By Megan Messerly, Riley Snyder and Michelle Rindels, The Nevada Independent

Governor-elect Steve Sisolak and Nevada lawmakers will have a little more than $8.8 billion in projected tax revenues to work with as they craft a budget for the state’s next two years, an increase of $591 million over Nevada’s current budget.

The $8,834,900,000 revenue figure comes courtesy of the state’s Economic Forum, which projected on Monday a 7.2 percent increase in state tax revenue over the next two years and also assumed an economic slowdown — but not a full-blown recession — sometime before 2021. The forum consists of a five-member panel of economists appointed by the governor and legislative leaders charged with forecasting revenue for the state’s two-year budget cycles.

The group met to weigh and approve initial projections of billions of dollars in tax revenues for the state, ranging from payroll taxes to gaming percentage fees, by using projections submitted by the state fiscal analysts, the governor’s budget office and Moody’s Analytics.

Though a final tax revenue projection will be approved in May, the forum’s decision Monday gives the first clear picture of how much leeway the Democrat-controlled Legislature and Sisolak will have to pursue their priorities and campaign-trail promises. Outgoing Gov. Brian Sandoval’s proposed two-year budget outlined last week came in at $8.8 billion, with more spending allocated to school safety, Medicaid and K-12 education.

“I am encouraged by how the state is performing,” Sisolak said in a statement. “I look forward to reviewing the final forecast released by the Economic Forum and creating a roadmap to implement the priorities that matter to Nevadans. I am committed to building a bright future for our state and that starts with building a budget that funds the initiatives that will get us there.”

As they did in their November meeting, much of the forum members’ discussion centered around how to best prepare for a likely economic slowdown or recession predicted to strike at some point in the next two years.

State fiscal analyst Russell Guindon said he and other state economists disagreed with a forecast by Moody’s Analytics predicting that Nevada would suffer worse than the national average in an economic downturn, saying various economic indicators including construction employment appears more “normal” than it did during the state’s boom prior to the 2008 recession.

“People say we haven’t recovered the construction that we lost. I, as an economist, would start to get concerned if we were back to where we were in construction employment — now we are setting ourselves up for that fall,” he said. “It just seems like things are maybe a little more normal now in Nevada as we’ve come out of this recovery, then what we saw prior to the Great Recession.”

Nevada’s recent economic development efforts have focused on diversifying the economy beyond gaming and hospitality, which is dependent on discretionary income and thus vulnerable to national economic swings. Economists suggested the state has made meaningful progress on that goal, and that Nevada isn’t necessarily falling into the unsustainable pattern of construction workers building homes to house more construction workers.

“I think our economy is a little different now than it was before the Great Recession because of our mix,” Guindon said.

Despite the gains in other sectors, much of the state’s workforce is still employed in service or retail jobs that could be particularly vulnerable to a recession — leading Moody’s Analytics to predict Nevada unemployment in a future recession to outpace the national average. Susanna Powers, an economist with the Governor’s Finance Office, predicted a slowdown in growth over the next two and a half fiscal years as opposed to a recession per se, though.

“The camp I fall in is we will see continued growth, It will be softer, maybe slower, as we see our current economic expansion to mature,” she said.

Here’s a look at what the major tax sources are expected to bring in over the next two years:

Sales and use tax

The forum is estimating that the state’s sales and use taxes will generate $2.6 billion over the biennium, a 10.8 percent increase over the last budget cycle. Sales tax is the largest single source for Nevada’s general fund, accounting for about one-third of its revenues.

That includes a 5.2 percent increase in the 2020 fiscal year and a more modest 4 percent increase in the 2021 fiscal year meant to account for a projected economic slowdown.

While both taxes are assessed on the sales of goods and services, sales taxes are levied on retailers when selling while use taxes are imposed on items purchased. The goal of use tax is to capture taxes on items and services purchased out of state.

Forum member Marvin Leavitt agreed with forecasters that a series of new projects — including the new Raiders stadium, the expansion of the Las Vegas Convention Center and the new Resorts World casino — will buoy sales and use tax over the next two years, but expressed uncertainty whether that growth would continue into the end of the biennium. He also noted that the forum historically tends to overestimate sales and use tax.

“It looks like to me that we’ve got enough big construction projects in the works that almost the next two years at least guarantees we’ll have a certain level of sales tax,” Leavitt said. “We don’t have a guarantee on the construction into that third year, plus the effect of a slowdown in the economy.”

Gaming percentage fee tax

The forum projects the state will collect $1.6 billion from gaming taxes in the upcoming biennium, a 3.2 percent increase over the prior two-year cycle. Gaming taxes account for about 18 percent of general fund revenues.

The total percentage fee collections include taxable gaming revenues — calculated from the total gaming win and adjusted for credit issued and collected — and an estimated fee adjustment, a monthly tax liability reconciliation.

Leavitt, one of the forum members, expressed uncertainty that gaming revenue would significantly increase until the new Resorts World casino opens in early 2021. But he agreed with fiscal staff that the casino’s opening may not immediately translate to an increase in taxes collected because the casino may see a significant amount of credit play when it first opens.

“I’m under the assumption that we’re going to see this 1, 2 percent growth for the biennium, other than the last six months,” Leavitt said. “But [fiscal staff] pointed out something that is true, when these large properties open up, you have the credit play and it could take three to four months to collect it. Well, again, you might have the increase in the gaming win but not in the actual percentage fees.”

Guindon, the fiscal analyst, noted that the economic slowdown also could result in a slowdown in visitors toward the end of the biennium, and a corresponding reduction in gaming taxes collected. His projections, which were the most conservative of the four gaming revenue forecasts over the biennium, were ultimately accepted by the forum.

Insurance premium tax

The forum projects Nevada will collect $950 million in taxes on insurance premiums over the next two years — a 10.7 percent increase.

Insurance premium taxes account for about 10 percent of Nevada general fund revenues.

Forum members characterized this tax as largely resilient to economic downturns. Fiscal analyst Michael Nakamoto pointed out that people will still have things to insure — homes, cars, businesses and their own lives — when recessions come.

He also pointed out that health-care costs continue to rise, buoying the tax collections.

Real property transfer tax

The forum expects the state will collect $227 million over the biennium from the real property transfer tax, which is levied based on the value of real estate that’s sold. The tax provides about 2 percent of general fund revenues.

Forum member Leavitt noted that this tax can be difficult to predict. Nevada’s housing market is experiencing a wide range of conflicting factors that can speed or slow homebuying.

Economists suggested that the current rate of home price increases is unsustainable. Wages are failing to keep pace with the rising values of homes in the state, and the two need to come into closer alignment.

“We’re starting to find that normalization,” said Powers, the economist with the Governor’s Finance Office. “What is normal for Nevada?”

There are also the first signs of land shortages in Southern Nevada, and the consideration that people are reluctant to buy homes when they think a recession is approaching.

Commerce Tax

State fiscal analysts said they’re still trying to perfect projections of the state’s Commerce Tax, created in the 2015 Legislature and applied on a business’s gross annual revenue over $4 million, with rates determined by business type.

Forum members approved a projection of $445 million in tax revenues — an 8 percent increase over the last budget cycle — over the two-year budget period, but observed that the forum has been off in past projections of Commerce Tax revenue and had no background into how the tax might perform were the economy to stop growing.

“This one is a tough one,” Leavitt said. “We’ve never been through a recession since this tax has been enacted. So you’re sort of flying a little bit (blind).”

Another influence on the tax is a reduction in another tax — drafters of the Commerce Tax legislation included a provision requiring an automatic reduction in payroll taxes, or “Modified Business Tax,” if the combined amounts of payroll tax, Commerce Tax and an excise tax on banks exceed Economic Forum projections by more than 4 percent.

That scenario happened in 2018, meaning payroll taxes will decrease by about $100 million over the next two-year budget cycle.

The Commerce Tax brings in about 5 percent of Nevada’s general fund revenue, but after factoring in tax credits that businesses can take against their modified business tax payments, it contributes closer to 2.5 percent.

Live entertainment tax

The forum predicts the live entertainment tax will draw nearly $258 million over the biennium, about a 2.2 percent increase over the current biennium.

The tax is a 9 percent admission charge on a live entertainment venue that seats more than 200 people, although there are major exceptions, such as for tickets to a professional sporting event in which a Nevada-based team is playing. It brings in about 3 percent of state general fund revenue.

State analysts say the combination of increasing popularity for sports team — notably the Las Vegas Golden Knights — and stable attendance at Strip residencies and shows means revenue from the tax is likely to stay flat in the next two years.

“The tax is moving sideways,” Gaming Control Board analyst Michael Lawton said last month. “And in the opinion of people I spoke with, there really isn’t anything on the horizon that’s going to materially drive this collection. There’s not a new show that we’re aware of, there’s not a new venue.”

Modified business tax

Forum members voted to accept a projected $1.37 billion from the state’s Modified Business Tax over the two-year budget period, an increase of about 1.5 percent from the last two-year budget cycle.

The tax itself is a 1.475 percent tax on wages, excluding the first $50,000 and health-care deductions, with different rates charged to financial institutions and mining industries.

It brings in about 16 percent of Nevada general fund revenue.