Nevada should replace its gross receipts tax with something better but it won’t

“If I had my way, I’d take the tax out,” Republican Assemblymember P.K. O’Neill said last month about the state commerce tax paid by Nevada businesses.

It’s not a bad idea.

The commerce tax was crafted by quasi-governmental fixture, consultant to the publicly subsidized stars, and lobbyist in denial Jeremy Aguero at the request of then-Republican Gov. Brian Sandoval for the 2015 Nevada legislative session.

The measure, which was enacted with bipartisan support, applies small levies well south of 1% (between 0.051% and 0.331%, depending on the industry) on the gross receipts of businesses that collect an annual revenue of more than $4 million.

O’Neill and Republican Assemblymember Jill Dickman are sponsoring a bill to have the $4 million exemption grow with inflation, effectively expanding the exemption a little more each year, and capturing a few less businesses in the process. It would have a negligible impact on state revenues and Nevada businesses alike in the short term, though the impact on state revenue would compound over time. 

Only seven states levy a tax on gross revenue. States name them differently — “corporate activity tax” (Oregon), “franchise tax” (Texas), “commerce tax” (Nevada), etc. — but tax policy think tanks such as the Tax Foundation and the Tax Policy Center categorize them collectively as a “gross receipts” tax.

And the center-right Tax Foundation, in particular, is not fond of gross receipts taxes at all.

Among the many faults the group finds in “this harmful tax,” perhaps the most pernicious is “tax pyramiding” — a good or service gets taxed again and again by every business at every step in the market process.

That “continual forward shifting of the tax burden” ultimately results in consumers paying higher prices.

Nevada consumers already pay higher sales tax rates than people in most of the rest of the country, which makes inflation hit households in Nevada harder than in other states (and is yet another reason Nevadans will also be hit harder by Trump’s tariffs than people in most other states). Nevada’s commerce tax exacerbates the problem.

Price increases driven by commerce tax pyramiding also make the tax regressive — the lower a household’s income, the higher the percentage of that income is paid as a tax. That’s in keeping with Nevada’s upside down tax structure in general, which is notorious for being one of the nation’s most regressive.

“Nevada’s Commerce Tax is a prime example of a state with a poorly structured and legally tenuous gross receipts tax,” the Tax Foundation wrote in a 2024 overview of taxes on gross receipts in the U.S. The group singled out the aforementioned $4 million exemption for “eliminating many small and medium-sized businesses in Nevada from the Commerce Tax altogether.” 

(The “legally tenuous” bit refers to an “in-state payroll” quirk in the tax that could make it ripe for challenge under the U.S. Constitution clause granting Congress the authority to regulate commerce between the states. But since Republicans who control Congress have relinquished power over everything and anything in deference to Trump’s authority, that potential constitutional transgression is unlikely to be anyone’s concern anytime soon.)

“Gross receipt taxes” such as Nevada’s commerce tax “can and should be left in the dustbin of history,” the Tax Foundation asserts.

“If states intend to levy a broad-based business tax,” the group’s overview concludes, “a properly corporate income tax that allows businesses to deduct the cost of goods sold, as well as qualifying business investments and inputs,” which would curb tax pyramiding, you see, “is — while far from an ideal tax — demonstrably better than a tax on gross receipts.”

Yeah well we won’t be doing that

When O’Neill, who previously has struggled to grasp the meaning of regressive taxation, says he’d like to “take the tax out,” he assuredly doesn’t mean he would like to replace it with a corporate income tax.

But ridding the state of its commerce tax without replacing it with something smarter would leave a projected $760 million hole in state revenue over the next two years.

The damage that Trump and Elon Musk have recklessly inflicted on federal programs and services is as yet still incalculable, and the prospect of repairing what they have broken is still unknown. 

What is known, however, is that states that stand the best chance of maintaining a semblance of vital public services will be those states with a history of at least trying to adequately fund and staff state and local government. 

Nevada isn’t one of them.

And barring a currently unthinkable outbreak of sense and sensibility among Trump and his congressional Republicans, Nevada will likely be facing intense budget challenges over the next two years, especially with diminished Medicaid funding, yet another thing that is projected to hit Nevada harder than most states. 

Nevada can’t “take the tax out.” 

And it can’t replace it with a corporate income tax, for the same reason Sandoval and Aguero came up with gross receipts tax ten years ago. Sure, it was convoluted, unfamiliar, and wracked with bizarre industrial tax rate variations that were indecipherable to the layman from a policy standpoint but grossly obvious from a political one (oh hi mining). And, if memory serves, opponents at the time warned of the tax pyramiding problem.

But the big attraction about the commerce tax is that as blunt and flawed and silly as it so obviously was/is, it wasn’t that one tax that Nevada politicians of both parties are horrified to entertain, let alone make an argument or — perish the thought — vote for: It wasn’t an income tax.

Technically, it is true that Nevada can replace its gross receipts tax with a corporate income tax that would treat businesses and working households more fairly. While the state constitution prohibits establishment of a personal income tax, it also explicitly allows a business and/or corporate income tax.

But replacing the commerce tax with a business income tax would require at least a few Republicans to vote for it, because of the  state’s daftly undemocratic requirement that any new or increased taxes must be approved by two-thirds of both houses of the Legislature.

And approving a business income tax — or any new or increased tax for that matter — would require Democrats to not only vote for it, but to make a public case for it.

That’s just not going to happen at any time in the foreseeable future, if ever.

Instead, O’Neill’s bill to make the commerce tax slightly more complicated and slightly less useful was passed out of a committee controlled by Democrats, and seems exactly the sort of thing that perhaps not most but enough legislative Democrats would vote to send to the desk of a Republican governor who would no doubt be delighted to sign it, Nevada legislative Democrats arguably being among the most business-compliant legislative Democrats in the nation.

If that’s what happens, a little bit more of the state’s tax burden will be lifted from business, a  little bit more of it will fall on the shoulders of working households, and Nevada’s tax structure will be a little bit more upside down, fairness wise. In other words, yet again, the Nevada way will win the day.

Note: This column was updated to provide a more precise (but still snarky) characterization of commerce tax industrial rate variations.