How state education margins would work

By Thomas Mitchell

The November 2014 mid-term election is still a year away, but the campaigning over a key ballot question should be starting in earnest soon.

The Nevada State Education Association managed to gather enough signatures and survive enough court challenges to have its Nevada Education Initiative go before the voters. The initiative proposes a 2 percent margins tax on all Nevada businesses that gross more than $1 million a year.
Lynne Warne, president of the teachers’ union, has predicted that businesses will strongly oppose the tax but the measure will pass.
The union has estimated the tax would bring in $800 million a year in additional funding for K-12 education. In the current state budget, education is scheduled to receive $2.6 billion a year, with $1.7 billion of that coming from the general fund. The amount the tax would raise and just how much would actually go toward education is widely disputed by opponents.

A coalition of businesses is coming together and expects to start its opposition campaign possibly before the first of the year. There is already a website (http://protectingnevadajobs.com/) that spells out reasons to vote against the tax.
A poll conducted for the teachers’ union in mid-September found 61 percent supporting such a tax and only 34 percent opposed.

A poll conducted for the Retailers Association of Nevada — one that pointed out some negatives about the tax — revealed a closer possible outcome at this point a year out from the election.

About 46 percent of those polled by the retailers said such a tax would bring in necessary funding for education, while 47 percent said is would increase prices and unemployment and hurt businesses.
Carole Vilardo, president of the Nevada Taxpayers Association, explained how the tax would be assessed.

Once a business exceeds $1 million in gross revenue, it must pay the tax, Vilardo said. Then the business may take one of three deductions: A. A straight 30 percent of revenues, leaving the tax due on 70 percent of revenue. B. The cost of goods sold. C. Employee compensation up to $300,000 per employee.
In addition, she said, “You are allowed a deduction for the modified business tax (A payroll tax of 1.17 percent for most businesses). And if you’re a gaming property or even a tavern, so long as you pay the first gaming tax, if it is required of you, you can deduct it. That gives you your total income.” Mining is not allowed a deduction for its net proceeds tax.

Vilardo points out, “The cost of goods sold doesn’t follow the federal definition. So, at the very least for purposes of auditing, you would have to carry a separate set of ledger sheets on cost of goods sold, one to satisfy a federal audit, one to satisfy a potential state audit.” Also, the deadline for paying the state tax is months earlier than the federal tax deadline.

The tax must be paid, she said, even if the company is in bankruptcy.
As long as a company’s gross revenue remains $999,999 or less, it is not subject to the tax, but as soon as the $1 million threshold is crossed the tax kicks in.

“In Texas that was called the cliff,” Vilardo said, “which they finally corrected this year, because of all the complaints on that. If you made a million and ten dollars you become liable for the tax on the entire million and ten. What Texas finally did in their legislative session this year is they exempted the first million dollars of revenue, so that if your revenue totaled out to a million and ten dollars, you paid only on the ten dollars.”

As for the amount the tax might raise, Vilardo noted, “During the joint hearing at the Legislature, the economist for the teachers’ union was specifically asked by (state Sen.) Ruben Kihuen to provide a methodology used to determine the $800 million a year, and the economist promised to do so. That was never forthcoming. Never delivered.”

Kelly Bullis’ certified public accounting firm in Carson City has created an online spread that business owners may use to estimate what the margins tax would be for their companies. It may be downloaded from the Nevada Manufacturers Association website at: http://nvmanufacturers.org/hot-news/education-initiative/

Because of the way the initiative is written and will be voted on in an off year from the Legislature, it cannot be amended for three years.
(Next week: How the margins tax will hurt the economy of Nevada and destroy jobs.)

Thomas Mitchell is a longtime Nevada newspaper columnist. You may email him at thomasmnv@yahoo.com. Read additional musings on his blog at http://4thst8.wordpress.com/.

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