Recession or not, Nevada and Gov.-elect Lombardo are primed for a bigger budget

Nevada is expecting to collect $11.4 billion in tax revenue over the next two fiscal years.

The Economic Forum, a five-member panel of private sector fiscal analysts, on Monday approved the forecast for the 2023-25 fiscal biennium, which begins July 2023 and runs through June 2025. The forecast provides the base for the governor’s executive budget, which will be given to the Nevada State Legislature prior to the start of the 2023 legislative session in February.

The $11.4 billion forecast is significantly higher than the $9.2 billion forecast approved in May 2021 for the current biennium, but it is only $325 million more than the actual revenue and revised remaining estimated revenue for the current biennium.

Revenue this current biennium has far exceeded expectations by economists and industry analysts, who have struggled with predictions amid myriad unprecedented factors caused by the covid pandemic.

Gov. Steve Sisolak released a statement after Monday’s meeting saying the Economic Forum projections show Nevada is “continuing our steadfast path toward recovery.”

The statement continued: “My office has been hard at work in developing the budget for the next biennium, and my team will continue the work to prepare an executive budget that reflects my administration’s priorities and continues to make investments in the health, safety and wellbeing of all our residents.”

Sisolak, a first-term Democrat, was defeated by Republican Joe Lombardo in last month’s midterm election. The governor-elect will be inaugurated next month and will be working with a Legislature solidly controlled by Democrats.

In late 2018, then-outgoing Gov. Brian Sandoval put together an executive budget proposal for Sisolak, his successor. Sisolak made relatively few changes to that budget before submitting it to the 2019 Legislature.

Lombardo on Monday released his own statement, saying the latest projections “demonstrate there is no need for a tax increase of any sort.”

The statement continued, “I look forward to making my administration’s budget priorities fit within these projections while still acting fiscally responsible and saving money for a rainy day.”

State agencies, which have already submitted their budget requests, have asked for a total of $10.8 billion in funding for the upcoming biennium.

Revenue projections

Nevada’s projected revenue increases come even amid concerns that a recession or economic slowdown looms on the horizon.

Echoing an analysis she gave the Economic Forum last month, Emily Mandel, an economist at Moody’s Analytics, described the national outlook as “tenuous” with “quite a bit of risk.” Moody’s does not expect a formal recession as defined by the National Bureau of Economic Research but acknowledged they expect a “significant slowdown” with some parts of the economy contracting as other parts continue to grow.

Mandel described it as a “growth recession.”

“That’s going to feel a little bit like a recession,” she added. “We’re going to see a slowdown in a lot of different areas of the economy. It’s possible we’ll see layoffs. It’s possible we’ll see the unemployment rate tick up a little.”

Moody’s Analytics expects the Federal Reserve to be able to effectively combat rising inflation. Inflation is projected to clock in around 8% this calendar year, then lower to 4% in 2023 before settling into the low 2% range in 2024.

Nevada is forecasting $1.8 billion in sales tax collections in Fiscal Year 2024 and $1.9 billion in Fiscal Year 2025.

When it comes to the gaming percentage fee, the panel expects the current fiscal year to end having collected $936.8 million. Looking forward, they are forecasting collections at $907.9 million in FY 2024 and $935.9 million in FY 2025.

Those numbers reflect an expected leveling off of strong performance from the gaming industry.

Nevada has seen 20 consecutive months of gaming win over $1 billion, a trend that surprised fiscal analysts when it first happened during the pandemic but has since been embraced as a new normal for the state’s hallmark industry.

Nevada Gaming Control Board Senior Economic Analyst Michael Lawton said they anticipate some pullback in consumer spending as a consequence of “record high inflation, rising interest rates and volatility in the stock market.”

“With the Federal Reserve attempting to lower inflation by ongoing interest rate hikes, the gaming industry continues to look for a slowdown in consumer spending,” he added. “Although these trends have not surfaced yet on the Las Vegas Strip, the board feels that it would seem reasonable to assume some impact over time.”

Consistently one of the more difficult revenue streams to predict, Nevada’s live entertainment tax (LET) sparked discussion among the five fiscal analysts about how aggressive the forecast should be.

Central to the discussion was how much LET revenue to assume from two major events: Formula 1 Las Vegas Grand Prix, which is scheduled for November 2023, and Super Bowl LVIII, which is scheduled to be played at Allegiant Stadium in February 2024.

The Formula 1 race is expected to bring in 100,000 spectators with an average ticket price of $1,300, according to an analyst from the Legislative Counsel Bureau. That would translate to $11.7 million in LET, which is assessed at 9% of the ticket price.

The Super Bowl is expected to bring in 65,000 in-stadium spectators at an average of $2,500 per ticket. That would translate to $7.3 million in LET. (That estimate assumes the Las Vegas Raiders do not advance to that Super Bowl because sporting events involving a Nevada-based team are currently exempt from LET.)

Economic Forum Chair Linda Rosenthal at Monday’s meeting expressed comfort with an aggressive projection of $75 million for FY 2024, saying of LET that “Vegas always seems to find a way to bring shows to drive this higher.”

But other members wanted to be more conservative.

Ultimately, the panel approved a $70 million forecast for FY 2024 and a $59.8 million forecast for FY 2025. The latter year does not assume the return of Formula 1 for a second year, though that has been publicly promised. (For comparison, LET revenue for the current fiscal year is projected to end at $59 million.)

The complete Economic Forum forecast report approved Monday will be available on the LCB website once it has been finalized by staff.