July 13, 2010
Tax Foundation Analysis Shows Harmful Nature of Corporate Income, Gross Receipts Taxes
Washington, DC, July 13, 2010 - Enacting a corporate income tax or a gross receipts tax in Nevada would make the state's tax climate less attractive for capital investment and job creation, harming the state's competitive advantage over others in the region, according to a new Tax Foundation report.
Broadening the sales tax base to include all end-user goods and services and lowering the sales tax rate is consistent with sound tax reform, according to the report.
"As policymakers consider these and other tax reform proposals, they would do well to keep in mind the impact that certain taxes have on revenue stability and economic distortions," said Tax Foundation Tax Counsel and Director of State Projects Joseph Henchman, who authored the report. "Corporate income taxes are the most volatile of the major tax revenue sources and are the most harmful tax for economic growth."
Tax Foundation Fiscal Fact, No. 235, "Nevada Panel Considering Tax Reform Options, Including New Business Taxes," is available online at http://www.taxfoundation.org/publications/show/26507.html.
The report examines year-to-year changes in state tax revenue among property, general sales, excuse, individual income and corporate income taxes and found that the annual percentage changes varied the most among corporate income taxes. The standard deviation, a volatility measure analyzing whether the year-to-year percentage changes are about the same or whether there's considerable variability, for corporate income taxes is 15.43 - nearly twice the amount for individual income taxes (8.10) and almost five times the amount for general sales taxes (3.16).
The standard deviation is 6.17 for property taxes, 2.81 for excise taxes and 5.02 for all taxes.
"Such volatility can be problematic for state budgets, where predictability and year-over-year revenue smoothness is preferred to maintain annual spending commitments," Henchman said. "This is especially troubling for a state that has a bi-annual budgeting procedure."
Another reform being considered is a harmful type of tax known as a gross receipts tax, which is imposed on all transactions and results in what economists call "tax pyramiding" as products move through the production process. Gross receipts taxes interfere with business investment decisions, leading to lower economic growth and job growth, according to the report.
One suggestion for sound tax reform is to broaden the sales tax base and apply it to all consumer purchases of goods and services, but exclude business purchases to avoid double-taxation of some products. Without special-interest carve-outs for certain industries or products, substantial revenue can be raised with low tax rates.
"With Washington, Oregon, California, and Arizona recently raising taxes, Nevada's already enviable tax climate looks better and better," Henchman concluded. "As the economy improves, the state is well-positioned for capital investment and job creation. This is an advantage that Nevada should be careful not to jeopardize."
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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