Unique and treacherous threats loom over the construction industry, with even greater dangers facing subcontractors, from the proposed Margin Tax, Karen Griffin of the Coalition to Defeat the Margin Tax Initiative explained. Griffin’s presentation at the NSA/FCA Summer Membership Meeting described the effects of the tax on the state’s workers, businesses and the economy, including highlighting a recent memo from Jeremy Aguero of Applied Analysis discussing the likely impact of the measure on the construction industry.

The Margin Tax, Question 3 on this November’s ballot and termed “The Education Initiative” by its proponents, would impose a 2% tax on the gross revenue of any business, or combination of businesses with common owner(s), with revenues greater than $1 million.

Griffin explained just some of the ways in which this tax would have a destructive impact on Nevada’s economy in general and the construction industry in particular. She referred to the recent memo from Aguero describing the likely effects of the Margin Tax on the construction industry and the distinctive threats the tax poses to subcontractors.

Construction subcontractors could be uniquely adversely-affected by the Margin Tax, according to Aguero’s memo, due to the “pyramiding” effects of the tax. At each level of the supply chain, companies will have to pay the Margin Tax on revenue that had been subject to the tax at prior levels. General contractors will be forced to pay the Margin Tax on revenue on which subcontractors had already paid the tax.

The memo notes, “[G]eneral contractors will have an incentive to structure their subcontractor agreements in such a way that they, as opposed to their respective subcontractors, would be able to take the available cost of goods sold deduction in determining their Margin Tax liability (e.g., where the general contractor purchases all of the materials for a job). While this may decrease the potential tax liability for a general contractor, it would materially increase the tax liability for subcontractors and may increase the industry’s tax burden overall.”

The threats to the construction industry are not limited to the direct impacts of the tax. According to Aguero, “[T]he construction industry is unique in that it is less a ‘sector’ itself and more a reflection of investment (or demand) in all other sectors of the economy.”

Reductions in business activity in one area of the economy can have a negative impact on business investments that affect other areas. As Nevada makes a quick transition from one of the lowest business tax states to one of the highest, the impact of reduced investment would be profound.

“No other industry bears more risk in this regard than does construction,” writes Aguero.

Earlier analysis compiled by the Coalition, and presented by Griffin, described the negative effects on jobs, economic growth and consumer prices of the Margin Tax. When including indirect effects, nearly 9,000 jobs and $1.1 billion in annual economic activity could be lost by the state.

Consumer prices on a variety of goods will increase, including on groceries, clothing, gasoline and electricity. “We know that NV Energy will be required to directly pass this on to ratepayers,” said Griffin.

The Margin Tax would be the equivalent of an average of an approximately 15% corporate income tax, nearly double California’s 8.8%. Virtually overnight Nevada would move from one of the lowest business tax states to one of the 5 highest.

Despite the moniker dubbed it by its supporters, “There is no guarantee the Margin Tax would increase education spending by one penny,” Griffin explained.

The money collected from the tax goes to the state’s Distributed Schools Account. Historically, when more money has gone into the DSA, the Legislature has taken money out of the account through the backend. For example, she noted that money from the Room Tax “has not gone to increase education funding since 2009.”

Griffin stressed the importance of informing the public about the tax. The Coalition provides a “Tool Kit” for employers to use to inform employees, family members, colleagues and friends about the Margin Tax.

The NSA is a member of the Coalition to Defeat the Margin Tax and encourages our members to become involved. The life of your business may depend on it.