## Monday, October 13, 2014

### Some Simple Math on Nevada's Margin tax

Suppose you are a small business owner that sells \$1 Million per year worth of goods and services.  That's the level that triggers Nevada's proposed "margin tax".  \$1 Million Sounds like a LOT doesn't it?  Surely those "rich millionaires" can afford to pay their fair share of taxes?  That's the thinking behind Nevada's proposed margin tax.  But a business owner doing \$1 Million in sales is NOT a millionaire!  Let's dig a little deeper.  In MBA school they teach you that a well run business should drop 10% of gross sales to the bottom line as profit.  What does this mean?  Well, in a business selling \$1 Million it simply means after you pay your employees, rent, the cost of goods that you sell, and other expenses like insurance, auto etc if you're extremely well run your profit should be \$100,000.

Wow - that still sounds like a good pay day!  Those business owners sure are rich aren't they?  But wait a minute.  The real world isn't always as portrayed in business school.  Lots of small businesses in Nevada are extremely low margin and competitive - such as grocery stores or the computer business I happen to be in.  In the computer business many of us only drop 4% of our sales to the bottom line (yes really).  Why?  Partly because we have to compete with online retailers like Dell that discount computers.  So the profit in a business like computer sales and repair that does \$1 million in sales might typically be \$40,000 per year.  But don't forget - the federal government takes their share of that profit!  For simplicity let's assume a 33% federal tax rate.  The highest tax rate is now above 39% but 33% is fairly typical.  So lets say this hypothetical business owner sends \$13,200 to uncle Sam, leaving him with \$26,800 for his family to live on.

Now along comes the Nevada Margin tax.  There are 2 ways to calculate how much tax this business will owe but neither takes into account profit or how much federal tax a business owner has already paid.  The simplest of the two proposed methods is just to take 2% of 70% of gross sales.  2% of 70% of \$1 Million results in a tax of \$14,000!  That means this business owner will owe the state of Nevada MORE than his entire federal income tax bill, leaving his family a whopping \$12,800 of his profits to live on.  It's easy to tax the other guy and easy to say "our kids deserve better schools".  But when you realize the unfairness in these numbers you understand this will literally cause businesses to leave the state or close up shop.  By the way, the second method of calculating the margin tax results in a tax of "only" \$10,000 using sample numbers and ratios from our business.   In our case we will have no choice but to raise service rates and prices, resulting in lower sales.  Hey, maybe we'll get lucky and drive our sales down to \$999K resulting in zero margin tax.  Make no mistake: business owners will be making this calculation.

The unfairness of the margin tax goes even further.   Because it doesn't account for profitability, it effectively places a heavier tax burden on some businesses than others.  For example a small doctor's office will pay far more dollars in tax than a used auto dealer or low margin equipment sales company.   For many smaller service businesses it will take Nevada from one of the lowest tax states to one of the highest tax states.  As they say in the movies: "that is going to leave a mark".

Do we really want a law that creates an incentive for business owners not to invest and work hard?   There will be a significant profit motive to keep sales below \$1 Million, resulting in lower growth, lost sales tax revenue for the state, and more business owners with fewer employees.

Nevada's margin tax is WORSE than an income tax because it doesn't attempt to account for or even calculate the profitability of a business.  I HATE the idea of a state  income tax but I'd take a state income tax over this disaster. As a side note, since Dell isn't a Nevada corporation, do you think they'll have to pay the Nevada margin tax?   If not you've just handed Dell a huge price advantage over my 30 year old local Nevada based business.

Please vote "No" on question 3.

#### 1 comment:

1. Thank you for explaining this so well!