The Nevada Tax Debacle

John Berthoud Martians have landed in Nevada. Really.

State legislators and the Republican Governor just enacted the largest tax increase in the state's history, but the Democratic leader of the Assembly swears that the tax burden won't fall on humans. "The taxes we passed will not go to the individual," opined Assembly Majority Leader Barbara Buckley of Nevada.

If Martians have indeed landed in Nevada, perhaps they will indeed foot the astonishing $836 million tax increase that Ms. Buckley and her cohorts engineered. But short of an alien invasion, the tax hike will have a devastating effect on the people who will have to pay the cost of these levies.

The centerpiece of the plan is a payroll tax on workers' gross wages. The rate for all businesses will be 0.7 percent, except for banks, which will have to fork over 2 percent. Employees will probably bear the brunt of this tax and will see wages lower than they otherwise would be. But certainly some of the burden will be borne by employers who won't be able to hire as many people as they'd perhaps planned.

Lawmakers dumped even higher taxes on alcohol and tobacco. These levies will disproportionately affect lower-income Nevadans. According to Congress's Joint Committee on Taxation, more than 2/3 of all federal tobacco taxes come from those earning less than $40,000 per year (this is true of state tobacco taxes as well). And higher tobacco taxes in recent years have also spawned a burgeoning market in cigarette smuggling, which can even be linked to terror cells in the U.S.

Finally, the Nevada pols also added a tax on real estate sales and a tax on live entertainment. But perhaps most outrageously, all these tax hikes were enacted to underwrite a 30.5 percent increase in spending. This staggering increase far outpaces inflation and population growth.

Beyond paying the direct costs of this tax hike, Nevadans can also expect to see their incomes take a hit as the new taxes slow the state's economy. A review of state budget history in the aftermath of the last fiscal crisis in the early 1990s makes it clear that raising taxes to solve budget shortfalls is pure economic poison. In a study for the American Legislative Exchange Council, economist Steve Moore examined the ten states that cut taxes or avoided tax increases over 1990-1996 and compared them to the ten states that raised taxes the most during this period. By a variety of measures, over the period 1990-1997 (the time period is lagged to account for implementation), the tax-cutting states outperformed the tax-hikers:

  • Population Growth. The tax-cutting states gained 13 percent in population, while the tax-raising states grew by only 3.8 percent during this time.
  • Employment Growth. The tax-cutting states saw employment rise by 16.3 percent, while the tax-raising states saw employment increase by only 5.3 percent.
  • Income. State personal income grew by 22.5 percent in the tax-cutting states, but only by 11.3 percent in the tax-raising states.

Moore's findings about the relationship between lower taxes and greater economic growth are echoed in many other studies. A study by the National Center for Policy Analysis and Canada's Fraser Institute looks at economic freedom in America's 50 states and finds that those with greater freedom (measured by such things as lower taxes and more flexible labor markets) have higher per capita incomes. The ten freest states have per capita output that is $2,560 higher than the average state.

Other states have raised taxes this year, but most of them also at least reined in spending. Not so in Nevada. So as bad as this year's tax hike was, there could be more in the works in coming years to feed the voracious spending appetites of Governor Guinn and his public employee allies.

Nevada has been one of America's most economically-attractive states in recent years. Under the bungled policies of Kenny Guinn -- the Mario Cuomo of the west -- that appears likely to change.

John Berthoud is President of the 350,000-member National Taxpayers Union.

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