Frequently Asked Questions about Question 3, the Margin Tax Initiative

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1 Frequently Asked Questions about Question 3, the Margin Tax Initiative BASIC ASPECTS OF QUESTION 3, THE MARGIN TAX INITIATIVE Q: What is the Margin Tax Initiative? Question 3 is a deeply flawed tax measure that will appear before Nevada voters on the November 2014 statewide ballot. This initiative would damage Nevada s struggling economy, cause the loss of thousands of jobs and force consumers to pay more for food, housing, utilities and healthcare without guaranteeing more funds for education. Although promoters claim the tax is for education, the law lets the legislature divert the funds to anything. Moreover, Question 3 contains no guidelines on how any funds that might go to education would be spent. It s a blank check the politicians and bureaucrats could spend however they want, with no oversight and no accountability. If passed, the 2% Margin Tax proposal would be based on GROSS revenues, not profits, so it s the equivalent of a nearly 15% corporate income tax. That would make Nevada one of the five highest taxed states in the country for business nearly double California s corporate income tax rate of 8.8%. Q: How much would the proposed Margin Tax cost Nevada businesses and consumers? Estimates of how much the tax initiative would raise vary from $460 million to $800 million annually. The measure s proponents say it would raise $800 million annually. A study by leading Nevada economic expert Jeremy Aguero showed it would raise between $650 million and $750 million annually. And, a white paper from the Guinn Center for Policy Priorities projected a range of $460 million to $690 million annually. Regardless of which study you look at, each of these numbers would represent a massive tax increase that would ultimately be paid by Nevada consumers. Q: Proponents of Question 3 claim the revenues would go to education. What are the facts? Although language in the initiative dedicates revenue from the Margin Tax Initiative to the state s Distributive School Account (DSA), it does not guarantee an additional penny for education. In fact, every cent raised by the Margin Tax Initiative could be used for any budgetary purpose by simply reducing the state s general fund money that currently goes to school spending. Proponents of the Margin Tax Initiative claim that the revenue from this massive tax proposal would go to fund Nevada s education system. That claim is disingenuous.

2 Here are several quotes from a Nevada journalist, a top economic analyst and even the proponents own lawyer: [The petition] may increase funding for K-12 education, it may not. - Francis C. Flaherty, Nevada State Education Association attorney, December 5, 2012, NV Supreme Court oral arguments before the En Banc Court, Chief Justice Cherry Presiding If this petition passes, [t]he legislature could increase funding for education, the legislature could decrease funding for education. - Francis C. Flaherty, Nevada State Education Association attorney, December 5, 2012, NV Supreme Court oral arguments before the En Banc Court, Chief Justice Cherry Presiding There is a problem. They could take funds out of the Distributive School Account and do something else with it. - Jon Ralston, Ralston Reports, February 5, 2014 Noble intentions notwithstanding, the assertion that the proceeds of the proposed margin tax will be dedicated solely to the enhancement of education programs should be treated with skepticism. - Jeremy Aguero of Applied Analysis, Use of Incremental Funds memo, March 31, 2014 Nevada has a long history of taking earmarked funds and using them to bolster the state s general fund. In 2009, another initiative petition circulated by the Nevada State Education Association resulted in a tax on hotel rooms in Clark and Washoe counties. That tax was also supposed to support education funding, but our schools have never seen increased funds as a result of that tax. Initially, the funds were added to the state s general fund. Starting in 2012, the revenue from the room tax was directed to the DSA and the state s general fund contribution to K-12 schools was reduced. In fact, general fund support for education is less in the current biennium than it was in the biennium preceding the room tax increase. Q: Why are so many Nevada organizations, businesses, labor groups, community leaders and citizens opposed to Question 3? Question 3 is a costly and deeply flawed tax measure that would cause the loss of thousands of existing jobs and make it virtually impossible to attract new businesses to our state. It would increase taxes on Nevada s major employers and thousands of small businesses by an average of 450%. As a result, consumers would pay more for food, housing, electricity, gas and healthcare. Although promoters claim the money will go to fund education, there is no guarantee that our schools will get more funds. Under the law, the legislature could spend the revenues from this costly new tax on anything, with no oversight and no accountability.

3 Q: If Question 3 passes, could the legislature increase the tax or expand it to apply to more businesses? Yes. Under state law, three years after a ballot initiative is passed, the Nevada legislature can change it. If Question 3 passes, the legislature would eventually have unlimited authority to increase the tax rate, lower the revenue threshold at which it must be paid, or broaden the tax to apply to more businesses or individuals without any further vote of the people. Q: Do any states have a similar tax? Texas is the only state in the country that imposes a similar tax. However, there are drastic differences between the two taxes and the two economies. Texas economy is roughly ten times the size of Nevada s. Structurally, the economies are different with Texas heavily dependent on oil and gas and Nevada heavily dependent on tourism. Nevada s proposed Margin Tax Initiative is two times higher than the Texas tax for most businesses and four times higher for wholesalers and retailers. The Nevada Margin Tax Initiative proposes a tax rate of 2% on all businesses subject to the tax. Texas imposes two franchise tax rates: 1.0% for most businesses and 0.5% for wholesalers and retailers. Texas also provides a third tax rate of 0.575% for entities with $10 million or less in total revenue. Both the Texas Franchise Tax and the Nevada Margin Tax Initiative impose the tax on businesses with more than $1 million in gross revenue. However, in Texas, businesses can deduct their first million in gross revenue as a standard deduction. Under the proposed Nevada Margin Tax, there would be what is called a fiscal cliff, meaning a business making one penny less than $1 million in gross revenues would pay no tax. A business that grossed one penny more than $1 million would pay the new tax based on the entire million, even if none of it were profit. Finally, the Texas Franchise Tax allows for many deductions that the Nevada Margin Tax Initiative does not. For example, healthcare providers in Texas are allowed to deduct payments received through Medicaid, Medicare, the Indigent Health Care and Treatment Act, the Children s Health Insurance Program, as well as services related to workers compensation claims and services provided under the TRICARE military health system. Texas healthcare providers at healthcare institutions can exclude 50% of these amounts. Nevada s Margin Tax Initiative does not provide for any of these deductions. IMPACTS OF QUESTION 3 ON NEVADA BUSINESSES Q: Promoters of Question 3 claim it would only apply to big businesses. Is that true? No. Promoters of this measure portray it as a minor tax on big businesses and want voters to believe all the tax revenue would go to education. In reality, the initiative would impose a major new tax burden on both large employers and thousands of small businesses throughout the state.

4 According to a study conducted by leading Nevada economic analyst Jeremy Aguero, when direct and indirect impacts of the Margin Tax Initiative are factored in, the private sector would lose nearly 9,000 jobs. The initiative s new tax would be especially damaging to employers who have high overhead and slim profit margins, such as farmers, ranchers, grocery stores, restaurants and other small retailers, and to those that are already on the brink of closing. It would only allow businesses to deduct some of their actual costs from the revenues subject to the tax. For example, they could deduct their cost of goods or their payroll costs, but not both. Imposing the initiative s tax on top of the state s existing Modified Business Tax would create the equivalent of an almost 15% state corporate income tax nearly twice as high as the corporate income tax rate in California. Q: What is the provision in Question 3 that some people call the fiscal cliff? The fiscal cliff refers to a flaw in the initiative that exempts a business making one penny less than $1 million in gross revenues from paying the tax. However, a business grossing one penny more than $1 million would pay the 2% Margin Tax based on the entire million dollars, even if none of it were profit. If that business used the standard 30% deduction, it would pay $14,000 in margin taxes. Q: How would the proposed Margin Tax compare with business taxes imposed in other states in our region and across the country? Question 3 would make Nevada one of the five highest taxed states in which to operate a business. This measure is the equivalent of an almost 15% state corporate income tax rate. Nevada would have the highest business tax in the West nearly double California s corporate income tax rate of 8.8%. Q: Promoters of Question 3 say it s a small 2% tax. Is that true? No. The Margin Tax Initiative is worse than it seems. This tax proposal is on gross revenues, not profits. It is the equivalent of an almost 15% business tax. That would make Nevada one of the five most highly taxed states in the nation in which to do business. The measure is deeply flawed and unfair, because employers would have to pay the tax even if they had no profits and were losing money. And the tax would be imposed on the businesses that provide most of the jobs in Nevada: major employers and thousands of small businesses with gross revenues above the threshold, including farms, restaurants, grocery stores and other local retailers. The businesses exempted by the measure are mostly one-person operations with no employees. IMPACTS OF QUESTION 3 ON NEVADA S ECONOMY Q: How would the Margin Tax affect jobs in Nevada? According to a study conducted by leading Nevada economic analyst Jeremy Aguero, when direct and indirect impacts of the Margin Tax Initiative are factored in, the private sector would

5 lose nearly 9,000 jobs and approximately $413 million in labor income (employee wage and salary payments) annually. The initiative s new tax would be especially damaging to employers with high overhead costs and slim profit margins, such as farmers, ranchers, grocery stores, restaurants and other small retailers, and to those that are already on the brink of closing. Q: How would the Margin Tax affect economic development in Nevada? Question 3 would increase the tax burden on Nevada employers by hundreds of millions of dollars annually. Economic studies show that would cause the loss of thousands of existing jobs and make it extremely hard to attract new businesses and jobs to Nevada. Anecdotally, economic development experts say they are already hearing from business owners who are waiting to decide whether to expand or move to Nevada until after the outcome of Question 3 is decided in Nevada s November general election. IMPACTS OF QUESTION 3 ON NEVADA CONSUMERS Q: Would the Margin Tax impact consumers? Yes. Increased costs imposed on businesses providing goods and services in Nevada would ultimately be passed on to consumers. This would force Nevadans to pay higher prices for everything from food, clothing, gas, water and electricity to housing, insurance and healthcare hurting those who can least afford it. Promoters of Question 3 know everyone cares about education. But their costly, deeply flawed measure doesn t ensure a better education for our kids. What it would do is hurt Nevada employers and our economy, put thousands of Nevadans out of work, discourage businesses from growing and increase prices consumers pay for food, shelter, utilities, healthcare and other vital goods and services. ABOUT THE NO ON 3 COALITION Q: What is the NO on 3 coalition? We re the official campaign committee organized to support a NO vote on Question 3, the Margin Tax Initiative on the November 2014 statewide ballot. Our coalition represents tens of thousands of small and large employers, community leaders, parents and consumers. A partial list of notable NO on 3 supporters is available on our website StoptheMarginTax.com. Q: How can I join the coalition to show my opposition to Question 3? You can join online and get more information by clicking the Join link on our website StoptheMarginTax.com. Q: Is there any cost to join? No. There s no cost or obligation to become a member and, by joining, you will help us show we have broad, statewide support. If you would like to donate any time or money to help our campaign, please visit the Tool Kit section of our website StoptheMarginTax.com or call us toll-free at

6 SOURCES Ballot Question #3: Employment, Labor income and Output Impacts, Jeremy Aguero, Applied Analysis, 1 April 2014 Ballot Question #3: Use of Incremental Funds, Jeremy Aguero, Applied Analysis, 31 March 2014 California Franchise Tax Board website, What are tax rates for corporations? Fact Sheet on the Education Initiative (Margin Tax), Guinn Center for Policy Priorities, February Initiative Petition Statewide Statutory Measure, Nevada Secretary of State Website Texas Margin Tax Experiment Failing Due to Collection Shortfalls, Perceived Unfairness for Taxing Unprofitable and Small Businesses and Confusing Rules, Joseph Henchman, Tax Foundation, 17 August The Fiscal and Economic Impacts of Nevada Ballot Question #3: A Preliminary Review and Analysis, Jeremy Aguero, Applied Analysis, February 2014 The Texas Franchise Tax and the Nevada Margin Tax (proposed): A Summary Comparison, Jeremy Aguero, Applied Analysis, 22 April 2014 Paid for by the Coalition to Defeat the Margin Tax Initiative StoptheMarginTax.com