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Nevada Votes on Margin Tax

by Joe Monzon, Denver, October 2014


The Nevada Margin Tax Initiative, Question 3 is on the November 4, 2014 ballot. The measure seeks to institute a 2% margin tax on businesses that generate revenues above $1 million with the funds being earmarked for public schools.


How Taxable Margin is Determined


Under Question 3, a business entity’s taxable margin is determined by taking the lesser of:


  • 70% of total revenue; or

  • Total revenue minus either the cost of goods sold or the amount of
    compensation paid to its owners and employees.

The 2% tax would be imposed on the percentage of the margin that corresponds to the entity’s total business in Nevada. A business that pays modified business taxes, would be credited for that amount against the amount it would owe.


What Proponents Say


Supporters of Question 3 say it will give schools a predictable funding source needed to provide a better education for Nevada’s children.


Published reports explain, "The money from this tax will go directly to K-12 education to pay for smaller class sizes, textbooks, technology, classroom materials, and programs resulting in increased student success and higher graduation rates. Experts acknowledge that a better funded education system results in better jobs and higher wages. A quality education for our children will ensure their success and the success of Nevada’s economy."


What Opponents Say


Citizens opposed to Question 3 say it is a deeply flawed tax measure that would damage Nevada’s economy and force consumers to pay more without guaranteeing more funds for education. Specifically, they take issue with the following:


  • No Accountability - While promoters claim the tax is for education, Nevada law
    allows the legislature to divert education funds to other uses.

  • Large Tax Increase - It’s the equivalent of a nearly 15% business tax, making
    Nevada one of the five highest taxed states in the country for businesses

  • Unfair - The 2% tax would be on gross revenues, not profits. Employers would
    have to pay the tax even if they are losing money.

  • Higher Consumer Costs - Increased costs imposed on businesses would
    ultimately be passed on to consumers.


Neutral Analysis


Applied Analysis was hired by the Coalition to Defeat the Margin Tax to analyze Question 3. Both opponents and supporters have cited the study in their position.


The report finds that a majority of businesses in Nevada would not pay the margin tax because they have less than $1 million in gross revenue and are specifically excluded. The businesses that employ the majority of Nevada’s workers and account for the majority of the state’s economic activity, however, would bear significant increased liability.


Applied Analysis says the margin tax distributes Nevada’s business tax burden throughout the state’s economy more efficiently than the existing modified business tax. At the same time, it will have some pyramiding effects (where a tax is paid on a tax) and some businesses will continue to have tax liability even when reporting negative profit margins.


The report explains that the proposed margin tax is commonly compared to the Texas Franchise (margin) Tax. However, there are some important differences between what currently exists in Texas and what is being proposed in Nevada. Perhaps most notable is a substantially higher tax rate. At 2%, the Nevada margin tax will be two times that imposed on business in Texas.


If Question 3 is approved by Nevada voters, the margin tax will start to accrue on January 1, 2015.