Public Policy Focus | Nevada Spending Growth Lags Economic Growth

Posted on by & filed under Nevada by the Numbers Blog.

Economic researchers and analysts across the country have developed a number of ways to assess state spending levels relative to economic growth. In order to gauge these numbers and their relationship to one another in Nevada, RCG Economics has compared Nevada’s General Fund (“GF”) spending to Nevada’s annual Private Sector Gross State Product (“Private GSP”) using data for the 34-year period between 1980 and 2014. While there have been several policy changes affecting taxation rates and revenue during that period, including new taxes and changes to the base of existing taxes, the data still provides an interesting picture of how the state’s GF and Private GSP are growing relative to one another.

In order to achieve comparable data sets for purposes of this analysis, RCG converted Nevada’s annual GF spending, which is based on a July-June fiscal year, to calendar years that were then matched to Bureau of Economic Analysis’s (BEA’s) annual reports for Private GSP for Nevada. The results of our analysis are illustrated below.

Leg appr gf as perc of gsp

As shown, Nevada’s legislatively approved GF, as a share of the state’s Private GSP, ranged from 2.4% to 3.3% (rounded) between 1981 and 2014. The minimum share occurred in 2000 and 2001, while the maximum occurred in 1982 and again in 2009 (recessionary years). At the end of 2014, the GF share of Private GSP was just above 2.8%, the same as the 34-year average. Nevada’s GF as a share of Private GSP generally goes up during recessions, as can be seen in 1981-82, 1990-91, and 2007-09. (Note: It is typical to see a lag between an economic downturn and when tax collections decline due to that downturn.)

Another way to assess the relationship between Nevada’s GF and Private GSP is to look at how each one grows and dips over time, as illustrated below.

GSP growth and dips

On average, annual GF revenues rose by 7.1% between 1980 and 2014 (not adjusted for inflation). The peak of 14.6% occurred in 1991 and the trough of -3.7% occurred in 2012. During this same 34-year period, average annual Private GSP grew by 7.6%, with the peak of 14.9% occurring during 2004 and the trough of -8.8% occurring in 2009. (Note: Private GSP rose by just 3.4% between 2013 and 2014, less than half of the 34-year average.)

It should be noted that the differences in timing between the spikes and drops of the GF and the GSP during recessionary periods could, in part, have to do with the fact that Nevada is “fee heavy,” i.e. that the state has a general business environment of specific exactions as opposed to those that are ad valorem. Even when there is reduced economic activity, businesses still must pay quarterly and annual fees (which are often flat) for all kinds of licenses and services. In addition, as stated previously, there is typically a lag associated with tax collections.

Analysis

The most critical issue revealed by the data is that the average annual growth of Nevada’s GF during the last 34 years has lagged the average annual growth of the state’s Private GSP, and it has done so by approximately 7% (which is the percent difference, not percentage point difference, between 7.6% and 7.1%).

RCG believes this lag is due to:  1) Nevada’s tax structure/portfolio, which has not consistently enabled the growth of the GF to keep pace with the growth and development of the general economy; and 2) the composition of the state’s economy, which has historically been concentrated on one primary (export) industry, i.e. gaming and hospitality, which is predominantly driven by consumer discretionary-spending, which, in turn, can be volatile.

Final Thoughts

Depending on a person’s fiscal and political predilections, the fact that the growth of Nevada’s GF generally lagged the growth of the state’s private sector economy for the 34 years ending in 2014 can be viewed as positive or negative.

Those who think state government spends too much can take solace in the fact that the GF is not growing at a faster rate than the private sector economy, either as a share or in terms of its growth rate. Conversely, those who think state government spends too little can reasonably argue that the rate of GF growth should at least be the same, or nearly the same, as the rate of growth of the private economy. For them, and for those who think an evolving and growing economy requires ongoing government investment (i.e. spending), the data strongly support the hypothesis that Nevada’s tax system needs re-structuring in order to best reflect – and best capture revenue from – the growth of and in the private economy.

Outside of political and philosophical concerns, it is a fact that the economic activity Nevada has traditionally taxed, and continues to tax, does not fully reflect and represent today’s actual private economy, nor does it fully represent and reflect growth activity. As such, from a purely economic standpoint, a restructuring of the state’s tax portfolio is in order.

The recently passed commerce tax is an attempt to broaden one portion of Nevada’s tax-base and capture revenue from growth in the affected sectors and industries. Whether the commerce tax will capture enough revenue from existing and future economic activity to significantly reduce the gap between the rate of GF growth and the rate of Private GSP growth is unknown. Even if it reduces the gap to some extent, the commerce tax cannot capture all growth activity on its own.

A more far-reaching reengineering of the state’s tax structure is still in order. It should be thoughtfully crafted in the context of Nevada’s 1) existing economic environment, 2) economic development efforts and corresponding growth, 3) conservative estimates of future growth, and 4) the economic particulars of the regional, national, and global economies. This restructuring should be supported by reform and refunding of the state’s “rainy day” fund, as was previously recommended in this blog.