Whitepaper: 08.15.2014

Investing in Education

— Ray Sedey, Chairman/Chief Executive Officer

Economic Impact of the Proposed Nevada Margin Tax for Public Schools Initiative Raises Concerns
by Ray Sedey, McCarthy Executive Vice President, Nevada Division

As a local community builder for more than three decades, our employee owners have been fortunate to raise their families in Las Vegas and immerse themselves in this community. Working beside neighbors, partners and friends, we’ve ridden the highs and lows of the economy with a steadfast commitment to seeing continued growth and development across this iconic city. After what some may describe as one of the most turbulent times for stability and prosperity in Nevada, there appears to be a light at the end of the tunnel.

As noted recently in the Las Vegas Business Press, “Construction is now growing at a faster rate than any of Nevada’s nine other supersectors,” and we’re seeing this momentum locally with the groundbreaking of some very unique and challenging projects. However, while owners, developers and our community leaders continue to invest in the educational, economic and cultural appeals of Las Vegas, these initiatives may soon be short-lived if the Nevada Margin Tax for Public Schools Initiative Question 3 is passed this November.

Known by some as “The Education Initiative,” and by others as “The Margin Tax Initiative,” Question 3 has become a controversial measure. When first introduced in 2013, Question 3 was hailed as a solution to help fix the current state of Nevada’s public school system. For parents, as well as tax-paying citizens, it seemed an optimistic proposal to increase the quality of education we provide our children while alleviating over-crowding, low retention rates and decreased graduation rates. After all, education in Nevada has suffered through more than $700 million dollars in cuts since 2009 according to the Associated Press.

Supporting Education
With per pupil spending amongst the lowest in the nation, finding a way to generate, as well as allocate, new funds to Nevada public schools needs to be a priority. However, Question 3 appears to have overlooked the allocation as there is no guarantee this money will go towards education. Any revenue generated from this new tax will be distributed through a general fund, in accordance with the Nevada plan. This means funds won’t necessarily be mandated to the counties that need it the most, and the general funds can be used towards non-education-related issues. In order to ensure our school system would reap the benefits of this education tax, allocation, oversight and accountability would need to be addressed now.

Supporting Businesses
Question 3 is targeting businesses that generate more than $1,000,000 in gross revenue in a calendar year. While there are a couple different methods for calculating this tax, the most basic to consider is taxing 70 percent of total revenue for a business. As an example, if a company generated $1,000,000 in revenue, this would be multiplied by 70 percent to get to their taxable revenue of $700,000. If approved, Question 3 would then require that business to pay a taxable rate of approximately 2 percent, creating a tax burden of $14,000 regardless if the company was making a profit. With so much of our economy depending on the start-up of new companies and the success of businesses who exist here already, we can’t expect a company who is losing money to pay an additional margin tax – what incentive would they have to continue serving us? Additionally, according to an Applied Analysis study, the margin tax would impose the equivalent of a 15 percent state corporate income tax rate, the highest in the Western region, eliminating any chance of attracting new business to Nevada. 

Las Vegas has made a reputation for itself as being a robust town with high community expectations. A key part of being able to meet those expectations is the contributions of large industries such as construction. Nowhere in the world can you experience so many cultures, icons and one-of-a-kind establishments. But as owners begin looking at their return on investment, will they continue supporting construction with jobs, opportunities and growth? As Question 3 is currently proposed, there are no flow-through provisions written in the legislation, drastically reducing the appeal for a company to want to bring/keep their business here. This is a major flaw of this initiative that should have been considered already.

The lack of a flow-through provision specifically hinders businesses that rely on multiple tiers to provide products and services. This is especially true in the construction industry where there are many organizations/levels who contribute to building a project. As Question 3 is written, a company such as a general contractor would be subject to a 2 percent tax as described above. The caveat of not having a flow-through provision is that all of their subcontractors and their suppliers would also be subject to the 2 percent tax on 70 percent of each of their respective revenues. As a result, the total cost of a project would likely increase between 3 percent and 5 percent to account for the margin tax. As an owner, that additional 3 percent to 5 percent could be the difference of building your project in Nevada or taking your project elsewhere.

If Question 3 is passed, it would go into effect in January 2015 and impact ongoing projects. The cost of having an owner cease their project or eliminate future capital improvements and expansions is simply too high for our community. Nevada communities rely too strongly on new development – both public and private – to risk deterring growth by increasing the cost to do business here. It’s time to refocus our energy on a solution that will repair the school system, while still protecting the business climate.

About the Author
Ray Sedey is Executive Vice President for McCarthy’s Nevada Division. Based in Las Vegas, he has played an instrumental role in the company’s growth and ongoing success in the Southwest and Intermountain Regions. Acknowledged among the “Top 20 under 40” by ENR Southwest, he has managed nearly $700 million worth of construction projects throughout Nevada, Arizona and New Mexico during his career. Ray is a member of the American Concrete Institute and serves on the Executive Board of the Associated General Contractors. Additionally, he serves on the Construction Management Advisory Board for the University of Nevada Las Vegas and the Civil Engineering Board for Montana State University. Contact Ray at rsedey@mccarthy.com.

sign up to receive insights

Sign up to receive McCarthy Insights