Power struggle over tax and revenue system lurking ahead of 2015 Legislature

The unanticipated Republican takeover of the Nevada Assembly has thrown a potential monkey wrench into Gov. Brian Sandoval’s plans to restructure Nevada’s tax and revenue system.

While most thought the Assembly’s Democratic majority would shrink, no one — pundits, political operatives, members of the Legislature or the governor’s advisers — expected the Republicans to claim a solid majority.

Sandoval had been dealing with Sen. Michael Roberson, R-Las Vegas, who was expected to become Senate Majority Leader and Speaker Marilyn Kirkpatrick, D-North Las Vegas, who was expected to retain that post for the 2015 session.

Kirkpatrick, in fact, was in Carson City the week before the Nov. 4 election meeting with the governor and his staff on plans to overhaul the state’s tax and revenue system.

It’s generally believed both had pretty much agreed to back Sandoval’s upcoming proposals for the 2015 Legislature.

But, when all the ballots were counted, the Legislature’s lower house went from 27-15 Democrat to 25-17 Republican. While Roberson is the new majority leader in the Senate, Sparks Assemblyman Ira Hansen was the choice to become speaker. He replaced Reno’s Pat Hickey who many in the caucus saw as too moderate.

The practical effect of the election result is instead of needing to flip just one Republican Assembly member to get a two-thirds majority and pass or reform taxes, Sandoval now needs to convince 10 Republicans to join Democrats in making any significant changes.

That will be a major challenge — especially any changes designed to increase state revenue — since there are at least eight members of the Republican Assembly caucus who have signed the no-tax pledge.

Hansen said Republicans will be willing to listen to the governor. “Nobody is saying no to anything until we see what the governor wants,” Hansen told the Las Vegas Review-Journal on Saturday. “Obviously I have a very conservative group. So taxation is like the very last line of defense. It’s the easy way out. We need to look at all the options in the budget before we just say yes or no to something as big as taxes.”

As of Saturday, Hansen had not spoken to Sandoval.

Even more problematic for the governor, one of the eight is the newly named chairman of the Assembly Taxation Committee, Michele Fiore of Las Vegas.

University of Nevada, Reno political science chairman Eric Herzik said the conservatives who swept into office Nov. 4, owe Sandoval who claimed a 71 percent victory margin. Without Sandoval, he said he doubts many of them would have unseated Democratic incumbents.

“The governor, who many conservatives don’t trust, showed them how to win,” Herzik said.

Herzik said he doubts the Republican Assembly will do Sandoval much good during the session, pointing to Fiore chairing Taxation. “If that isn’t the most conservative part of the caucus waving the middle finger at the governor, I don’t know what is,” he said.

He said even if the governor wants to reform, not raise taxes, Fiore may make things difficult.

“For the most conservative members, even reforming taxes is often seen as a tax increase,” Herzik said.

Fred Lokken of the Truckee Meadows Community College Political Science Department too said no one saw the Assembly takeover coming including Sandoval.

But he said Sandoval was smart not to offer any details of what he is planning.

“The simple reality is he could change course 180 (degrees) and we wouldn’t necessarily be able to confirm it,” he said.

He said as the state climbs out of the recession, there has been a growing move to reform a tax and revenue system that has performed badly for the past several years.

“If all that is off the table, we will continue to be a state of three million operating with a tax system designed in the 1960s,” Lokken said.

One big piece of reform Sandoval may have been looking at is extending the sales and use tax to services since that has become the majority of Nevada’s economy. That would enable him to lower the overall tax rate significantly while providing the state more total revenue.

But his chances of convincing the Assembly leadership to back that plan are slim at best.

Beyond that, a potential target looming large in front of lawmakers is the 243 tax breaks currently in statute. According to a report issued Monday by the Department of Taxation, those exemptions, abatements, credits, deductions and other tax reductions cost the state of Nevada $3.77 billion in fiscal 2013-2014.

Some of them can’t be changed by lawmakers such as the voter-approved provision exempting food from the sales tax. But many others are purely statutory, including the nearly 80 property tax breaks different categories of people and businesses get. Even some conservative members have expressed a willingness to look at some of those breaks, although not on the record at this point.

Republicans agree with Democrats Nevada needs more revenue to meet rising costs, some of which are outside the state’s control. The biggest example there is the cost of Medicaid, expected to rise some $400 million for the coming budget cycle. The state would be on the hook for between one-third and half of that total.

There are numerous other increases sought that aren’t within state control, many of them in entitlement programs within Health and Human Services. And the state is required to make up the shortfalls caused by K-12 enrollment increases that could cost another $100 million.

State agency requests released in October totaled $7.7 billion over the biennium. That is more than $1 billion higher than the existing $6.6 billion General Fund budget — a budget which, itself, is balanced on the back of $1.184 billion in tax increases and revenue diversions that are all scheduled to sunset June 30, 2015.

If the GOP blocks new revenues and even refuses to extend the sunsets, that $7.7 billion in agency requests would have to be chopped back to $5.5 billion for the coming biennium.

Both Lokken and Herzik said the GOP takeover means Sandoval’s chances of instituting meaningful change to tax policies in the state are much more limited.

Herzik said not only that but the new Republican majority in the Assembly could object to even extending the $1.18 billion in sunsetted taxes used to balance the current budget.

“If that happens, oh, this budget is in trouble,” Herzik said.

Lokken came to the same conclusion adding unlike in the past this Republican majority is more likely to come out of the gates swinging than to take a measured approach.

“Instead of the spirit of compromise and finding middle ground, they will probably have trouble finding that even in their own party,” he said.