For conservative Republicans, Governor Sandoval’s call for $438 million in new taxes a year was unthinkable – and an idea unmatched since 2003, the year Nevada implemented a payroll tax on businesses. Sandoval had the backing of moderate Republicans in the Assembly and Senate leadership in both parties on the basis that new revenue would be used to improve the state’s education system. Others were not so sure, though, especially when Sandoval proposed a business license fee or tax on businesses. One such skeptic was Assembly Taxation Chair Derek Armstrong, featured on this month’s cover, who initially proposed his own tax plan but ultimately voted for a compromise bill. The following edited interview with Armstrong was conducted by Territorial Enterprise editor Elizabeth Thompson on June 2, 2015, the day after the historic session ended.
E. Thompson: There was widespread expectation going into the session that next to nothing was going to get done if it involved a bigger state budget and so the outcome of session was, I think, a big surprise to many in the state who follow politics and policy. What were your expectations going into the session, and what surprised you?
Armstrong: I guess I would start from election night until the first day of session because that was an evolution in itself. On election night, we realized that we were in the majority in the Assembly, and that changed the expectations moving forward. We had our caucus meetings, and everyone was put into committee positions. I was put in as the chair of Tax… So, I was smack dab in the middle of really a lot of the major issues because this session was all about education and funding education, and I was in the midst of all those fights.
E. Thompson: Did you need to be talked into the seats on Taxation and Education, or were you a willing soldier?
Armstrong: With my background, I wanted to be on the Taxation Committee so I asked for that. I actually also asked to be on Transportation because I thought that would be a fun committee to be on, and then I asked to be put on Ways and Means as well, and so I got two out of three.
E. Thompson: So you got two out of three, which ain’t bad, as the song goes.
Armstrong: Yeah, it wasn’t bad, and you know, being on Education was pretty special. We did some great things this session. I guess that’s probably one of the things that surprised a lot of people, but I think it wasn’t really a party issue and that everyone wanted to improve education in Nevada. We’ve been at the bottom of most of the education lists for way too long, and I think, you know, the governor said it from the State of the State that this session was going to be about education, and I think that we made some great strides forward to improving it.
E. Thompson: The concern of cautious observers was that, sure, everyone wants to improve education, but which ideas really work, and which can become law in light of partisan divides? Democrats typically, historically don’t like school choice, meaning vouchers, so there was this expectation that no choice-related reform was doable as part of a tax-and-reform deal. And Republicans, typically want to reform collective bargaining, which for Dems is a hill to die for. But as you say, the Republican majority in the Assembly made a difference.
Armstrong: Obviously that really helped. We went from policies keeping us on the bottom of rankings lists for school choice options to being close to the top in the nation for school choice, with the opportunity scholarships, some of the charter school bills, and then also the education savings accounts.
E. Thompson: The word “accountability” was uttered repeatedly by conservatives worried that any new money spent wouldn’t really make a difference. Are enough accountability measures in place along with the reforms?
Armstrong: I think we did a lot as far as accountability goes. Much of the new spending is targeted categorical spending that is outside the Distributive School Account”. So each one of those programs are going to have to come back next session and report metrics to the Legislature. I’m not sure whether it’s going to be fair to judge new initiatives completely based off of just one or two years of data, but we’ll at least see some indicators.
E. Thompson: Can you give me an example?
Armstrong: Elliot Anderson added a bill to put some accountability measures in the class size reduction spending, because that was a big issue coming into the session. We heard it in the Education Committee again and again, the concern over effectiveness related to new spending to reduce class sizes.
E. Thompson: Let’s talk about the new commerce tax, which will in part fund some of the education reforms. As someone who initially proposed funding mechanisms other than those pushed by the governor, how did you get to a place where you were willing to give up some of what you wanted and accept a revised version of what the governor had initially proposed?
Armstrong: So, I guess I would start before AB 464, going back to just before the State of the State when Governor Sandoval came out with his idea for a business license fee. When we were briefed on it, I had some concerns because it applied to every business, and that was troubling for me.
E. Thompson: When you say it applied to every business, you mean every business of every type regardless of revenue?
Armstrong: Right. My original plan had a small impact on small businesses related to the business license fee. For non-corporations, it went up $100 a year. In the last version of things, even that impact went away so that there wasn’t a small business license fee increase at all. And we still kept the exemption for the Modified Business Tax for small businesses, and then we also put the exemption of $4 million for the commerce tax portion. So I felt like I had done as much as I possibly could to protect small businesses under this new tax plan.
E. Thompson: One of the arguments against the commerce tax that was stated repeatedly by Assemblywoman Robin Titus during the session was this: If you’re a conservative, you’re generally against this idea of government interference, including choosing winners and losers and boosting some businesses while not boosting others. As such, you’re against special tax breaks and abatements for new businesses – which Nevada offers already, with even more being added this session – and meanwhile, you’re sitting in a legislative body that is talking about raising taxes on all the other businesses. How do you rectify those two things in your own mind?
Armstrong: This is one of the conversations I had with the governor even before the start of the session. Is there a conflict there, with some of the incentives we offer businesses to come here, because we’re trying to diversify the economy and broaden the tax base, while at the same time, we’re talking about taxing existing businesses? That was one of the things I had to work through in my mind throughout the session. I concluded that it’s just a reality that some industries are being provided incentives across the United States, and if we’re really trying to diversify the business economy in Nevada, we have to compete for some of those industries. Whether the economic impact for the state is direct or indirect, if it’s going to ultimately create jobs, there is a net benefit. But I agree that is sometimes hard to balance what’s going to be good and what’s going to be bad with those types of incentives.
E. Thompson: And what about balancing the good and bad of commerce tax, and other taxes that were added or increased this session?
Armstrong: I felt like every piece broadened the tax base and tried to make the overall tax policy as fair as possible. We saw that even when we brought in Uber. We made sure that they pay their fair share like the taxicabs do, and that broadened the base, and we required that all of those Uber drivers have state business licenses, as well. And we made sure that all of the co-locators in the data centers, that put their equipment in Nevada, have to have a Nevada State business license. So those were important things we did to broaden the base.
When we can capture revenue from non-Nevadans, I think that’s a benefit. We did that in several ways. We cleaned up the Live Entertainment Tax and included events like the Electric Daisy Carnival and Burning Man, where people come in to the state from all over. So I think overall, comprehensive tax reform in Nevada came out of this session, and for me, as Chair of Taxation, I’m very happy with the end result. Will it be perfect? No, but I think we did a lot of great things this session.
E. Thompson: So there’s been some talk, and a strong end-of-session push by some including the Las Vegas Chamber, that the next tax reform conversation should be about a sales tax on services, possibly to include lowering the sales tax rate while broadening the base into services. Where do you stand on that?
Armstrong: I’ll always leave myself open to the conversation and hearing the arguments. I think one of the arguments in favor of the idea is that Nevada in the past 60 years has transformed from a goods-based economy to a services-based economy. Our sales tax base has gone from being around 70 percent of transactions down to about 30-40 percent of transactions. So I’m more than willing to take that discussion on, and have an open mind, and see what happens.
E. Thompson: It was pretty well established through expert testimony this session that the state can’t do a complete, in-depth study and figure out a properly weighted structure for a sales tax on services in just 120 days. Are there plans afoot for the Interim Finance Committee, as an example, to actually start working on collecting some data?
Armstrong: In a way, some service taxes will now be collected, just by virtue of the commerce tax. I think that may help start the process. There were some concerns from the Secretary of State and others in regard to some of the collection of services data, though, so I’m not aware that there is a plan at this point.
E. Thompson: What do you want Nevadans to know about the outcome of the session?
Armstrong: I think that for me at the end of the day, I just hope that the fact that we raised revenue doesn’t overshadow all of the good things that have come out of this session. We did so much on education reform, and we did our very best to try to make Nevada a better place for the kids. I hope that that’s the message that comes out of this session.