The “Economic Forum” meets next Wednesday to determine how much tax revenue the Nevada Legislature will be able to plan to spend over the next two-year biennium. The bigger that number, the more pork will be doled out. Some lawmakers are deeply concerned, fearing that the Forum’s forecast could be even lower than we’ve yet heard.

Smaller Increases Are “Cuts” to Some

A month ago, Governor Gibbons became convinced that the revenue forecast would fall down far enough to impact the two-year state budget by over $100-million (about 1.5% of total planned state spending), and ordered all state agencies except K-12, Child Welfare and Road Maintenance and Construction to reduce their requests for new programs or expansions of existing programs (both are called “Enhancement” requests in our budget vernacular) by two-thirds.

There were no reductions in “Base” requests (equal to what was spent in the current biennium) or “Maintenance” requests (increases to deal with the cost of living and our increased population). All in all, not a big deal, though it elicited howls of frustration, pain and rage.

Then, two weeks ago, some “new money” materialized that allowed Governor Gibbons to restore more than half of those earlier reductions. This “new money” came from reducing Nevada’s projected Medicaid demand. Medicaid is socialized medicine for the disabled and underemployed, although most is spent on the underemployed.

Medicaid, Giver of Surpluses

Medicaid is a federal mandate. The feds require that we offer a limited menu of services to a limited group of recipients, though the feds “generously” offer to pay for about half the cost. Nevada is required to tax its citizens for the other half. Like most intermountain states, but unlike California, Nevada ran for many years complying with this mandate. California, suffering from a profound lack of understanding of the proper role of government, offers hundreds of millions of dollars worth of optional add-on services to optional add-on groups, and taxes its people accordingly. That’s one of the reasons why so many of them are moving to Nevada.

In 2001, Nevada started adding new, optional services and serving new, optional groups, leaving behind both our peer intermountain-west states and common sense. The feds paid half, but Nevadans had to come up with the other half. This, along with big increases in higher ed spending (we flooded the system with new Millenium scholars, but for every $2,500 of tuition their scholarship paid for, Nevada taxpayers had to come with another $10,000 to fund their non-tuition costs) was the cause of the 2003 tax hikes.

In addition to offering new services to new groups in 2001-2005, budget demands were pumped up even more with unrealistic estimates of the hordes of Nevadans who’d jump on the expanded Medicaid entitlement.

Experience proved the caseload estimates inflated, so the money budgeted to pay for the nonexistent demand “reverted” back to the General Fund - in other words, it became available to budget a second time, but only for one-time projects. Those dollars became our “surplus” - both in 2005 and, again, in 2007.

We’re currently planning on spending the 2007 surplus on highway construction ($170-million), building University buildings ($110-million) (for a system with almost-flat enrollment!), increasing the rainy day fund (around $40-million) and a variety of charities, mostly in the medical research and disabled services arenas.

It is quite likely that by reducing our welfare demand projections down to a realistic level, we are spending the 2009 “surplus” today. This may be the last session with a large “surplus” to hand out to favored beggers, unless we actually eliminate obsolete agencies down the road, and don’t start any new ones. That’s almost unimaginable in its legislative horror.

What’s Causing Revenue To Fall?

Falling revenue is only part of the problem. And not all revenue sources have equal impact.

Under the “Nevada Plan” for funding schools, state tax revenues are combined with certain local tax revenues in coming up with per-student funding. If the local tax revenues don’t come in as expected, then the state has to make up the difference, in order to maintain the target per-student funding level. Property tax is one of the largest components of local tax revenues in the Nevada plan. Sales tax is another. If these revenue streams fall unexpectedly, the state has to make them up.

That turns out to be the cause of most of our crisis. The last numbers I saw - they’re bound to change next week - forecast a $30-million reduction in property tax revenue, but a $80-million impact on state coffers, after the K-12 funding formula was considered.

Green, Green, My Love Is Green

So what is behind the falling forecast of property tax and sales tax proceeds? Last session, we put property tax on a “diet,” limiting increases to 3% for owner-occupied residential property and 8% for all other property. The blended rate ends up increasing tax proceeds by about 6% per year, plus taxes on new properties, which come onto tax rolls at their new market value. All in all, it leads to a very predictable, and robust, revenue source.

The culprit, it turns out, is AB3 from the 2005 special session.

This legislation made Nevada the only state to offer developers a giant tax break - half their property tax bill per year for the next ten years - if they promise that their project will achieve LEED “gold” standards for energy efficient construction. And the world jumped on board. (GreenBuildingsNYC.com, Sunrise Sustainable Resources, Inc., Nevada Energy Office).

Similar to the environmentalist incentives in Arizona a few years back, Nevada’s “keen to be green” attitude leaves state government standing at the end of a plank, a pirate sword punctuating the skin on the small of our backs, with sharks circling in the warm seawater thirty feet below. The only difference would seem to be that the winners in Arizona were many ordinary citizens who bought alternative fuel cars. Here in Nevada, the benefit accrues only to developers.

There’s no worse feeling than seeing your blood drip down into shark-infested waters right before you’re pushed off.

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