they would disappear two years later.

To compensate for the gaping hole that expiration would create, his budget included both significant budget cuts and a series of experimental money maneuvers, including sweeping $62 million from the local Clark County Clean Water Coalition — a multigovernment authority created in 2002 to design and create a massive $850 million sewer infrastructure program — into state coffers.

But then, just days before the budget needed to be finalized and as both parties remained gridlocked on the tax issue, the Nevada Supreme Court handed down a precedent-setting decision prohibiting the state from taking various revenue streams from local governments, including the water coalition.

“When the Supreme Court decision came down it basically made a worst case scenario — what I considered a full-blown disaster — from a funding standpoint,” said Democratic Rep. Steven Horsford, who was Senate majority leader at the time and had been sounding an alarm about the cuts throughout the session. “We couldn’t put the state’s future at risk because we were so set in our ways, and that’s why we had to come together, compromise.”

Sandoval relented and presented a revised budget that extended hundreds of millions of dollars in sunsetting taxes. It was a relief for Democrats who controlled the Legislature but had been fruitlessly trying to salvage state services or raise revenue, allowing lawmakers to close shop on the 2011 session with some peace.

That doesn’t mean the budget wasn’t a tough pill to swallow. It featured a 7.5 percent pay cut for teachers and administrators, reduced social services and included a 4.8 percent pay cut for higher education and state employees in the form of furloughs.

Sandoval told the Las Vegas Review-Journal that at one point he was booed by state workers as he walked into the Nevada Department of Transportation offices.

His budget drew jeers from conservative groups for the opposite reason. Tea Party groups wrote letters opposing his reversal on the “sunset” taxes, and Americans for Prosperity unleashed a robocall accusing the governor of “leading the charge for more spending.”

Those blows failed to land. Sandoval announced in 2012 that he would again extend the sunset tax package in the next year’s legislative session to help balance the state budget, although he didn’t introduce any new taxes and put the kibosh on a late-breaking Democratic plan in 2013 that would have raised taxes.

He again took a stand against taxes in 2014, when a union-backed coalition tried to impose a margins tax on businesses that made more than $1 million a year.

“Spending is so much more enjoyable when you ignore where the money comes from,” Sandoval said at a Nevada Taxpayers Association luncheon in 2014. “But we must try to resist the easy temptation to forget the burdens of taxation, even when that burden may fall on someone else.”

That tax went down in flames at the ballot box in the same cycle that Sandoval — facing no top tier Democrat opponent — cruised to re-election and carried a long list of Republicans on his coattails.

But the election resulted in a sharp change of rhetoric from the governor who once spoke decisively against new taxes. Within weeks of his re-election, Sandoval put out a statement saying that Nevada’s revenue structure was not keeping up with the state’s demands. He said in a recent interview that the need for more revenue was clear to him from the beginning.

“I think I realized it from Day One,” he said. “Before I entered office I had already visited over 100 schools … I knew there was a dire need, but we were also in a situation where I simply couldn’t … raise a tax.”

Restrepo believes Sandoval quickly realized that following the path of tax-cutting governors in other states, such as Kansas’ Sam Brownback, would smother the state’s economic recovery.

“The reality that hit him once he took office is that he had to modify some of the stances on the ‘Read my lips, no new taxes’ kind of thing,” he said. “That happens when you get into office — you realize there are certain needs in a community or in a state that do not allow you to cut taxes, or it may even require you to increase them.”

The budget Sandoval introduced in early 2015 included a slate of education programs backed up by making the sunset taxes permanent and raising or creating other taxes — most notably a tax on overall business revenue that critics, including Republican Treasurer Dan Schwartz, said was too similar to the 2014 margins tax initiative.

In total, the final tax package would include $1.1 billion in new and extended taxes — the largest one-time increase in state history, made by a Republican governor and with the support of many Republican lawmakers.

A parade of high-profile business leaders — including members of the powerful Nevada Resort Association — publicly testified in support of the package, offering political cover to the sizeable number of Republicans who eventually voted for it. The dramatic choreography illustrated Sandoval’s skill in winning over disparate interests over the years and then leading them toward a singular goal.

“We’ve had a lot of governors who had a lot of political capital that didn’t cash it in,” said Democratic political consultant Billy Vassiliadis. “He used his influence, his charm, his tenacity. The fact that it passed with two Republican houses of the Legislature, a lot of credit goes to him.”

While some Republicans consider the move to create the Commerce Tax — assessed on business revenue over $4 million, with rates based on industry type — an unforgivable betrayal, no effort to repeal it has come close. A proposed 2016 ballot measure to undo the tax was blocked after a court decision, and an effort to end it in 2018 gained even less momentum.

Anderson believes that’s because most powerful business interests were at the table when the Commerce Tax was under discussion.

“It was long overdue,” he said. “The amount of money from that tax increase is pretty close to what we abate in property taxes. So you’re going to have growth in the economy, and you’re going to have expenditures for services that are in demand — you’ve got to pull it from somewhere.”

Imposing the tax on big businesses was a way to capture revenue from, for example, large retailers who operate in multiple states but used the savings they had operating in lower-cost Nevada and shift it to pay their higher taxes in California. It was also designed to compensate for the strain that some large but low-paying businesses were putting on the social safety net.

“It was a way to spread the base out and allocate the tax burden a little more fairly across the board,” Anderson said. “To that point, it’s worked as advertised.”

After businesses take any tax credits they’re allowed, the Commerce Tax comprises about 2.5 percent of the revenue to the state’s general fund budget. The most recent state projections estimate the tax will bring in about $445 million over the next two years.

The conservative-leaning Tax Foundation opposed the plan in the 2015 session, and critics have continued to argue that the overall “gross receipts” structure of the tax is problematic. Michael Schaus, a spokesman for the libertarian-leaning Nevada Policy Research Institute, said gross receipts taxes have fallen out of favor in other states because they created an incentive for businesses to avoid paying more in taxes by plateauing, rather than continuing to grow. Nevada is one of only five states with such a gross-receipts tax in place.

“You’re going to put a natural limit on how many people you want to hire and how much you want to expand if its going to cost you substantially more money once you cross over that threshold,” he said.

And although the total size of the tax package eclipsed $1.1 billion — the largest one-time increase in state revenue ever passed — economists including Restrepo have said the other parts of the package, including higher cigarette taxes and an increase in payroll taxes, were spread out enough to not stem business growth.

“When you look at it spread out over a per capita basis or a share of GDP, whatever metric you want to use, it was a moderate increase overall,” he said. “And we can argue what the nuances of certain taxes versus others, but in general I think he stepped in at the right time to do what he needed to get done.”

The rates are also a fraction of what businesses would have paid had voters passed the margins tax, which kicked in for businesses making more than $1 million a year and had higher rates. Anderson, who had paid the Commerce Tax for his own business, called it “negligible” and said it hasn’t harmed the state’s economy.

“It’s had zero impact on our growth,” he said.

Sara Bennett selects food inside the Hands of Hope Community Food Pantry at Catholic Charities of Southern Nevada in downtown Las Vegas on Wednesday, Nov. 21, 2018. (Daniel Clark/The Nevada Independent)

Wages

While Nevada’s climb from the recession has attracted national praise, there’s still criticism — especially about wages. A Pew report recently dinged Las Vegas and Reno for having some of the smallest changes in per-capita income between 2000 and 2017: The population of Las Vegas has grown 58 percent since the turn of the century, but per-capita income has risen just 1 percent. In Reno, a 35 percent growth in population has come in tandem with a modest 4 percent increase in per-capita income.

“I think the people who have always been comfortable in this state who discovered the recession the hard way are comfortable again. In fact, they’re doing better than ever,” Fulkerson said. “But the people who were getting hurt by the economy pre-recession are getting hurt worse now. So no, we haven’t made a 180-degree turn for everybody.”

In the depths of the recession, Sandoval articulated a business-focused policy prescription.

“Some believe government is the only solution to our current plight. I disagree,” he said. “Unemployment, foreclosures, bankruptcy – the cure is not more government spending, but helping businesses create jobs. The key is to get Nevada working again.”

That focus has its supporters and detractors.

“Companies wish a stable environment in which to invest and the governor has presented an administration that does that,” Krolicki said. “It tends to work with these companies in a professional and almost private sector way. It’s ‘let’s find a pathway to success’ as opposed to let’s build up walls and make it really hard and expensive, even though you want to come here.”

But left-leaning thinkers, including Nevada Current editor Hugh Jackson, have criticized Sandoval’s path of developing incentives for business and building up workforce training programs while opposing measures designed to more directly help workers, such as mandatory paid sick leave for private employers or raising the minimum wage.

“Couple those vetoes with the billions of dollars the state has granted in tax breaks and subsidies to businesses small, large, and extra-large during Sandoval’s administration, and Sandoval’s ideology is obvious: State government must help business, but not workers,” he wrote in a Dec. 24 column. “Sandoval at heart is a trickle-down guy, with a workforce training flavor spike.”

Still, the Sandoval administration has seen a drumbeat of positive economic news as his term comes to an end. On Thursday, it announced revenues from taxable sales have now hit their 100th straight month of growth, and that there’s more money than ever before ($293 million) in the Nevada rainy day reserve account that was wiped out in the recession.

Anderson believes Nevada’s recovery could have turned out much differently without Sandoval in charge.

“We would’ve been like the rest of the country, I think,” Anderson said. “I don’t think it would have been as accelerated as we’ve seen. When you’re growing in the top five numbers in just about every metric, that’s been done with intent and purpose and planning and execution. There are a lot of other states that are jealous about how far we’ve come.”