blank.gif (51 bytes) "Playing Nevada"
A Way to Save the Silver State's Bacon?
Or a New Way to Impose New Taxes?
by Steven Miller

gain and again when times have been tough, Nevada has turned up a powerful hole card: its Old West libertarian heritage. Nearly always, that card has won the hand Nevada has been dealt.

Siderbar:
La Gatta on the Education Connection

In the 1900s, with attitudes lingering from its recent frontier past, the Silver State was already granting quick divorces. By the mid-1920s the practice had evolved into a major statewide industry, drawing millionaires and celebrities into short-term residence, enriching legal practitioners and underwriting local and state government. Reno—the state’s biggest city at the time—gained world renown as Planet Earth’s divorce capital.

In the early 1930s, in Nevada as elsewhere, illegal card and dice games were rampant. At the same time, it was the onset of the Great Depression and Nevada’s state government was broke. In February and March of 1931, after long years of debate, state lawmakers came to a consensus: they would reinstate a bit of the Silver State’s old Wild West freedom—the legal freedom for adults to gamble. It was the beginning of Nevada’s current $13 billion-a-year gaming industry.

In 1997, in Clark County alone nearly 170,000 weddings were performed. Las Vegas today is the world’s marriage capital—an immense business channeling untold millions of dollars into the state. And what is the source of that flood of revenue? Once again it is the unique respect that the Silver State has historically granted to the principle of individual autonomy.

Distinctly repudiating the Nanny-State-knows-best attitudes of other states, Nevada has chosen to not demand that adults undergo blood tests or waiting periods as a condition of receiving marriage licenses. Indeed, Nevada law apparently has never had any such requirement. That was the conclusion of researchers at the state Legislative Counsel Bureau after a recent examination of the historical record.

The ‘Low-Tax’ Game

ne more major area where the Silver State’s heritage of individual liberty still has an impact—if largely in name today rather than actual fact—is in the sphere of taxes. Although Nevadans actually now bear one of the highest per capita tax burdens in the country, many state politicians remain ever eager to pretend in public that Nevada remains a low-tax paradise. To short-run thinkers, it can look like smart politics: So long as Silver State voters aren’t aware that the state and local tax burden they’re paying is the sixth highest per capita in America—the figures are from the Tax Foundation in Washington, D.C.—Nevada politicians have room to maneuver. Thus over the last two decades working Nevadans have been hit with swarms of new below-the-radar fees and taxes that effectively subsidize powerful special interests. And the governors and lawmakers perpetrating these schemes have largely paid no price at the polls.

A key requirement of the game, however, has always been preserving at least the illusion of low taxes. And for that purpose Nevada’s lack of an income tax has remained a useful symbol. Rather than rouse the great sleeping taxpayer beast, even Nevada’s most Machiavellian revenue-seekers have found it prudent to ally themselves with lawmakers who speak for Nevada’s tradition of liberty and recognize that the growth of government taxation is the diminishment of freedom. The resulting coalition has remained lethal for attempts to impose income taxes in the Silver State, thus allowing Nevada’s reputation as a low-tax state to limp gamely on.

Now that reputation is being appealed to once again. And the question, again, is which element of that same strange-bedfellows coalition is going to prevail?

A Call to, Again, ‘Play Nevada’

uring the hectic last days of the 1998 election season, a fat, saffron-colored envelope began appearing in the mailboxes of Nevada lawmakers. Within the packet was a 40-page proposal, sent by a relative newcomer to the state, who few of them knew. The paper described, said its author, John H. O. La Gatta, a way to:

  • Diversify Nevada’s economy;
  • Deal with the expected loss of large chunks of Nevada’s gaming revenue amid the damage to that business from California’s newly validated Indian casinos;
  • Bring more revenue into state and local government to meet anticipated new demands from the state’s growing population;
  • And best of all, do all this with no new tax burden on the citizens of the state.

La Gatta describes himself as a specialized kind of investment banker who, after a 35-year career, decided to move his residency away from New York and San Francisco. That was a little less than three years ago.

"I was living in the two states with the greediest governors and I was beginning to run out of Ronald Reagan’s 15-year depreciation," he says. Looking for the states with the most favorable income tax situations, La Gatta discovered Nevada and ultimately chose to settle in Reno.

It’s relevant that it was because Nevada had no income tax law that La Gatta chose to move here. His proposal—which has excited both interest among Nevada politicians and apprehensive suspicion among some business leaders—centers around what he argues is the "superlative opportunity" and "important ‘asset’" that Nevada’s tax laws constitute for the state.

Of course, the general idea that tax restraint helps attract business is not new. Nor is the idea that a state can profit as a tax haven. Both have been staples of Nevada economic planners for a long time and often incorporated into specific projects and laws.

In many respects La Gatta’s proposal parallels some other recent efforts to tap the financial and corporate sectors as a new and major empire of potential revenue and income for the state. Given the pessimistic projections for Nevada’s longtime cash cow, gambling, and the facts that the potential empire of new business appears to be within striking distance and that the businesses coming to the state would largely be environmentally benign, and it’s no wonder folks want to take a closer look.

La Gatta argues that—just like the state’s original gold and silver deposits—Nevada’s particular, historically determined tax tradition constitutes a uniquely valuable asset. But "[u]nlike gold and silver … this asset is entirely man made," he writes in his proposal. "It can be thought of as an accident of history, an intangible, and most certainly a creation of the legislature."

Acknowledging that Nevada’s divorce and gaming laws are unique no longer because of imitation in other jurisdictions, La Gatta says other states would be hard-pressed to try to neutralize the Silver State’s prospective advantage on the no-income-tax front. Most other states are basically locked into their income taxes, he says.

"California, New York and most other populous states," writes La Gatta, "are saddled with entrenched bureaucracies, unions, and constituencies that will make it difficult to materially reduce or eliminate broad-based taxes such as personal income taxes and corporate income taxes."

Moreover, La Gatta’s paper makes a detailed argument that the Silver State has a real shot at soon hosting major global firms’ financial- and corporate-sector operations. Until very recently, at least, conventional wisdom here in Nevada has seen light manufacturing as Nevada’s best chance for economic diversification.

"Playing Nevada" is La Gatta’s shorthand for what he’s suggesting the Silver State do again—play what he sees as its traditional role. And he notes it’s not the kind of advice that the state will get, or has gotten, from hired professionals.

"Typically consultants and experts a state hires," he told Nevada Journal, "will just say, ‘Well, why don’t you follow the other states? Why don’t you have a corporate income tax? Why don’t you have a personal income tax? Why don’t you do other broad-based taxes—[but] you know, keep it competitive, by making it half of the other states.’

"I think that would be a shame when you have this opportunity to play Nevada again," he said.

"I mean, Nevada did it with divorce; it’s done it with gaming. Now, those things are gone … but … not everybody has [no income tax]."

In La Gatta’s view, Nevada’s no-income-tax tradition is one of several long-term structural advantages that would allow the state eventually to successfully compete with Delaware, the nation’s per capita leader in business incorporations. Even in the near future he argues, the Silver State can significantly expand both its incorporation "franchise"—its annual revenue "annuity" from out-of-state incorporations—and its in-state economic growth, diversification and revenue.

How, specifically, should Nevada go after the "low-tax" business? What steps exactly are required to get the financial sector operations of big corporations moving to Nevada?

Ay – There’s the Rub: New Taxes

he heart of La Gatta’s proposal is a new tax—a consciously regressive "bulk rate tax" designed to attract major financial institutions. He notes Delaware taxes bank income up to $20 million at 8.7 percent, then cuts the rate to 2.7 percent on the portion of income over $30 million. And South Dakota taxes financial institution income up to $500 million at 6 percent, but scales down that tax to only 1 percent on the portion over $600 million. Nevada, he suggests, should do something similar.

He notes that South Dakota—one of the few other states with no personal or corporate income tax—has already attracted some very large financial institutions with this approach.

"You can see how South Dakota is making hay with this," La Gatta told Nevada Journal. "They’re elephant hunters. I mean, they go out and say: ‘Big monster institution, your [incentive] is 30 million bucks or thereabouts. Your first 500 hundred million in income is going to be taxed at 6 percent, and very quickly thereafter it’s going to be 1 percent.’ That’s South Dakota," he continues. "They got Citibank and other monsters to go there."

Nevada, he argues, could easily join in the competition with an analogous but better tax schedule.

Working out the exact specifics of that particular package of tax and incorporation law, he says would require some significant preliminary research and analysis, followed by passage of the new statutes in the Nevada legislature.

Opening the Barn Door?

ow solid are the assurances that this new tax —presented as a way to attract out-of-state financial instutions—would not turn out to simply be a big new tax on existing Nevada companies?

The intial form of La Gatta’s proposal presented the new "bulk-rate" regressive tax as simply a change in Nevada law—thus imposing the new levies on all present and future Nevada financial corporations. But now the investment banker says the legislature should work out protection for the small companies already in the state—a scenario small business people may find doubtful.

"Appropriate grandfathering sounds like a good idea to me, and that’s been bandied around among the types I’ve talked to," he says. "The big ones—if you’re talking Bank of America and Wells Fargo—you just tell them, ‘C’mon guys, don’t sweat it. Bring in three times as much business and save it on what you’re not paying in California and New York.’"

In the scenario painted by La Gatta, as soon as the new legal infrastructure is in place with its targeted tax advantages, low-tax Nevada necessarily will become a factor in the considerations of the large financial and corporate-sector firms the state is targeting. As these businesses compete and seek to maximize their profits, market pressures and incentives will drive them, over time, to incorporate their new subsidiaries in Nevada.

Given Nevada’s little publicized but actually high per capita tax burden, Nevada Journal asked La Gatta how the state could honestly sustain any significant bid for a national tax haven role.

The investment banker responded by noting first that Nevadans’ high per capita federal tax burden—the state ranks seventh nationally in that category, according to the Tax Foundation—"merely means we’ve got more than our share of rich people here." And that reality, he argued, arises because Nevada’s lack of an income tax recruits wealthy folks to the state.

In regard to Nevada’s high per capita tax burden arising from state and local taxes, La Gatta acknowledged the fact but gave it a surprising turn.

"I’m talking about high-paid yuppies, at best," he said. And those well-paid yuppies, he believes, will basically like the fact that things other than income carry the state’s main tax burden. In other words, what’s been called the regressivity of Nevada’s tax structure can, under La Gatta’s idea, operate as a positive—attracting wealthy young sales- and property-tax payers to the state at the same time as it attracts the large financial-institutions that employ them. While it’s an approach that may be viable economically, it can easily be interpreted as callously elitist.

La Gatta points out that his approach to diversifying Nevada’s economy differs in emphasis from what often seems to have been the reigning notion—soley seeking to attract to the state light manufacturing firms. Under the latter approach, he suggests, Governor Bob Miller’s quarterly $25-per-employee job tax does have a regressive and punitive effect on low-income/low-productivity jobs in casinos or light industry. But under his own approach, he argues, a $100-a-year "head tax" makes much less difference to a business when the employee being hired is paid $50-to-75 grand a year.

His theory, says La Gatta, is that Nevada diversification efforts should focus on the "intangible" businesses with their "clean white-collar jobs, ranging from the top-drawer legal-type secretary on up through computer jocks, and lawyers and accountants and financial types." While the global firms will have moved to Nevada for the state’s new "bulk rate tax" for large companies, the young upwardly mobile professionals who staff the firms’ Silver State subsidiaries will enjoy Nevada’s absence of income tax.

Then, says La Gatta, "they live happily ever after—buying their [Louis] Vuitton bags—with sales tax—and paying property taxes."

Will Nevada ‘Play’ Again?

t the time John La Gatta was first interviewed for this article, just after the election, he and his secretary were actively seeking appointments with legislators and constitutional officers of Nevada’s state government. Among both Democrats and Republicans, he said, the response to his paper had been quite favorable. La Gatta also noted that, independently of him, a study group of attorneys in Reno has already been working on a parallel track to develop draft language for Nevada business trust law comparable to that now existing in Delaware.

These laws would let the Silver State profit by offering firms across the country and around the world relief from other jurisdictions’ high taxes. Doing well by doing good, one would hope.

Yet the modus operandi Nevada’s political leaders have demonstrated time and again—selling new taxes on the basis that others will pay them—has to give one pause, even as this proposal gains momentum. The fact is, Nevada’s real problem at the level of state government is not a shortage of revenue. It’s a shortage of the will to scale back taxes of all kinds and really revive the state’s anti-tax tradition. NJ

 Steven Miller is managing editor of Nevada Journal.

News to Use
Nevada Commission on Economic Development
http://www.state.nv.us/businessop/

Nevada State Legislature website
http://www.leg.state.nv.us

Steven Miller
sm@npri.com


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