Elliott Parker: Nevada needs a new economic mindset

Gov. Brian Sandoval delivered his annual "State of the State" speech a little more than a week ago, and set out his budget proposal for the next biennium. A little more than a week from now, the Legislature will begin to consider whether that budget is a realistic statement of where we are and an appropriate vision of where we need to go.

How stands the state of the state? It's not rock-bottomed and copper-sheathed, as Daniel Webster might have wanted, but it has improved from the dark days when all economic indicators pointed down.

There are signs that Nevada's economy is improving. The key is housing, where real inflation-adjusted average prices have risen by more than 10 percent over the last nine months, compared to a two-thirds drop over the six years prior. Personal income has kept up with inflation over the last three years, after dropping dramatically between 2007 and 2009. And Nevada's population is once more growing faster than the nation's, which is odd, considering that our unemployment rate remains the highest of any state.

Sandoval pointed out that there are about 30,000 new jobs in Nevada compared to two years ago. We lost almost 180,000 jobs in the three years from 2007 to 2010, which canceled out all the job gains since 2002.

Where are these new jobs? In spite of efforts by the governor to attract new business, they are in the same old sectors. Almost two-thirds of these new jobs are in the so-called leisure sector, mostly meaning hotels, restaurants, and casinos, and almost a third are in retail trade, warehousing, and transportation. Some are in the gold mines of northeast Nevada.

Unfortunately, the rest of our state's economy continued to lose jobs over the last two years. While 70,000 construction jobs were lost in the first three years of the Great Recession, in the last two years another 6,000 were lost. Manufacturing lost another thousand jobs, while falling property tax revenues led to the loss of another 3,000 jobs in city and county governments. Everything else is flat over the last two years, with 2012 a little better than 2011.

What of the efforts to attract new business? In spite of a few highly-touted examples, we have very little to show for it so far. We give tax rebates and other special favors without demanding anything in return, without really accounting for the giveaways or holding the beneficiaries to their promises. As a result, we have yet to see many new jobs created by the state's efforts to bring businesses to Nevada, although we can hope there will eventually be a payoff.

In a flat economy, perhaps it should come as no surprise that the governor's budget proposal is also flat. A general fund budget of $6.5 billion over two years sounds like a lot of money, but it works out to less than 2.5 percent of our Gross State Product. The budget's proposed growth over the present biennium is less than the inflation rate plus population growth, so in real per-capita terms it is still falling.

The governor includes a few little gifts here and there, and his tone is optimistic and grand, but a close look at the budget allocations says we are doing everything on the cheap. Compared to the other 49 states, this is still the smallest state government budget in the country, relative to GSP. We are even hiring teachers on the cheap, expanding the Teach for America program for low-income schools instead of hiring more professional teachers who will be here for the long term.

Compared to the last five years, flat is good. Like others, faculty at my university are relieved not to be going through another near-death experience. Over the last five years, UNR's state appropriation has been cut by 30 percent even though prices have risen by 9 percent and enrollments have grown by 18 percent. Students have paid for about half of these cuts with higher tuition and fees. But both Sandoval and Gov. Jim Gibbons before him proposed much larger decreases in higher education funding, so we are thankful it wasn't worse, and thankful even more cuts are now off the table.

Sandoval has proposed restoring some funding to the Guinn Millennium Scholarship program, not to adjust for tuition increases but enough to keep the program through the end of his term. He proposes cutting state employee furloughs in half, though these should be eliminated entirely, perhaps through a trigger if revenues continue to exceed Economic Forum forecasts. While Sandoval has not suggested restoring the pay cuts state employees took two years ago, he has proposed restoring some merit or step increases after another year. And he supports the new higher education budget formula, which will reallocate a larger share of a fixed higher education pie to Clark County while giving colleges and universities more control over their own student tuition.

Still, it is hard not to be disappointed that this budget makes few real changes. Many studies collect dust on the legislative shelf, all telling us we need to restructure our state revenues to fit our economy. Nevada's casinos may have stabilized but they are not likely to be a source of growth in the future, and we still depend on the gaming tax for a quarter of state revenue. Sales and use taxes, which mostly exclude services - even though services account for the larger part of our economy - bring in another third of revenue.

Mining taxes, meanwhile, only provide 3 percent of state general fund revenue, and represent a total of about 1 percent of gold production in Nevada. Though many argue that mining ought to pay more in taxes for extracting our state's natural resources, comparable perhaps to what oilmen in Texas pay, the Governor's budget actually projects declining mining taxes.

A good tax system draws revenue from a broad spectrum of sources, from a diversified base that allows low rates. We could easily adopt tax structures from other states without reinventing the wheel, at low rates that keep us competitive. This budget does not do that.

Instead of a low-tax state, Nevada is in many ways a no-tax state. Nevada is one of only six states without a personal income tax, and one of only five states without a corporate income tax. The Governor now proposes cutting the low modified business tax, while at the same time draining the rainy day fund, an odd proposal since our economy is no longer in free fall.

Even including our modified business tax and other miscellaneous taxes, the Tax Foundation rates Nevada as the state with the third most business friendly tax climate. So why do we attract so few businesses? If you ask the corporations, it's because we lack the infrastructure and the education system they require.

The Great Recession has taught us that we can no longer rely on Nevada's old economy to pull us toward a bright future. What we need from our Sandoval and Legislators is a new vision that will take us where we want to go, to a prosperous future in which our taxation, education system, health care, recreation opportunities, and public infrastructure not only draw big firms here, but also dissuade our entrepreneurs and our best and brightest students from leaving the state for a better education and better business opportunities elsewhere. A new economy requires a new mindset.

That mindset was not in evidence in the State of the State address. Although the speech was well delivered, it essentially postpones taking the kind of action needed to take us beyond a flat economy and a flat future, in which we remain as vulnerable as ever to the next recession that might come along.

• Professor Elliott Parker is chairman of the Department of Economics at the University of Nevada, Reno.