The only certainties in life are debt and taxes. But considering them in tandem can reduce both. The point to remember is that taxes are a price on public services. People won’t pay taxes that don’t deliver good roads and schools.

Taxes in Nevada

Compared to Chicago, Nevada gets good marks for its taxes. The Tax Foundation ranks its business tax climate as the seventh best in the country. It has no corporate income tax, and that should attract profit maximizers. But danger signs loom. According to the Tax Foundation, state, and local tax collections, $5,080 per person, equals less than three-fifths of the public debt. The state pension fund is most worrisome. Its assets cover only three-fourths of its liabilities, reports the fund.

Taxes in Nevada may rise to pay off debt. But property taxes on homes are already high. Although the tax rate on homes is low, the tax bill is one of the 16 highest in the country because of high property values, according to the Lincoln Institute of Land Policy, a reputable think tank.

Probably, business taxes will rise, not personal taxes, because home property taxes are already high, and the public will fight an individual income tax. Nevada has no such tax, one of seven states with that distinction—and one that historically has been reluctant to give up, partly due to competition with Florida for retirees.

The tax rate on state and local sales is the thirteenth highest in the country. It is not likely that Nevada could raise it much more without losing sales to low-tax Idaho and Utah. So, corporate taxes are the logical candidate for a tax increase. Tax rates on commercial and industrial property are low compared to other states, said the Lincoln Institute. Relative to residential property taxes, commercial property taxes in Nevada are America’s fourth lowest.

Do Taxes Stunt an Economy?

The prospect of a business tax hike should give pause for thought and pause again. The business tax is the price of public inputs into production, such as roads and police protection. An increase in most business taxes per se will raise the cost of production and thus discourage it. Business taxes thus reduce economic growth. But there are three caveats to this dictum that matter.

First, the tax hikes may finance improvements to business infrastructure. For example, a toll on a highway that accesses a large distributor may pay for repairs and new lanes. Walmart can then supply its stores more quickly.

Second, the firm may pass the tax hike to consumers without loss of sales. In that case, a tax increase will not decrease production because the firm will make as much profit as before from one more unit. But this case is rare. Sooner or later, customers almost always respond to price hikes by taking their business elsewhere. For example, the demand for movies in theaters fell sharply when televisions became affordable in the 1950s because they raised the price of cinema compared to other entertainment venues.

One good that is not sensitive to price is prescription medicine. Insurers, not patients, pay the bills. Thus, drug taxes raise money for the government without sharply cutting the drug supply. Of course, pharmaceutical companies tell another story. A tax on drug profits dampens innovation by lowering the rate of return to new drugs.

Third, the firm’s production may not depend on its costs, so a rise in tax costs will not reduce its output. For example, a land tax cannot affect land supply since the Man Above ignores His tax bills! This is why schools are financed with property taxes: We can spend more on schools without worrying about dragging down the economy. However, the property tax also applies to buildings. A tax on construction will indeed discourage it. Even the land tax in Nevada may eventually induce developers to move to Utah.

In short, if we wish to stimulate the economy, it makes sense to cut business taxes that do not pay for business services. Nevada’s main business tax is on gross receipts. It falls upon revenues (money that the firm takes in), not on profits (money that the firm keeps after expenses).

Consider a store that sells $1 million of goods annually and pays its workers and landowner $900,000. The store’s profit is $100,000. The corporate income tax applies to this amount. The store’s revenues are $1 million. The gross receipts tax applies to this larger amount. The impact of the gross receipts tax on a firm is several times greater than that of a corporate income tax. That’s why owners of small firms get sweaty palms over the gross receipts tax (also called a turnover tax).

The Wild, Wild Turnover Tax

Moreover, Nevada’s turnover tax varies wildly across industries, from 0.051 of one percent on mining to .331 of one percent on rail transportation. The varying tax rates invite political maneuvering. Rail lobbyists will ask legislators why their industry pays far more than mines. The turnover tax also dissuades firms from producing as much as they could.

As they produce another shirt, revenue falls (because shirts flood the market) while cost rises (workers demand overtime). By cutting weekly output, the income from the last shirt rises (the market is no longer flooded) while the cost falls (workers don’t work overtime). The firm profits more than before from the last shirt. Unfortunately, cutting output also cuts jobs.

In particular, the turnover tax kills off startups. That’s easy to do: Almost a fourth of all startups in the U.S. fail in the first year, and their average life is only 4.5 years, says the Small Business Administration. The gross receipts tax puts startups deeper in the red, stiffing entrepreneurs. In Nevada, the number of new businesses fell from November 2022 to December 2023 by 2.9%, reported the Census Bureau. Bad luck for the gamblers’ state: None of its neighbors saw new businesses decline except Oregon.

Because of such problems, the turnover tax, common decades ago, has disappeared in all but seven states.

Cutting business taxes is a tempting tool for attracting businesses. Surely, if Las Vegas lowers business tax rates, businesses will come. However, decades of empirical studies, pioneered by John F. Due in the 1960s, suggested that tax breaks rarely attracted firms. One reason was that states raced to the bottom to compete for firms.

If Nevada lowered its corporate income tax rate to 0%, so would Wyoming, Texas, Washington, and South Dakota. The tax cut would thus make Nevada no more likely than before to attract jobs. Although Nevada has one of the lowest commercial property tax rates in the country, the rates in several nearby states are even lower: Utah, Washington, Idaho—and Wyoming, which has the nation’s lowest rate, according to the Lincoln Institute.

Early empirical work also concluded that the most effective tax breaks were limited in value, as they were tailored for nearby firms. Nevada may be able to lure Restaurant A from Los Angeles with a tax holiday specifically for it, but a cut in the corporate income tax for all comers did not seem to work. The reason may be that the general tax cut eliminates revenues for improving roads, water supply and sewerage, telecommunications, and other services to businesses. In considering whether to relocate to Nevada, the firm weighs the savings in tax payments against the loss of infrastructure. It may well decide to keep the services that it has.

The New Truth about Tax Breaks

Recent work in tax breaks accounts for these factors, as well as for a fundamental one: In a competitive economy, every firm makes average profits eventually because extra profits made by one firm will lead rivals to cut their prices and take away its business. In this setup, a tax cut in Nevada will produce profits only until rivals in Utah lower their prices.

However, suppose instead that firms need not compete by cutting prices. Suppose that they have local market power. Your local convenience store can charge high prices because busy consumers in the neighborhood are willing to pay to save time. They don’t want to drive to the next suburb.

Then a tax cut can raise the firm’s profits for a long time because Las Vegas customers are willing to continue to pay soaring prices even though rivals in Salt Lake City lower their own. Work in the past few years on tax breaks, notably by Suárez Serrato and Zidar, starts with the idea that firms have power over local markets.

In this framework, it does appear that tax breaks raise corporate revenues. But half of the money goes to the firm’s owners! Only 40% of revenues trickle down to workers who would spend them. So, the old empirical conclusion that corporate tax breaks don’t stimulate much growth may still hold.

In the United States, taxes account for a fourth of the price of goods on average and, in the case of beer, 41%. In principle, a sales tax holiday may stimulate the economy by lowering prices and thus boosting demand. In a tax holiday, the state forgoes for a while the tax on sales of, say, outdoor equipment. Unfortunately, neighboring states may also offer tax holidays and thus steal the home state’s customers.

But Nevada does not have this problem. It is the only state in the Far West to offer sales tax holidays. However, Nevada’s holiday is complicated, notes the Tax Foundation. During the holiday, National Guard members can reclaim their tax payments “just” by submitting to the tax authorities: (a) a request, (b) their letter of exemption, and (c) their receipt. Repeat for every purchase. After all the paperwork, you may even have time left to enjoy the yacht you bought.

A few lessons: High taxes on certain goods should provide high value. A gasoline tax should fill potholes. Don’t tax goods bought by customers sensitive to price. They’ll stop buying the goods, and tax revenues will be zip. Apply the same tax rate to all goods in the same category. It is unclear why the turnover tax rate should be six times higher for rail transport than mines.

Learning From Chicago’s Tax Mistakes

When it comes to taxes, Nevada could learn from Chicago what not to do. The Windy City may rank only third in population among American cities, but it ranks second in debt per taxpayer — $41,500, second only to New York City with $56,500, according to Truth in Accounting, a project at the University of Denver.

Half of the city’s budget pays pensions and interest on debt. High debt adds to the pressure for a tax hike. But that could simply drive away employers and residents. City and local taxes already claim an eighth of a typical American family’s income, estimated a study for Washington, D.C. Property taxes were especially burdensome. According to the Lincoln Institute, Chicago has the highest commercial property tax rate among major American cities. Residential property taxes are also high.

In 2021, more people moved out of Chicago than from any other metropolitan area, according to a study by Allied Van Lines and Zillow reported by the Illinois Policy think tank. Of course, high taxes are not the only reason to pack up and skedaddle. But the failure to spend tax revenues effectively can’t help. In Chicago, an unusually large share of the tax revenues that the city can spend as it wishes goes to the police.

In Chicago, the only certainties are debt, taxes, and reckless city spending. Nevadans may profit from this example.