Bad news about the economy just keeps on coming.

First, the housing bubble burst, taking with it the booming industries of real estate and construction. Then gas prices increased dramatically, airlines raised ticket prices and potential tourists could no longer afford to either fly or drive to Las Vegas. Last month, credit markets imploded, plans for new casino properties were put on hold and Nevada’s convention industry took a huge hit. The dominos tumbled in a long line of destruction.

With Wall Street embroiled in a financial crisis, Nevada is dealing with its own money woes. Nevada legislators realized this year that the current budget fell short by approximately $1.2 billion. Nevada Governor Jim Gibbons ordered state agencies to slash their budgets by 14.1 percent to prevent the state from sliding into a deficit.

The agencies complied, but the ramifications of cutting costs will be felt for years to come. If revenue forecasts are any indication, the state government and all of its entities will be forced to operate at low levels for the remainder of the decade.

So where did Nevada go wrong? A wide range of factors collided to create the state’s current financial tangle, but many Nevadans, including economists, government officials and community members, point to the state’s narrow tax structure as a sore spot in desperate need of an overhaul.

The Only Game in Town

Nevada entered the union with a mining-based economy that drew speculators who searched for silver from 1859 to the early 20th century. When mining began to slow, so did the state’s population growth.

Abandoned communities leave traces of the boom-and-bust lifestyle adhered to by the state’s original rootless residents. R. Keith Schwer, economics professor at the University of Nevada-Las Vegas and director of UNLV’s Center for Business and Economic Research, said these ghost towns are evidence of Nevada’s long-term lack of economic diversification that continues today.

Gambling has been a favorite pastime of Nevadans since the days of speculation, but it wasn’t until the Great Depression decimated what was left of the mining and agriculture-based economy that the state legislature voted to legalize gaming. Once considered a short-term fix for the state’s money troubles, gaming has become Nevada’s largest industry, and the one it relies on the most for revenue.

But experts say trading one industry for another, in this case mining for gaming, isn’t the most economically sound approach.

“The areas where spending is down are automotives, furniture shops, home repairs and discretionary recreation,” Schwer said. “It’s that last item that’s a good portion of our economy. There’s nothing wrong with the business cycle; it’s grown and it’s done us very well. Gaming now is everywhere and others have copied our success. It’s made it more cyclical.”

Back when gaming was a polarizing issue of morality (more so than it is now), Nevada was the only place to which gamblers could escape. These days, gaming is prevalent, having been legalized by several other states to supplement their budgets. When times get tough, as they recently have, die-hard gamblers seeking the best games in the world will still flee to Nevada, but not as often.

With decreasing numbers of visitors who aren’t staying as long or spending as much, Nevada’s main industry has been shaken. Gaming taxes accounted for 14 percent of the state’s budget in fiscal year 2007, and gaming revenue dropped 5 percent in fiscal year 2008. Sales taxes, Nevada’s other main source of revenue at 16 percent of the general fund, decreased by 4 percent this year. Two large blows to the budget created a significant shortfall, and now the state is being forced to examine its sources of income.

“We’ve relied on gaming and sales tax as a way to pay our bills,” said Nevada State Controller Kim Wallin. “We have to look for some alternative revenue sources.”

Costs Versus Benefits

Nevada attracts people and businesses that choose to grow roots because of the state’s friendly tax codes. There is no personal income tax or corporate income tax, and when elected in 2006, Governor Gibbons imposed a moratorium on introducing new taxes or raising taxes already in place.

But with no additional sources of income and tax revenues falling across the board, both Schwer and Wallin said the time has come to reevaluate Nevada’s tax structure and work to find alternatives.

“I don’t know how they’re going to be able to go in there and say, ‘No new taxes,’ especially if we have to cut the budgets down 14 percent,” Wallin said. “We may as well turn out the lights and walk away.”

Wallin, who oversees the state’s accounting and financial reporting as the state controller, said she doesn’t believe in raising taxes simply for the sake of raising taxes, but there have been instances where raising taxes would have saved taxpayers money in the long run, as when a Blue Ribbon Task Force recommended the state raise its motor fuel tax.

Revenue from the gas tax, which was last increased in 1992, goes toward a highway repair fund. In 2006, the task force said the fund faced a shortfall of $3.8 billion. That estimate is likely closer to $7 billion today.

Wallin said the extra wear and tear on vehicles from poorly maintained roads in both urban and rural areas costs each taxpayer an average of $270 per year. Raising the gas tax and improving the state’s infrastructure would have reduced that amount to $60 (taking into account the extra cost of the tax). Businesses supported increasing the tax, but Gibbons did not.

Community leaders like MGM Mirage Chairman and CEO Terry Lanni have advocated broadening the tax base to equalize the tax burden, increasing the modified business tax, which is a percentage of total payroll, and increasing the hotel room tax. Lanni has also supported a state tax on gross business receipts.

But if raising taxes is not an option, then perhaps diversifying the state’s economy is. With the federal government now seriously discussing the effect of fossil fuels on global warming, developing alternative energy sources could be a smart move for the state, which would then be able to rely less upon gaming tax revenue. A new industry would also create new jobs, which would ease Nevada’s 7.3 percent unemployment rate.

Where to Go From Here

With severe budget cuts affecting nearly every public entity in the state, everyone seems to agree that something must be done.

Though Gibbons refuses to raise taxes, Nevada voters get a chance to do just that this November. Question No. 5 on the ballot asks voters to choose whether to raise the hotel room tax, which is not to exceed 13 percent. The current room tax, which at its highest is 11 percent in Clark County, is low compared to other states. Fifty percent of the revenue generated from the tax goes toward the Las Vegas Convention and Visitors Authority to operate the city’s convention center and promote Las Vegas around the world. Five percent of the tax revenue goes to the state for the purpose of promoting tourism.

If raised, the additional revenue from the room tax will go into the general fund earmarked for education, and would eventually go toward paying teachers’ salaries. However, Question No. 5 is an advisory question, not a law, and will not automatically raise the room tax.

Schwer said there are two schools of thought: those who believe the state government is inefficient and should cut costs, and those who think the state is operating adequately and should raise revenue. For those who believe in the system, the question is only a matter of improvement.

“It’s hard to forecast that we would have as sharp a decline as we have seen,” Schwer said. “Obviously we made some mistakes from hindsight; rebating money out of the rainy day fund probably was a mistake. If we believe the tax system we have is the preferred one, then the focus is how do we recover from the problems we have and then try to find a system that would iron out the revenues available and match those to expenditures.”

For Wallin, there is a human element to cutting costs, and with the unemployment rate rising steadily each month, the number of people who need social services is only going to increase.

“Our social services are being inundated by people needing food stamps, needing meals, needing assistance. Something’s going to break somewhere,” Wallin said. “And we can’t just say, ‘Sorry, we’re not going to provide the services.’ I don’t think we’re prepared to see lots of homeless people and people in severe poverty. I don’t think we’re ready to turn into a Third World country here, but if we don’t do something, we will.”

If revamping Nevada’s revenue stream isn’t the answer, a number of other options could be, but it’s up to the people of the Silver State to decide.

By Caitlin McGarry

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