As a Nevada business owner or executive, you’re probably hoping that 2014 will be the year our state finally climbs out of the depths of the recession. This may be the year you get back into the black, make enough money to pay back those bank loans, and maybe even reconsider the expansion you put on hold in 2010. Not so fast! A very real danger is on the way, and it may derail all your plans. The so-called “Education Initiative,” which will come before the voters on the November 2014 ballot, could spell the end of any hopes for economic recovery.
Here’s a brief outline of the proposal, which is more commonly (and more accurately) known as the Margin Tax Initiative:
In 2012, the Nevada AFL-CIO and the Nevada State Education Association (the teachers’ union) filed an initiative petition to institute a 2 percent tax on the gross receipts of most Nevada businesses. They managed to get the necessary number of signatures by claiming that funds raised from this tax would be used to support education. It’s doubtful that many voters signing the petition actually read all 31 pages of small print1, and if they did, they’d have had to be CPAs to understand it, but enough people signed to get it on the ballot.
Unlike a corporate income tax, which taxes profits, the margin tax would be assessed on a company’s revenues, regardless of whether it was making any profit. The tax would be assessed on all companies with more than $1 million in revenue, and would take two percent of that revenue after a few allowable deductions. The easiest option is to deduct 30% of your gross revenue, so you would be taxed 2% on 70% of your sales.
For example, if your annual sales total $1 million, you would pay 2% of 70% of your revenue, or $14,000, regardless of what your profit margin is, or even if you’re making a profit at all. If you operate on a 10% profit margin, your net profit would be $100,000. So you would be paying $14,000 out of your $100,000 profit, an effective tax rate of 14%. This is much higher than California’s corporate income tax rate of about 8.8%.2 If you’re operating on a smaller profit margin, your effective tax rate would be even higher. Charts and graphs are available to show the average profit margin for different categories of business3, but the easiest way to figure out what your tax liability would be is to take your sales figure for the last 12 months (remember: sales, not profit) and multiply it by 1.4%. This is what you’d be paying to support the teachers union and their buddies.
According to Section 19 of the initiative, the funds raised “must be apportioned among the several school districts.” No mention of what the districts would do with the money, and no provision earmarking any of these funds for classroom instruction. According the Nevada Policy Research Institute, “A business margin tax would be a disaster for Nevadans of every stripe. If union bosses were serious about improving education and not just fattening their own wallets, they would whole-heartedly support an agenda of proven education reforms, like the ones proposed by Governor Brian Sandoval.”4
The only other state with a margin tax is Texas, and it has been so burdensome that more than 100 bills were proposed to change or repeal it in the first three years after it passed.4 Small businesses complain that they face disproportionate costs because, unlike larger firms, they don’t have a staff of CPAs to handle all the paperwork required. Those who want to use the “cost of goods sold” calculation instead of deducting 30% of sales would be especially hard hit, according to the Nevada Taxpayers Association (NTA), because the margin tax calculates it differently than the IRS; therefore, a business would have to keep two sets of records.5
NTA also points out that the initiative requires the Department of Taxation to post on its website the name of each taxpaying business and the amount of any tax paid, which has never been done before. Would you want your competitors to know what your gross receipts are?
According to the Tax Foundation6, “Gross receipts taxes are distortive and destructive. Nevada should be careful about its options, as its ability to attract investment and capital depends greatly on its favorable tax climate.” The Tax Foundation publishes an annual list of business-friendly states. Although Nevada has consistently ranked in the top five, which is a big boost for our economic development efforts, adding this margin tax would drop us substantially in their ranking and sabotage the state’s efforts to diversify our economy.
According to State Senator Michael Roberson, who represents District 20, “The margins tax is a misguided, job-destroying tax. It will thwart economic development, drive existing businesses out Nevada and put thousands of Nevadans out of work.”
If you care about the financial health of Nevada businesses, and of the overall Nevada economy, you need to educate yourself NOW about this dangerous proposal so you can spread the word about it and start working to defeat it.