Nevada’s May 2019 Economic Forum

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by Meredith A. Levine

What Is the Economic Forum?

The Economic Forum is a state-mandated panel that convenes periodically to submit revenue projections for the General Fund—Nevada’s major operating fund—to the Governor and the Legislature. It is a five-member committee drawn from the private sector, with three members selected by the Governor and one nominated by each the Assembly and Senate.

The Economic Forum meets in December of even-numbered years to provide forecasts for the unrestricted revenue portion of the General Fund. That forecast is binding on the Governor’s Recommended Budget for the upcoming biennium. The Forum meets again in May of odd-numbered years, during the Legislative Session, to submit revised projections for the General Fund’s unrestricted revenue. These forecasts are binding on the Legislatively Approved Budget. Two additional meetings—one in December (odd-numbered years, e.g., 2019) and June (even-numbered years, e.g., 2020)—are held to update the status of actual General Fund revenues relative to forecasted amounts.

The forecasts rely on global, national, and statewide economic indicators. The Economic Forum projects expected revenue for each statutorily-required source that is deposited in the General Fund. These revenue sources may be subdivided further into two categories: major General Fund revenues and non-major General Fund Revenues.

A major fund is one in which its “total assets, liabilities, revenues, or expenditures/expenses… are at least 10 percent of the corresponding total for all funds of that category or type.” Non-major General Fund revenues include all other taxes; licenses; fees/fines; use of money and property; and other revenue collected by the State. The distinction between major and non-major General Fund revenues is important, as members of the Economic Forum’s votes on each major revenue source are carried out on an individual basis, whereas non-major revenues are grouped together for a single vote.

How Did the Economic Forum’s Projections Change from December 2018 to May 2019?

The Economic Forum revised its overall forecast upwards slightly between December 2018 and May 2019. Unrestricted General Fund Revenue, net of Commerce Tax credits and other tax credit programs, is projected to be about $8.8 billion for the upcoming biennium (that is, FY 2020 and FY 2021). The forecast is roughly $11.4 million higher than the December estimates, for a 0.1 percent increase. For comparative perspective, at the May 2017 meeting of the Economic Forum, the forecast increased by $95.8 million (1.2 percent) over the December 2016 projections.

Economic indicators suggest that the Silver State’s economy is strong. In fact, Nevada has the fastest-growing economy in the country with respect to jobs coming online. Wages are growing quickly, especially in the manufacturing and professional services sectors. However, many economists predict that the U.S. economy is headed into a slowdown by the end of 2020, which is Fiscal Year (FY) 2021. This could have a knock-on effect on Nevada’s economy. Daniel White, an economist with Moody’s Analytics, who testified before the Economic Forum, identified three reasons a downturn might be expected:

  • With the country about 10 years out from the Great Recession, it is approaching the natural end of the business cycle. Nevada’s economy, which is tourism-dependent, is cyclical—especially sensitive to periods of prosperity (boom) and austerity (contraction)—so it may feel certain “recessionary” effects.
  • The tight labor market reflects labor force confidence. But when the unemployment rate falls below the full employment rate during expansion, that historically has been a sign that a recession is on the horizon, at approximately three years out. Full employment last was reached in the third quarter of 2017, suggesting a possible recession sometime toward the end of 2020.
  • The yield curve, which signals investors’ expectations regarding interest rates, may be exhibiting signs of inversion (i.e., a downward slope). Many economists view inverted yield curves as harbingers of recession.

Analysts noted that Nevada’s increased economic diversification over the past 10 years may help insulate the economy from the potential slowdown. And, according to the Moody’s analyst, the downturn is likely to be a “Wall Street” recession (i.e., focused in the financial markets) and/or a “growth” recession (i.e., whereby Gross Domestic Product, or GDP, does not decline but rather continues to grow year over year, albeit at a slower pace than during expansion).

The Economic Forum’s approval of a forecast that exercises restraint indicates its members’ mindfulness of this context and careful consideration of the relevant indicators.

Revenue Summary Categories

Briefly, the Governor’s Recommended Budget for the 2019-2021 biennium amounts to approximately $29.4 billion. The General Fund, which is the State’s major operating fund, comprises 30.4 percent of the total budget, at more than $8.9 billion for the 2019-2021 biennium.

Table 1 presents the Economic Forum’s General Fund revenue projections for the upcoming biennium, by source, at the summary category level, for December 2018 and May 2019. Between December 2018 and May 2019, the Economic Forum projected all but two tax categories to increase incrementally. For example, the total sales and use tax, which makes up the largest share (30.2 percent) of the General Fund, as shown in Figure 1, increased by just $11.4 million (0.4 percent) between the two forecasts. Likewise, total state gaming taxes, which comprises the second-largest share of the General Fund (18.0 percent) increased by only $1.1 million (0.1 percent).

Total mining taxes and fees were revised down by about $17.0 million between December 2018 and May 2019, for a 13.8 percent decrease. The real property transfer tax, discussed further below, also decreased over the period.

Of non-tax revenue, only total other revenue (e.g., Hoover Dam revenue, miscellaneous sales and refunds, etc.) enjoys a forecasted increase. Licenses, fees/fines, and use of money and property are expected to decrease.

Major General Fund Revenues

Before tax credits, major funds represent 82.5 percent of the Economic Forum’s forecasted General Fund revenue for the 2019-2021 biennium. Table 2 presents the Economic Forum’s major General Fund revenue projections, by source, for December 2018 and May 2019.

  • Sales Tax: The Sales Tax is alternately referred to as the Sales and Use Tax or the “State 2% Sales Tax.” It is a tax imposed upon retailers at a rate of two percent on the taxable sale or use of personal property. The May 2019 Economic Forum estimates revenues from the Sales Tax to be $11.2 million (0.4 percent) more than that projected in December 2018 for FY 2019 and FY 2020.
  • Gaming Percentage Fee Tax. The Gaming Percentage Fee Tax consists of those fees due on taxable gross gaming revenues from non-restricted licensees, according to a progressive schedule: 3.5 percent on monthly revenue of up to $50,000; 4.5 percent on monthly revenue in excess of $50,000 up to $134,000; 6.75 percent on monthly revenue in excess of $134,000. The Economic Forum revised the Gaming Percentage Fee Tax forecast upwards since December 2018, for an increase of about $4.0 million (0.3 percent) over the upcoming biennium.
  • Live Entertainment Tax (LET)–Gaming. The LET–Gaming Tax is paid by licensed gaming establishments for their live entertainment events; the rate is nine percent on the admission charge. The LET–Gaming Tax will increase by nearly $7.9 million (3.9 percent). Some concerns were raised, however, that fewer nights of taxable admissions, more residencies (that increase visitation but are not held at gaming establishments), and sporting event exemptions will lead to increased volatility in the long run for this tax.
  • Live Entertainment Tax (LET)–Nongaming. The LET–Nongaming Tax is paid by non-gaming establishments for their live entertainment events; the rate is nine percent on the admission charge. The LET–Nongaming Tax witnessed a considerable decrease since the December 2018 forecast, at about $5.7 million (9.9 percent). It is a high-variance tax in which projections can be difficult, given that there is a time lag between tickets are purchased and taxes are remitted. While continued growth of the Electric Daisy Carnival (EDC) and Burning Man may help drive collections, the ending of a prominent residency on the Las Vegas Strip (Céline Dion) and the unclear status of the Route 91 Harvest Festival could offset these yields.
  • Commerce Tax. The Commerce Tax is imposed on businesses with more than $4 million in Nevada gross revenue in a given fiscal year but is levied only on the Nevada gross revenue portion above $4 million, with rates varying by industry classification for the business. The Commerce Tax forecast increased by approximately $9.1 million between December and May (2.0 percent).
  • Modified Business Tax (MBT). The MBT is imposed on every employer who is subject to Nevada Unemployment Compensation Law, with taxes levied on taxable wages, defined as total gross wages, net employee health care benefits; rates vary in accordance with the business’s classification as a nonfinancial business (all taxable wages exceeding $50,000 at a rate of 1.475 percent through FY 2019 and a rate of 1.378 percent for FY 2020 and subsequent fiscal years), a financial business (2 percent of taxable wages), or a mining business (2 percent of taxable wages through FY 2020 and 1.853 percent of taxable wages beginning in FY 2020). In dollar amounts, the MBT–Nonfinancial Businesses experienced the largest increase of any of the major General Fund revenues, at about $15.7 million (1.2 percent). The Economic Forum retained its December 2018 forecasts for MBT–Financial Businesses and MBT–Mining Businesses.
  • Insurance Premium Tax. The Insurance Premium Tax is paid by insurers whose tax liability was at least $2,000 in the prior year at a rate of 2 percent of net premiums (risk retention groups) and 3.5 percent of net premiums (all other insurers). The Economic Forum increased its projection for the Insurance Premium Tax by roughly $8.2 million (0.9 percent) over its December estimate, as insurance remains a stable source of growth for the State, as people still require it, irrespective of the economic climate.
  • Real Property Transfer Tax (RPTT). The RPTT is a tax levied on the value of real property transferred from one person to another—the value of the transfer, exclusive of any encumbrance, must exceed $100; rates vary by county size, with certain optional and additional taxes permitted in some counties. The RPTT witnessed the most significant decrease since the December 2018 forecast, at roughly $15.9 million (7.0 percent). Lack of affordability, declining sales volume on increased mortgage rates, and a price-based market correction were drivers of the downward revision.

Overall, major General Fund revenues are approximately $34.3 million higher than what was estimated at the December 2018 meeting of the Economic Forum, for a 0.5 percent increase.

What Are the Implications for the Budget?

The Ways and Means Committee in the Nevada Assembly and the Finance Committee in the Nevada Senate deliberate in joint subcommittees, who report their budget recommendations to the full committees, which then vote on individual departmental funding. After the agency budgets have been approved, they are rolled into five budget implementation bills for floor votes: the K-12 Education Funding Act, the Appropriations Act, the Authorizations Act, the State Employee Compensation Act, and the Capital Improvement Plan Act. All must be enacted before the regular session adjourns. After approval, the entire budget is referred to as the Legislatively Approved Budget.

However, the Nevada Legislature has discretion over the use of the additional $11.4 million approved by the Economic Forum for FY 2020 and FY 2021. It is obligated to balance General Fund appropriations with General Fund revenues for biennial budgeting and must use the Economic Forum’s May 1, 2019, forecast in so doing.

The additional $11.4 million approved by the Economic Forum could raise the Governor’s Recommended Budget by about 0.04 percent. But the amount may be subject to revision. As Russell Guindon, Principal Deputy Fiscal Analyst, Fiscal Analysis Division (Legislative Counsel Bureau) observed during the May meeting of the Economic Forum, members also approved an increase to the FY 2019 forecast. While this money technically is “assigned” for the current biennium, the Nevada Legislature has some flexibility over its allocation. It is revenue that legislators can take into consideration when building the 2019-2021 biennial budget. These additional available resources can be spent in FY 2019 or carried forward into the upcoming biennium to fund programs and services. The FY 2019 forecast is roughly $31.4 million, which would bring the total additional three-year amount to about $42.8 million.

Table 1.   Economic Forum: General Fund Revenues, by Source—2019-2021 Biennium
Table 2. Economic Forum: Major General Fund Revenues, by Source—2019-2021 Biennium
Figure 1.   Economic Forum: General Fund Revenues, by Source—2019-2021 Biennium