Residents of Southern Nevada await Clark County Commissioners’ inevitable imposition of the quarter-cent sales tax increase, a hike voters overwhelmingly approved earlier this month. In Northern Nevada, Washoe County Commissioners gave initial approval to the quarter-cent increase on November 17. Since 1997, when legislators passed a bill which allowed commissioners to raise their counties’ sales tax rates, debates have raged over the need for additional revenue to fund infrastructure projects in Las Vegas and Reno. But these battles have missed a more significant point: Residents of Nevada already face one of the highest sales tax burdens in the country. This burden is particularly onerous for low-income workers and families. A tax on sales is inherently regressive, since its rate remains the same for all, regardless of income. Herewith, a look at why Nevada’s sales tax is harmful to less affluent citizens—and detrimental to the Silver State’s economic health as well.
The Sales Tax Bite
Nevada’s base sales tax is 2 percent. A school support tax adds an extra 2.25 percent. A number of additional taxes are imposed by Nevada’s 17 counties. The sales tax totals 6.5 percent in 10 of Nevada’s counties, but in Clark and Washoe Counties—where the vast majority of Nevadans live—the rate is 7 percent (7.25 percent when the quarter-cent increases go into effect). Each state that borders Nevada has a lower sales tax rate except California—Oregon has no sales tax at all. The average sales tax rate for the nation is 5 percent, meaning that most Nevadans will soon pay 45 percent more in sales tax than the typical American. By any standard, Nevada’s sales tax rate is very high. Adjusting for income, it’s higher for some than for others.
Soak the Poor
As Las Vegas Business Press Managing Editor Hugh Jackson recently wrote, "Sales taxes are regressive, because they place a larger relative burden on lower-income families." In a 1996 study, Citizens for Tax Justice documented that lower-income households pay over six times as great a share of their incomes in sales and excise taxes as do wealthier families. Middle-income households pay four times as great a share. Unprepared food is not taxed in the Silver State, but it is not remotely accurate to claim that Nevadans with modest incomes seldom encounter the sales tax. In a lengthy media release which outlined his objections to the quarter-cent hike in Clark County, Assemblyman Harry Mortenson observed that the sales tax is applied to many necessities, including diapers, automobiles, soap, shoes, school supplies, toilet paper, clothing and appliances. Nevada, almost alone among the states, levies its sales tax on many medical necessities.
Nevada Policy Research Institute Senior Research Fellow Ralph Heller made note of the Silver State’s "medieval tax structure" earlier this year. "In just the last two decades," he wrote in Nevada Journal, "[the state] has passed multiple increases in its gasoline tax, its sales tax, its insurance premium tax, its cigarette tax, its property tax plus a long list of fee increases including automobile registration fees and the driver’s license fee." These hikes have taken their toll. Last year a District of Columbia study examined the tax burdens of the largest cities in each of the 50 states. Las Vegas was named one of three "cities with the least progressive state and local tax systems."
How Much Do Tourists Really Pay?
Many government officials claim that tourists cover a heavy chunk of Nevada’s sales tax bill. Yet this line of reasoning is becoming less credible as more people move to Nevada permanently and visitor numbers throughout the state level off—and possibly even decline, given the passage of Proposition 5 in California. The sales tax already accounts for a greater share of Nevada’s general fund than taxes collected from casinos. As Heller notes, "Economists have repeatedly told us that fully 50 percent of all retail sales are made between Thanksgiving and Christmas. But if you visit a shopping mall in Las Vegas or Reno [this holiday season], how many out-of-state cars do you really expect to find?" The "tourists pay" argument is especially weak in rural Nevada. Tourists contribute far less to the economies outside of Nevada’s two population centers, yet most residents of rural Nevada face only a marginally smaller sales tax burden than those in the Las Vegas and Reno metropolitan areas.
A Lesson from the Big Apple
For years, free-market proponents have amassed evidence that lowering taxes produces greater economic activity. Thus, cutting taxes rather than raising them can often generate greater revenue for government. The effects of changes to the federal income tax clearly support this theory. There’s little doubt that tax cuts can help state and municipal governments as well. A solid example of this is currently at work in, of all places, New York City. Tax cuts were once unthinkable in America’s big-government capital. But not anymore—in 1994, at the urging of Mayor Rudolph Giuliani, the city’s hotel occupancy tax was cut by a third. The total revenue generated by the tax did not decline, but rose. Now the Big Apple is applying the same philosophy to its sales tax. During one week in January 1997, sales tax was suspended on clothing items under $500 within the city. Helping lower-income families was one goal of the experiment. "Traditionally [the] sales tax hits poor families hardest, because they spend a large percentage of their incomes—sometimes as high as 12 percent—on clothes," said the mayor. The retail sales the city was losing to New Jersey, which does not tax clothing, was another justification for the holiday. New York City has now conducted four sales tax-free holidays, and each time business at clothing stores has surged. As New York City Economic Development Corporation President Charles Millard wrote in the Wall Street Journal, the experiments "demonstrated a simple truth: Lower taxes spur economic activity." Legislators in Albany got the message—they have permanently removed clothing items under $110 from state sales tax, starting in December 1999.
Conclusion
The sales tax is the most regressive tax in Nevada, and no attempts to raise it yet again should overlook the effect doing so would have on households with modest incomes. Silver State legislators and county commissioners should be aware of how New York City’s tax-free experiments have given relief to poor families and a boost to merchants. (By slashing its sales tax or reducing the number of items which are taxable, Nevada could draw shoppers from California and Arizona.) Nevada’s sales tax penalizes those with lower incomes, significantly saps the purchasing power of all consumers and stifles economic activity within the state. It is unfortunate that elected officials do not seem to grasp this reality. The question regarding Nevada’s sales tax is not how much it should be raised, but how much it should be cut.
D. Dowd Muska, a non-smoker, is a contributing editor for Nevada Journal, the Nevada Policy Research Institute’s monthly magazine. He can be contacted at ddm@npri.org.
At Nevada Policy, both our board of directors and staff are committed to promoting policy ideas consistent with the principles of limited government, individual liberty and free markets.
The Most Regressive Tax in Nevada
Residents of Southern Nevada await Clark County Commissioners’ inevitable imposition of the quarter-cent sales tax increase, a hike voters overwhelmingly approved earlier this month. In Northern Nevada, Washoe County Commissioners gave initial approval to the quarter-cent increase on November 17. Since 1997, when legislators passed a bill which allowed commissioners to raise their counties’ sales tax rates, debates have raged over the need for additional revenue to fund infrastructure projects in Las Vegas and Reno. But these battles have missed a more significant point: Residents of Nevada already face one of the highest sales tax burdens in the country. This burden is particularly onerous for low-income workers and families. A tax on sales is inherently regressive, since its rate remains the same for all, regardless of income. Herewith, a look at why Nevada’s sales tax is harmful to less affluent citizens—and detrimental to the Silver State’s economic health as well.
The Sales Tax Bite
Nevada’s base sales tax is 2 percent. A school support tax adds an extra 2.25 percent. A number of additional taxes are imposed by Nevada’s 17 counties. The sales tax totals 6.5 percent in 10 of Nevada’s counties, but in Clark and Washoe Counties—where the vast majority of Nevadans live—the rate is 7 percent (7.25 percent when the quarter-cent increases go into effect). Each state that borders Nevada has a lower sales tax rate except California—Oregon has no sales tax at all. The average sales tax rate for the nation is 5 percent, meaning that most Nevadans will soon pay 45 percent more in sales tax than the typical American. By any standard, Nevada’s sales tax rate is very high. Adjusting for income, it’s higher for some than for others.
Soak the Poor
As Las Vegas Business Press Managing Editor Hugh Jackson recently wrote, "Sales taxes are regressive, because they place a larger relative burden on lower-income families." In a 1996 study, Citizens for Tax Justice documented that lower-income households pay over six times as great a share of their incomes in sales and excise taxes as do wealthier families. Middle-income households pay four times as great a share. Unprepared food is not taxed in the Silver State, but it is not remotely accurate to claim that Nevadans with modest incomes seldom encounter the sales tax. In a lengthy media release which outlined his objections to the quarter-cent hike in Clark County, Assemblyman Harry Mortenson observed that the sales tax is applied to many necessities, including diapers, automobiles, soap, shoes, school supplies, toilet paper, clothing and appliances. Nevada, almost alone among the states, levies its sales tax on many medical necessities.
Nevada Policy Research Institute Senior Research Fellow Ralph Heller made note of the Silver State’s "medieval tax structure" earlier this year. "In just the last two decades," he wrote in Nevada Journal, "[the state] has passed multiple increases in its gasoline tax, its sales tax, its insurance premium tax, its cigarette tax, its property tax plus a long list of fee increases including automobile registration fees and the driver’s license fee." These hikes have taken their toll. Last year a District of Columbia study examined the tax burdens of the largest cities in each of the 50 states. Las Vegas was named one of three "cities with the least progressive state and local tax systems."
How Much Do Tourists Really Pay?
Many government officials claim that tourists cover a heavy chunk of Nevada’s sales tax bill. Yet this line of reasoning is becoming less credible as more people move to Nevada permanently and visitor numbers throughout the state level off—and possibly even decline, given the passage of Proposition 5 in California. The sales tax already accounts for a greater share of Nevada’s general fund than taxes collected from casinos. As Heller notes, "Economists have repeatedly told us that fully 50 percent of all retail sales are made between Thanksgiving and Christmas. But if you visit a shopping mall in Las Vegas or Reno [this holiday season], how many out-of-state cars do you really expect to find?" The "tourists pay" argument is especially weak in rural Nevada. Tourists contribute far less to the economies outside of Nevada’s two population centers, yet most residents of rural Nevada face only a marginally smaller sales tax burden than those in the Las Vegas and Reno metropolitan areas.
A Lesson from the Big Apple
For years, free-market proponents have amassed evidence that lowering taxes produces greater economic activity. Thus, cutting taxes rather than raising them can often generate greater revenue for government. The effects of changes to the federal income tax clearly support this theory. There’s little doubt that tax cuts can help state and municipal governments as well. A solid example of this is currently at work in, of all places, New York City. Tax cuts were once unthinkable in America’s big-government capital. But not anymore—in 1994, at the urging of Mayor Rudolph Giuliani, the city’s hotel occupancy tax was cut by a third. The total revenue generated by the tax did not decline, but rose. Now the Big Apple is applying the same philosophy to its sales tax. During one week in January 1997, sales tax was suspended on clothing items under $500 within the city. Helping lower-income families was one goal of the experiment. "Traditionally [the] sales tax hits poor families hardest, because they spend a large percentage of their incomes—sometimes as high as 12 percent—on clothes," said the mayor. The retail sales the city was losing to New Jersey, which does not tax clothing, was another justification for the holiday. New York City has now conducted four sales tax-free holidays, and each time business at clothing stores has surged. As New York City Economic Development Corporation President Charles Millard wrote in the Wall Street Journal, the experiments "demonstrated a simple truth: Lower taxes spur economic activity." Legislators in Albany got the message—they have permanently removed clothing items under $110 from state sales tax, starting in December 1999.
Conclusion
The sales tax is the most regressive tax in Nevada, and no attempts to raise it yet again should overlook the effect doing so would have on households with modest incomes. Silver State legislators and county commissioners should be aware of how New York City’s tax-free experiments have given relief to poor families and a boost to merchants. (By slashing its sales tax or reducing the number of items which are taxable, Nevada could draw shoppers from California and Arizona.) Nevada’s sales tax penalizes those with lower incomes, significantly saps the purchasing power of all consumers and stifles economic activity within the state. It is unfortunate that elected officials do not seem to grasp this reality. The question regarding Nevada’s sales tax is not how much it should be raised, but how much it should be cut.
D. Dowd Muska, a non-smoker, is a contributing editor for Nevada Journal, the Nevada Policy Research Institute’s monthly magazine. He can be contacted at ddm@npri.org.
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