Nevada lawmakers are debating proposals to increase taxes on the state’s mining industry as the state grapples with an anticipated $400 million drop in revenues over the next two years.
The mining industry’s current tax rate of 5% on net proceeds is baked into the state constitution. To change that, an amendment must pass through two consecutive legislative sessions and then be approved by voters as a ballot measure.
Lawmakers passed three resolutions to increase mining taxes during a special session last summer. If any of the measures is approved by the end of the June session, it would head for the ballot in 2022.
“That means the earliest it could take effect is in January 2023,” said Michael Parker, an S&P Global Ratings analyst.
S&P hasn't weighed in on credit factors related to the mining taxes and probably wouldn’t publish anything on the ratings ramifications until after an approval by voters, Parker said.
State revenues are coming in higher than expected when lawmakers approved the mining tax amendments on the first go-round last year.
In his proposed $8.5 billion budget for the upcoming biennium, Gov. Steve Sisolak was able to reverse some cuts to Medicaid and K-12 programs made last summer when the drop in revenues was expected to be more than twice as much.
But the budget is still roughly $500 million less than what was allocated during the last two-year budget cycle, indicating a combination of belt tightening and possibly tax increases are needed.
Given what Sisolak described as an “unprecedented and evolving fiscal situation,” in his budget, the governor said he is “committed to remaining flexible and working closely with the Legislature.”
Nevada's tourism and visitor-dependent economy was particularly vulnerable to the coronavirus pandemic, because lacking an income tax, the state depends on sales tax and hotel bed taxes. The lack of an income tax also means the state didn't benefit from taxes on income from white collar workers able to work from home, or from the so-called
“Any proposals on how the state will look to solve their structural budget gap is of note,” said Sussan Corson, an S&P senior director. “We are looking at the different proposals. We are calculating the mining tax could be 4 or 5% of revenue, but we would need to see what it would be from year to year.”
A mining tax might help move the state toward a solution to its structural imbalance, but it won’t solve the entire problem, Corson said.
All three rating agencies maintained negative outlooks on the state in September when it priced $166 million in general obligation limited tax bonds to pay for capital improvements, for historic preservation and to refund older bonds. It holds ratings of Aa1 from Moody’s Investors Service and AA-plus from both S&P and Fitch Ratings.
“Right now, we are still on negative,” Corson said. “We are trying to understand what their solutions will be. There are trends that seem to not be as dire as previously expected. But their exposure to the leisure and hospitality sector is outsized compared to other states.”
Revenue for Nevada’s major cities are down by 8% in fiscal 2021 compared to the prior year, and the state’s revenues are down by 9% on a year-over-year basis, according to Parker and Corson.
S&P will be watching to see if the state moves closer to a structural balance, she said.
Though Moody’s revised its outlook on state and local governments from negative to stable on passage of the $1.9 trillion federal stimulus bill last week, it noted that the economic recovery remains uneven. For states that earn significant income from travel and tourism, such as Hawaii and Nevada, and those with higher dependence on sales taxes, such as Florida and Texas, revenue recovery will be relatively weaker, Moody’s said.
The first measure Assembly Joint Resolution 1 would change the taxation rate from a 5% net proceeds tax limit to 7.75% of the gross proceeds of extracted minerals. One quarter of that tax revenue would go to state education and healthcare programs.
Senate Joint Resolution 1 would change the taxation rate to 7.75% of gross proceeds, like AJR 1, but 50% of the proceeds would be paid to taxpayers, similar to the Alaska Permanent Fund, which invests revenues from the oil and gas industry and pays dividends to state residents.
If the rate was at 7.75% in 2019, and not the current standard at 5%, the state would have brought in about $541 million — more than four times the $122 million that was collected, said Jeremy Aguero, a principal analyst with the Las Vegas-based Applied Analysis. If the gross proceeds tax were increased to 12%, it would represent an increase from $122 million to $300.7 million, Aguero said.
The third measure, AJR2, would increase the cap in the constitution on net proceeds of extracted minerals from 5% to 12% and tie the maximum taxation rate for a mine to the property rate of its jurisdiction.
The mining tax would represent a significant tax increase for the mining industry of 382% under AJR1 and SJR2, and 140% under AJR2, but it would be a relatively small share of the state’s aggregate budget, Aguero said.
“It doesn’t solve the state’s fiscal problems in any way,” Aguero said. “There is no way that 1% of the state’s revenue is going to be a panacea for a pandemic that has ravaged every sector of the state’s economy.”
Increasing the tax burden by seven or eight times will change the way companies invest in the business, their employees and the community, said Tyre Gray, president of the Nevada Mining Association.
While the mining association opposed the first two measures, it was neutral on the AJR2, because it would require a budget trailer each time the percentage was raised toward the 12% cap, Gray said.
“We were neutral, because it would give us the opportunity to discuss it with policymakers, before they approved an increase,” Gray said.
He added that he wouldn’t say that the mining industry couldn’t pay more, but not 400% more.
“The conversation needs to be about what is reasonable and sustainable for an industry that provides a livelihood for 30,000 people in the state and pays salaries averaging $90,000,” Gray said.
The federal stimulus money and the economic resurgence are already more meaningful than what a mining tax would do for the state, Aguero said.
Though it hasn’t shown up in reports, there has been an increase in visitors, more flights to Las Vegas and increased traffic at restaurants, and shows and concerts are coming back, and there has been a decrease in convention cancellations, Aguero said.
The best way to protect the state against economic downturns is to continue to diversify the state’s economy, Aguero said.
The state remains dependent on the leisure and hospitality sector though it has made strides in diversifying its economy with Tesla building a car battery manufacturing facility and Google a data center near Reno.
There is no question that the growth in industry near Reno has helped, Aguero said.
“Northern Nevada has done well during the pandemic,” Aguero said. “Manufacturing has become one of the biggest job creators in the state, and much of that can be attributed to the Tesla plant.”
It’s not the first time lawmakers have considered raising taxes on mining, because the industry is counter-cyclical it’s an easy target during a downturn, Gray said.
“When gaming or the economy in general goes down, the price of commodities goes up, because people use them to shelter income,” Gray said. “We are seeing more volatility, because digital currencies like bitcoin are more popular with tech-savvy younger generations.”
When Nevadans considered eliminating the 5% cap on mining taxes enshrined in the state’s constitution under Question 2 in 2014, the ballot measure lost by less than 4,000 votes.
“I haven’t seen any polling relative to whether voters would support or not support such measures,” Aguero said. “I expect there would be significant campaigns on both sides seeking to inform voters on the pluses and minuses, if the measures move forward.”
