Setting up the 2011 spending spree

New taxes in 2009 will lead to new programs for 2011

Despite the ravages of recession, Carson City appears to be exuding an air of optimism. The big buzz around the legislature concerns the potential new taxes on Nevadans and all the new government programs those new taxes will allow lawmakers to create, assuming an eventual economic recovery. The possibilities have the autocratic elite all aglow.

Lawmakers, no doubt, are dreaming of the day when state government can fund more special projects like a Las Vegas museum to celebrate the mafia. Or, can expand into more business ventures traditionally run by private individuals, as local jurisdictions have done with golf resorts. Or, dole out more corporate welfare to their friends in the private sector. Perhaps enough money will allow government to completely displace those critical private media outlets with more government-funded media outlets, such as KLVX or KNPR. Yes, the possibilities are endless.

The trouble with state fiscal "crises" is that they are terribly predictable. 

During a recession, businesses and families are forced to cut back expenses and find more efficient ways to operate. Businesses cannot make up for lost sales by simply raising prices on products and services, since that would only lead to further declines in sales. Government, however, can raise the price for its products, because it has the ability to force people to pay—even as their incomes shrink.

Bearing this in mind, state legislators are busy drumming up ideas for new taxes. Nothing is more appealing to a government employee-dominated state legislature than the prospect of a recession. It is the perfect political cover for imposing new taxes. Additional revenues, legislators always claim, are necessary in order to avoid cuts to existing government programs (never mind that, as recent NPRI research demonstrates, the quality of government services actually deteriorates as tax revenues rise). And since the employees of such government programs are represented by powerful unions, that means interest groups are automatically ready to lobby for and support the new taxes.

Politically, it is much more difficult to impose new taxes for the explicit purpose of creating entirely new programs. Yet that is essentially what lawmakers are doing each time they levy new taxes during a recession. They recognize that if the economy recovers—despite the tax increases—the new taxes will produce record government revenues, which can then be used to fund pet projects and foster even greater dependency on government. This has been the pattern in Nevada for at least the last five decades.

Just one example: In 2003, state lawmakers responded to economic downturn and declining tax revenues by levying a glut of new taxes. These included: creation of the modified business tax, the land transfer tax and the bank branch excise tax; increases in the cigarette tax, the liquor tax, the gaming tax and business license fees; and effective increases in the sales tax and tobacco taxes (by reducing the administrative allowance given to firms for collecting the taxes).

Tax Name	Percent Increase	2005 Revenues	2005 Revenues Attributable to Increases
Sales and Use	0.75	$913,895,384	$6,854,215
Gaming	0.5	$749,655,622	$3,748,278
Liquor	75	$35,490,874	$15,211,389
Cigarette	128.6	$113,282,664	$63,721,499
Tobacco	1.5	$7,557,607	$113,364
Business License Fee	300	$14,486,315	$10,864,736
Modified Business Tax(General)	New	$205,348,170	$205,348,170
Modified Business Tax(Financial)	New	$21,575,335	$21,575,335
Bank Excise Tax	New	$3,084,456	$3,084,456
Land Transfer Tax	New	$148,730,974	$148,730,974
Total			$479,252,416

By FY 2005, however, economic conditions had improved, and these new taxes generated an additional $480 million in general fund revenue. In FY 2006, the tax hikes generated an additional $531 million in general fund revenue—pushing up total general fund revenues for the 2005-07 biennium by $1 billion.

Lawmakers in the 2005 Legislative Session responded eagerly to this influx of additional tax revenue, and spent the funds on a host of new government programs and pet projects. Funding for the Nevada System of Higher Education grew by 16 percent despite falling enrollment numbers. Salaries for state workers—especially for constitutional officers—were increased.  The Millennium Scholarship Fund was expanded. An all-day kindergarten program of dubious developmental merit for children was established in Clark County. More than a quarter-billion dollars were given to a "class-size reduction" program that ensures more and more students are exposed to poorer and poorer teachers. Various "pork" projects around the state received significant amounts of taxpayer money.

Now, as lawmakers in Carson City talk up the budget deficit, the true motives behind their calls for new taxes should be apparent. The disingenuous rhetoric about concern over "cuts to vital programs" does little to distract from the politicians' lip-smacking. 

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute.

Tags: Fiscal, Budget, Taxes