Bankers in Nevada are up in arms about the governor's proposed revenue tax for businesses - even those that post losses.
Advocates, however, say that such a tax is the only practical way to reduce the state's recurring deficits.
Next week Gov. Kenny Guinn, a Republican, is expected to introduce a bill in the state Legislature that would impose a 0.25% gross receipts tax on any company doing business in the state that generates more than $450,000 of annual revenues. Currently, businesses pay an annual "head tax" of $100 per employee, but if the proposal is approved, eligible companies would pay the revenue tax instead.
A handful of states, including Washington, Hawaii, and New Jersey, impose some form of a revenue tax, said Guy Hobbs, who chaired the governor's Task Force on Tax Policy. The new tax is needed in Nevada to curb the state's budget woes, he said. This year Nevada is facing a $704 million deficit. By 2012 it is expected to climb to $4.2 billion.
"We're facing a significant revenue pinch in Nevada, in part because we're too heavily dependent on a just couple of different sources to fund services," including gambling, which generates two-thirds of the state's tax revenue, Mr. Hobbs said. However, those revenues are diminishing each year, because the gambling industry is generating more of its revenues from nontaxable sources, such as hotels, restaurants, concerts, and even amusement parks, he said.
Why base the tax on revenues rather than earnings? "When a company is taxed on net profits, there are more ways to creatively manage the tax liability," Mr. Hobbs said.
Bankers strongly oppose the revenue tax and contend that an economic downturn is an especially bad time to increase businesses' tax burden.
All companies' bottom lines would suffer by having to pay taxes on revenues, even if they lose money, said Sam McMullen, a lobbyist for the Nevada Bankers Association, and banks are concerned that borrowers who are already stretched thin might be unable to repay loans because of their tax obligations.
Bankers also argue that the proposal's "across-the-board" structure is too simplistic. "Our specific concern is what the tax treatment will be for banking - the proposal is very unclear about which type of revenues would be taxable," Mr. McMullen said. "Also, depending on how banks structure their revenue streams, it could be very unfairly applied."
Mr. Hobbs said that bankers should voice their specific concerns now to Gov. Guinn to determine if there are unique industry issues that should be taken into account. However, he cautioned that the governor and legislators are wary about developing a tax code with myriad rules for particular industries or situations, much like the convoluted one that the state of Washington has developed for its business-and-occupation revenue tax. The code for that tax is more than 800 pages long.
Mr. McMullen said that bankers would support other tax reforms, such as raising the employee head tax or instituting a tax on service providers, such as attorneys, accountants, and landscapers. Those professionals would most likely pass that tax onto its customers, including banks, but the tax would be less burdensome over all, he said.
"Bankers are clearly interested in paying their fair share - they just believe that there are better alternatives than the gross receipts tax," he added.
However, Mr. Hobbs said that the gross receipts tax would raise more than $220 million a year - far more money than any of the other recommended taxes. He expects the legislators to pass the proposal, because the realistic alternative - drastically cutting services like education - may be far worse for them politically.
In Washington, a tax reform committee headed by Bill Gates Sr., the father of Microsoft Corp.'s chairman, recommended in December that the state implement a personal income tax and reduce its business-and-occupation tax. That tax, instituted in 1935, has discouraged companies from putting their headquarters in Washington, the committee concluded.
Michal D. Cann, the president and chief executive officer of $535 million-asset Washington Banking Co. in Oak Harbor, agreed. He said that annual loan growth could be much higher if the state could attract more companies by becoming "more business-friendly."
On the other hand, John Dickson, a senior vice president of $1.9 billion-asset Frontier Financial Corp. in Everett, said that the tax is not that burdensome - "it's just another cost of doing business."
According to Mr. Dickson, other companies would probably consider it less onerous if the state would spend some of the revenue on things that would help businesses grow - such as improving roads so that they could transport their freight more easily.
"Businesses wouldn't be as upset about paying this tax if they saw more results," he said.
