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A Very Taxing Study

Spin and Flackery Clad in Accountant Gray

by Steven Miller

evadans today see some 37 percent of their paychecks on average go to state, local and federal tax collectors. For special interests eager for ever-larger meals at the public trough, the resulting increase in taxpayer wariness poses a significant problem.

Clearly the direct approach--"Yo! Meal-ticket! Open a vein!"--won't work. To actually get the ol' moolah out of taxpayer wallets, something more cunning is needed.

Something like we see from the Nevada Resort Association (NRA) and the Nevada State Teacher Association (NSEA) teacher union: "Well, gee, Mr. Meal-ti ... er ... Mr. Taxpayer, it's just there are these large, impersonal and ... ah ... structural conditions that require ... er ... ah ... adjustments to Nevada's ... uh ... revenue base."

No doubt ample focus-group testing has shown that this and similar incantations--repeated endlessly by spokesflacks for the above organizations--have the best chance of opening the magic tax-spigots even wider. And then both special interests--gaming and the teacher union--will be able to use their enormous clout in the state legislature to essentially put those new revenues at their own disposal.

Clearly, neither of the two camps care about the carnage such plunder would wreak--on Nevada families trying to grow small businesses, on Silver State workers priced out of marginal jobs and on the entire future of a state that seriously needs to get out of its one-industry predicament.

Indeed, the kind of distortion of public debate that stems from Nevada's domination by a single industry is perhaps nowhere better exemplified than in the famed 1991 Arthur Andersen report, "The Fiscal Impact of Population Growth in Nevada."

Funded by the NRA and presented to the state legislature in 1991, the paper is a highly political document masquerading as an impartial academic inquiry. Subtitled "A Report to the Nevada Resort Association," the paper has been an outstanding success in public relations terms-- if not those of genuine fiscal analysis.

Not only did the report do yeoman service for the tax-raisers' cause in 1991--justifying the imposition of what eventually became Nevada's business employee tax--it also, throughout the rest of the decade, has continued to provide NRA advocates of higher taxes on non-casino Nevada businesses with a panoply of seemingly sound and authoritative arguments. Even today casino-industry representatives continue to cite ideas, arguments and alleged facts from the study in their media interviews, guest commentaries and public and private appearances. Truly, for casino interests, the 1991 Arthur Andersen report has been the gift that keeps on giving.

That day, however, may be over.

During a meeting of the Nevada Development Authority board this year, according to a Nevada Journal source, NRA President Richard Bunker was again quoting the study, when finally someone at the table said, "Hey, let us see this thing. You keep quoting it and have for years." It was a telling point. For all the NRA's repeated verbal waving of the report, the organization has in fact for years kept the document close to the vest, beyond impartial scrutiny. Until recently, at least, not even the Nevada Development Authority had a copy.

Still, the Andersen report was already--if quietly--part of the public record. It had been filed, after all, with the state legislature. And because the report's arguments and assertions have over time become coin of the realm in Nevada taxation fights, earlier this year Nevada Journal's parent organization, the Nevada Policy Research Institute, procured a copy and asked economist Glen Tenney--an NPRI senior research fellow--to give the report some professional scrutiny. Tenney's subsequent findings are very enlightening.

The study's conclusions, he noted, were very clear and repeated throughout: Government spending in Nevada was expected to grow faster than the population, and taxes therefore must be raised in order to fund that growth. Yet those conclusions, found Tenney, "often either do not follow from the data or are otherwise misleading," and thus "appear to be politically motivated...."

Equivocation on a Key Term

One of the primary ways the Arthur Andersen study tends to mislead casual readers, suggests Tenney, is by the way it repeatedly uses a key economic term--demand. He notes that even though the word has a very specific meaning within the discipline of economics, the authors of the Andersen paper again and again use the term in an informal, non-economic, sense--and this in a supposedly economic study. A good example is one of the three major conclusions announced on the report's frontispiece:

There is likely to be a demand for additional public spending beyond the amount needed to maintain per capita expenditures at real 1987 levels.

Another example is when the AA report turns to the topic of population segment age:

The school-age population and persons aged 65 or older put more demands on the budgets of State and local governments than the rest of the population.

"The concept of demand," notes Tenney, "is widely used by economists to show the relationship between the quantity of any good that will be purchased and the price of that good.... To discuss the quantity of something that is desired, without considering the price--or what has to be given up in order to obtain that something--is akin to suggesting that no sacrifice is necessary to obtain the good, that there really is such a thing as a free lunch, and that economics is all meaningless blather."

Yet exactly that kind of discussion, he points out, is what "The Fiscal Impact of Population Growth in Nevada" study indulges in repeatedly.

"The authors could have just as well said that these persons of certain ages will want or desire more government services because of their specific ages and stages of life. But notice what small amount of meaningful content there is in saying that certain people want or desire certain things. Such a statement simply repeats the truism that people always want more of everything...."

Tenney then asks "why the authors of the AA study used the word 'demand' instead of using more common words such as 'want' or 'desire.'" One possible reason, he observes, "is that the use of the word 'demand' seems to lend a certain authority or legitimacy to the statement that would not have been possible by using more common words such as 'want' or 'desire.'" And though Tenney explicitly declines to suggest that the report's authors used the word "demand" in the peculiar way they did in order to deceive, he does argue that the word was used in a way that did advance a tax-hike agenda. That was because opting for the "desire" sense of the term implicitly suggests that the appetite for government services is all that needs be considered--as though this was a world of desires alone and not a realm where humans always must choose among necessarily limited goods. While such a fantasy is common among fans of ever-larger government, it remains, says the NPRI research fellow, a serious error.

Newcomers vs. Long-term Residents

Another major part of the Andersen report is devoted to making a case that newcomers to Nevada don't pay their way in terms of government services. Therefore, continues the implied argument, the more that people move to the Silver State, the higher Nevada taxes should be. As we'll see, from whatever angle the Andersen study comes at this topic, it gets it wrong.

This section of the report, Tenney notes, is summarized by a table that purports to compare the major taxes paid by newcomers with the government expenditures made on behalf of those newcomers.

"This table is perhaps the most misleading part of the entire AA study," the economist argues. "The obvious implication of the table presented in this manner is that newcomers as a group do not even come close to paying their own way when it comes to state government."

But this is seriously misleading, he says. Just how much so emerges if one does the parallel calculations for long-term residents (See table next page). In that case, the $6,496 total for expenditures goes up slightly, since long-term residents use government education and social services resources a bit more than do newcomers. Similarly--using the same data sets used by the AA report--long-term residents' property and sales taxes turn out to pay only 2 percent more of the alleged public expenditures than do newcomers' taxes. Professor Tenney drives the point home: "Thus we see that in reality ... the difference between newcomers and long-term residents is quite small with respect to how close they come to 'paying their own way.'"

Of course, that raises another major question: If the huge--six-fold--disparity between newcomers' estimated expenditures and taxes is paralleled by a similar disparity for longer-term residents, how in the world is the state of Nevada making up the difference?

"A quick answer to this question," explains Tenney, "is that the table does not include the remaining taxes going into the coffers of the state ...."

In other words, the polemical power of Table 1--so pronounced that Arthur Andersen chose it to be one of only two tables preceding the document proper (while 39 others were consigned to the endnotes)--derives entirely from the fact that it is doubly misleading. Once understood, it provides virtually no support for the newcomers-don't-pay-their-way proposition.

The Mythical Shifting Tax Burden

Well, if Arthur Andersen's prize table does not accurately report all the revenue that goes into the coffers of the state, what are the remaining sources? As the Andersen report authors interpret the data, in 1987 Nevada had five sources of revenues:

Federal government 14.1%
Residents 32.5%
Tourists 22.9%
Business 23.8%
Interest earnings 6.6%
TOTAL 100%

Such a view is conventional enough. Unfortunately, the convention is wrong.

"What remains unsaid in the AA report," writes Tenney, "is that the real burdens of all taxes are borne by real human beings. Neither businesses, factories, gaming establishments, nor any other inanimate object can ever bear even a dime's worth of the burden of taxation of any kind."

While this is common sense, he says, there is also evidence that "large portions of the general public believe--without thinking seriously about the matter--that faceless corporations can somehow bear the burdens of taxation." This turns out to be a big opening for tax-and-spend politicians, since such "taxes on businesses" don't elicit the same kind of man-in-the-street resistance that direct taxes on individuals do.

The reality that needs to be kept in mind, Tenney writes, is that "any attempts to soften the blow of taxation--by shifting the 'official' burden to inanimate objects--[are] attempts to obscure the real burdens of taxation in order to increase its level." Therefore as any taxes on Nevada "businesses" are simply a disguised burden on Nevada residents, the small table above could, with more equity, be expressed by:

Federal government 14.1%
Residents 56.3%
Tourists 22.9%
Interest earnings 6.6%
TOTAL 100%

Then, while he's at it, Tenney proceeds to dynamite another tax-shift fallacy deeply ingrained in Nevada economic mythology. It's the idea--beloved by state politicians for generations--that a big chunk of the tax burden in Nevada is "exported" to tourists through gaming and entertainment taxes.

The AA report leans heavily on this old chestnut:

The revenue system that supports governments in the state of Nevada is unique among all the states in terms of its reliance on taxes on the gaming industry and its ability to export taxes to visitors who come from out of state.

There is actually high comedy here--though of course the scribes over at Arthur Andersen somehow managed to miss the joke: If taxes really can be "exported to visitors who come from out of state," why is the Nevada Resort Association so frantic to avoid "exporting" more taxes? By this logic, State Senator Joe Neal's scheme to "assist" Nevada casinos to "export" more taxes poses less peril than the breeze from a butterfly's wing. Surely it's only a matter of time until NRA President Richard Bunker calls Neal up on the telephone: "Hey, Joe--c'mon over for brandy and a cigar. We just didn't understand what our hired guns were telling us."

On the other hand, could it be that the NRA knows its self-interest correctly, and that the catch phrases about tourists bearing most of the Nevada tax burden are wrong? That is exactly the position of the late, renowned economist Murray Rothbard, notes Tenney:

In perhaps the clearest discussion of tax incidence in all of economic literature, Murray Rothbard reminds us that ... the real burden of taxation is always imputed backward to the original owners of productive inputs such as land, labor and capital. With respect to taxes paid by tourists and collected by businesses on behalf of state government in Nevada, this means that the direct burdens of these taxes are borne primarily by the workers and owners of the gaming and entertainment industries.

Apparently Nevada gamers know better than the report their industry association gave to the 1991 Legislature.

"The fallacious idea that taxes are simply 'passed on to the consumer'" writes Tenney, "is a common one that almost everyone seems to know is true. But it is wrong."

And since the people bearing the primary burden of the taxes are the owners of the land, labor and capital, that means in most instances here in Nevada, it is Silver State residents--business families, employees and investors --who, once again, are actually paying most of those taxes. Thus, if the Andersen table on the sources of state revenue is corrected once again, it might read something like:

Federal government 14.1%
Residents 73.1%
Non-NV investors 6.2%
Interest earnings 6.6%
TOTAL 100%

University of Nevada, Reno professor John Dobra, in a comprehensive study of Nevada taxes and their burdens, has similarly concluded that "Anyone who thinks that the state is getting a free ride from tourists should think again."

'Demands' of the Government Schools

By now of course, readers will be able to predict how the AA report's analysis in the area of government school enrollments comes down: Since enrollment is expected to outpace population growth in at least the three largest counties in the state, taxes of course must be increased.

"The implicit assumption made by the report," Tenney writes, "is that anyone with school-age children is welcome to come to Nevada and live off the taxpayers, and that it is the duty of the state to increase tax levels to the height necessary to accommodate this growth." A rational response to the challenge would be different, he notes: "If the existing system of state finance allows certain groups to benefit at the expense of others, the system itself is in need of reform. And the 'reform' should not be in the form of increased taxes which only allow a continuation and expansion of the perverse system."

A 1995 study by the Nevada Policy Research Institute showed that state spending on public education in Nevada increased 194 percent from 1983 to 1992 while enrollment increased only 40 percent. Though this was a hefty per-pupil increase of an inflation-adjusted 54 percent for the 10-year period, it was accompanied by generally flat SAT scores for Nevada students.

"The lack of progress in Nevada's public schools, despite increasingly large amounts of spending," notes Tenney, "is likely associated with the nature of public schooling itself rather than a problem associated with a lack of money.

"Economists William Mitchell and Randy Simmons go to the root of the problem," he continues, "by suggesting that public schooling combines students and parents as consumers who don't really buy, with teachers as producers who do not sell, and taxpayers as owners who do not control. Economic reasoning would only suggest that such a structure would be a recipe for disaster or mediocrity at best."

Tenney also refutes one of the NSEA's recurrent slanders against Nevada taxpayers--one uncritically repeated by the Arthur Andersen report authors:

"According to the AA report, in 1989, 'Nevada ranked 32nd among all the states in terms of average current expenditures per pupil.' This low ranking for Nevada," says Tenney, "is misleading because the numbers used to arrive at that ranking include federal dollars spent on education in Nevada. When we look at only state of Nevada appropriations, which would have to be considered more proper when analyzing Nevada finances, we find that Nevada consistently ranks between 5th highest and 15th highest in terms of per pupil expenditures."

Thus if sub-average totals are going into Silver State public education, it's not because Nevada taxpayers are taking too small a hit from state tax collectors. Instead, the shortfall clearly stems more from a deficiency of clout that Nevada brings to the pork fights in Washington, D.C.

But whether Nevada is above or below some hypothetical average in government spending per pupil has actually little importance, points out Tenney: "Consider what would be the case if ... Nevada spent nothing on education. This would mean--if we assume this money were left in the hands of the taxpayers--that taxpayers would have more money to spend on private education for their children."

This of course is the phenomenon called "opportunity cost" by economists: Every dollar sucked up to feed the government's failing, union-bossed, 19th century industrial-model school system is a dollar that parents and young people will never have the opportunity to spend on superior, customer-responsive, competitive-market education.

The option suggested by the Andersen report--that the state spend 13 percent more in order to bring Nevada up to the average--is wrongheaded from two perspectives, observes Tenney. "First it advocates spending ever more money trying to fix a system that can't likely be fixed with more money. And second, if Nevadans really wanted to be 'average,' for whatever reason, they should cut spending on education because Nevada consistently ranks among the highest of the states in education spending."

Garbage In, Garbage Out

Behind its varying foreground subjects, the AA report remains a compendium of appeals to ignorance, equivocation on terms and barely cloaked bias for ever-greater spending. It ends as it began, equating the desires of certain interest groups with "demands" the state must fulfill. "[S]pending in real terms has to grow faster than the population," argues the report, to keep up with "the demands for new schools, expanded road and highway networks and social services."

Tenney notes that "The report informs us that from 1982 to 1987 state government spending did in fact increase at a faster rate that the population, but this is no reason to think that spending increases should continue in that fashion." Interestingly enough, he points out, "the report did not even entertain the possibility that the costs to taxpayers of any given level of taxation could be greater than the benefits."

Fundamentally the Andersen report argument, observes Tenney, was that population growth would necessitate greater capital expenditures, that these additional expenditures would increase average costs, and so per capita taxation would have to be increased to fund the growth. It's a line of argument that eventually is self-defeating.

What may not be so obvious in that analysis, "and a point which was certainly not brought up in the report," observes Tenney, "is that an increase in average total costs brought about by growth implies that the government is operating in a range where diseconomies of scale have set in. Economic reasoning would suggest that if this is the case, it is good reason for the government to cut back on services in order to lower average costs."

In Flight from a Truism

The AA report authors, observes Tenney, "are caught in a dilemma: "If they argue that the government's average costs rise as population increases, then they are admitting or at least implying that government ought to be scaled back in order to operate more efficiently. If they were to argue that average costs decrease with increases in population, ... then they would be forced to see increasing population as a blessing from a fiscal standpoint, and their report would be unnecessary and superfluous."

Virtually the entire report can be seen as an effort to obscure a simple truism--one that shows why it is not necessary for the growth in government spending to exceed the growth in population in order to maintain a specific level of government services.

"If per capita spending levels remain the same--which is the assumption of the AA report--then the spending growth rate will, by definition, be equal to the population growth rate," notes Tenney. "It's a matter of mathematics: If the growth in spending did not equal the growth in population, this would mean that the level of per capita spending had changed."

So once again, an implicit equivocation in the Andersen report on a key term just happens to have the consequence of making tax increases on Nevadans appear necessary.

"Any assumed changes in government services that are 'required' by shifts in patterns of age, wealth, residence or any other assumptions that can be made, constitute changes in per capita spending which, by definition is a change in the average level of services." says Tenney. "Therefore, it is important to understand that if growth in 'necessary' spending is found to exceed the growth in population, it is because the assumed levels of spending have in some way increased rather than being held constant as the AA report suggests. So its argument that spending must grow faster than population is simply not true on its face."

The AA report resembles the work-product of a morally relativistic diagnostician--someone who would examine a patient beset by a spreading cancer, then write a report interpreting the crisis from the point of view of the carcinoma--and its "demands." "Between 1982 and 1987 the population of cancer cells grew 28.3 percent and the population of healthy cells grew only 20.4 percent. As demonstrated in Section 4.2 of this report, the increase in cancer cells over the next five years will have to be about three billion higher to continue the same rate of cancer cell spread...."

This is not a legitimate basis upon which to build the Silver State's future. NJ


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