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.
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. Renothe states biggest city at the timegained world renown as Planet Earths 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 Nevadas 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 States old Wild West freedomthe legal freedom for adults to gamble. It was the beginning of Nevadas current $13 billion-a-year gaming industry.
In 1997, in Clark County alone nearly 170,000 weddings were performed. Las Vegas today is the worlds marriage capitalan 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 States heritage of individual liberty still has an impactif largely in name today rather than actual factis 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 arent aware that the state and local tax burden theyre paying is the sixth highest per capita in Americathe 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 Nevadas lack of an income tax has remained a useful symbol. Rather than rouse the great sleeping taxpayer beast, even Nevadas most Machiavellian revenue-seekers have found it prudent to ally themselves with lawmakers who speak for Nevadas 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 Nevadas 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:
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 Reagans 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.
Its relevant that it was because Nevada had no income tax law that La Gatta chose to move here. His proposalwhich has excited both interest among Nevada politicians and apprehensive suspicion among some business leaderscenters around what he argues is the "superlative opportunity" and "important asset" that Nevadas 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 Gattas 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 Nevadas 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 its no wonder folks want to take a closer look.
La Gatta argues thatjust like the states original gold and silver depositsNevadas 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 Nevadas 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 States 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 Gattas 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 Nevadas best chance for economic diversification.
"Playing Nevada" is La Gattas shorthand for what hes suggesting the Silver State do againplay what he sees as its traditional role. And he notes its 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 dont you follow the other states? Why dont you have a corporate income tax? Why dont you have a personal income tax? Why dont 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; its done it with gaming. Now, those things are gone but not everybody has [no income tax]."
In La Gattas view, Nevadas no-income-tax tradition is one of several long-term structural advantages that would allow the state eventually to successfully compete with Delaware, the nations 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 incorporationsand 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 Theres the Rub: New Taxes
he heart of La Gattas proposal is a new taxa 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 Dakotaone of the few other states with no personal or corporate income taxhas 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. "Theyre 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 its going to be 1 percent. Thats 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 instutionswould not turn out to simply be a big new tax on existing Nevada companies?
The intial form of La Gattas proposal presented the new "bulk-rate" regressive tax as simply a change in Nevada lawthus 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 statea scenario small business people may find doubtful.
"Appropriate grandfathering sounds like a good idea to me, and thats been bandied around among the types Ive talked to," he says. "The big onesif youre talking Bank of America and Wells Fargoyou just tell them, Cmon guys, dont sweat it. Bring in three times as much business and save it on what youre 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 Nevadas 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 burdenthe state ranks seventh nationally in that category, according to the Tax Foundation"merely means weve got more than our share of rich people here." And that reality, he argued, arises because Nevadas lack of an income tax recruits wealthy folks to the state.
In regard to Nevadas high per capita tax burden arising from state and local taxes, La Gatta acknowledged the fact but gave it a surprising turn.
"Im 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 states main tax burden. In other words, whats been called the regressivity of Nevadas tax structure can, under La Gattas idea, operate as a positiveattracting 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 its an approach that may be viable economically, it can easily be interpreted as callously elitist.
La Gatta points out that his approach to diversifying Nevadas economy differs in emphasis from what often seems to have been the reigning notionsoley seeking to attract to the state light manufacturing firms. Under the latter approach, he suggests, Governor Bob Millers 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 states new "bulk rate tax" for large companies, the young upwardly mobile professionals who staff the firms Silver State subsidiaries will enjoy Nevadas absence of income tax.
Then, says La Gatta, "they live happily ever afterbuying their [Louis] Vuitton bagswith sales taxand 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 Nevadas 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 Nevadas political leaders have demonstrated time and againselling new taxes on the basis that others will pay themhas to give one pause, even as this proposal gains momentum. The fact is, Nevadas real problem at the level of state government is not a shortage of revenue. Its a shortage of the will to scale back taxes of all kinds and really revive the states anti-tax tradition. NJ
Steven Miller is managing editor of Nevada Journal.