Sunday, Feb. 27, 2011 | 2:01 a.m.
Nevada’s current economic situation is like that of the Donner Party, a friend said. Our food is gone, and snow is still falling. Some of us will make a break for it, but those of us left behind must choose between foraging for more food or eating our young.
This is a critical moment for Nevada. Do we watch helplessly as we spiral downward, or step up and invest in those things that will keep Nevada a state worth living in?
Most of those investments will be private, and we must do more than just hope our no-tax climate will magically attract firms willing to hire Nevadans. Otherwise, we would already have the most diversified economy in the country.
However, some of the essential investments, such as education, are public. Gutting public infrastructure will not make Nevada a better place to live, nor a better place to start a firm. Many proposed cuts are penny-wise but pound-foolish, and we risk damaging our state for decades.
As we act, we should acknowledge the public sector needs to do some things better, that its critics have legitimate concerns mixed in with their misinformation. Our politicians need to seek a compromise that finds revenues to maintain essential state services and improve public education, but also implements reforms that prevent taxes from increasing in the future.
To begin with, we need to broaden our tax base. Relying on sales of goods and gaming for our taxes is like Mississippi relying only on cotton. Times have changed.
A recent study by two UNR professors, Sonja Pippin and Mehmet Tosun, shows that a tax reform that extends the sales tax to many services could raise enough revenue to fill the entire budget gap. Even Nevada Policy Research Institute supports a broader tax base through a tax on services, if accompanied by a reduction in overall rates, which we can do once the economy stabilizes.
We could forage for other sources of revenue, too. We could tighten up on some other sales tax exemptions, such as those for soft drinks and many prepared foods, and we could eliminate many of the deductions that mining takes from their net proceeds tax. We could either extend the current modified business tax, or replace it with a more balanced business tax.
Gov. Brian Sandoval doesn’t want to raise taxes in a recession, although the alternative of sacrificing higher education and other state services would be even worse for the economy and our potential to attract new businesses.
The governor has proposed borrowing against the state’s insurance premium tax, a plan that legislative Democrats argue is unwise. It would borrow from already-committed revenue and thus hurt our credit rating, raising our cost of borrowing. It would be like buying groceries on a check loan that you repay with next month’s grocery money.
Yet consider this alternative: If the Legislature passes a tax on services, but delays it for a couple of years, this would give us time to figure out how to best collect it, and we would avoid raising taxes during the depths of Nevada’s depression. If we borrow against this future revenue to fill the current gap, we are just smoothing out when we spend it. We would not have to repay from moneys we won’t have, and not risk our credit rating.
So that this does not lead to unnecessary future expenditures once the economy recovers, Nevada has a law that limits long-run growth of general fund expenditures to population growth plus inflation, relative to a 1979 base. Although we shouldn’t increase expenditures just because we have the revenue, we should build up a significant rainy day fund for the next time. We might even use that rainy day fund for seed money loans to attract employers to Nevada.
Once debts are repaid and a rainy-day fund is on track, then we should reduce rates on existing taxes to a level sustaining a stable state government, one that grows only as fast as the economy over the long run, and one that provides the minimum of what Nevada needs.
Should some of the budget gap be addressed with spending cuts? Yes, but not with arbitrary across-the-board cuts that are imposed regardless of value. We should demand specific proposals for cuts, for cases where the value produced for the state is not worth the cost, and improve the incentives of state employees and managers to report spending that is not in Nevada’s best interest.
Next, we need reforms to slow the growth of future state spending, and also address any misuses. If some state or local employees have been promised future benefits far in excess of what they contribute, we should fix this. If state work rules allow some county employees to make far more than intended, we should fix this. We can consider transitioning more employees to a defined-contribution plan, and re-examine some of our collective bargaining rules. But we should also acknowledge that most employees have merited their benefits, and we should not lightly break commitments for those who contributed in good faith.
State pay can also be addressed. Most state employees are willing to accept the governor’s proposed 5 percent pay cut, if it helps us keep doing our jobs. Once the economy recovers, this pay can be restored. Beyond that, however, future pay increases should not be across the board for all state employees alike. Instead, pay increases should be linked to market conditions for similar employees in other states, or in the private sector. And where performance can be reasonably measured and evaluated, merit pay increases should be preferred to automatic cost-of-living adjustments and longevity pay.
Let’s stop putting ideology over the needs of the state, and let’s quit punting our problems to the next Legislature. Let’s combine reforming and stabilizing the tax base with realistic cuts and reforms that prevent future tax increases when the bill for our short-term thinking finally comes due. When rescue finally comes, let’s make sure we are not surrounded by large piles of small bones.
Elliott Parker is professor and chairman of the economics department at UNR.