After more than 650 days, state lawmakers will soon get an answer from the state Supreme Court as to whether decisions extending two expiring tax sources in the waning hours of the 2019 Legislature were constitutionally valid — with potential major budget implications for the 2021 session on the line.
Attorneys representing both sides tangled before the seven members of the state’s highest court on Monday over the merits of a lawsuit filed more than 21 months ago by state Senate Republicans.
Justices made no ruling on Monday, but beyond the constitutional questions, a decision to uphold the District Court’s ruling last September in favor of Senate Republicans could have major implications for lawmakers crafting the state budget this session. The extended payroll tax rate being challenged in the lawsuit brings in tens of millions of dollars in state tax revenue — meaning legislators could soon be facing a large budget hole with just weeks left in the session.
The lawsuit was filed by eight state Senate Republicans in July 2019 over a pair of bills — one removing a scheduled decrease in a payroll tax and another extending a $1 per transaction DMV technology fee — passed during the 2019 Legislature with less than a two-thirds majority, constitutionally required for any tax increase.
Legislative Counsel Bureau General Counsel Kevin Powers argued Monday that proponents of the 1990s initiative requiring a two-thirds vote in the Legislature for any tax increase back then had the general goal of requiring a higher bar for legislation that would increase or expand different forms of tax revenue, but that the intent was “never to hamstring the government and impair existing revenues.”
“Both of these bills are consistent with the intent that the voters understood, that existing revenues will not be impaired,” he said. “Simply, the burden on the fee-payer or the taxpayer has remained the same. There has no been no change from one fiscal year to the next fiscal year.”
Justices peppered both Powers and state Deputy Solicitor General Craig Newby (representing the governor’s office and state DMV) with questions about why the actions taken by the 2019 Legislature didn’t meet the constitutional threshold (and two-thirds requirement) of a bill that “creates, generates, or increases any public revenue in any form.”
Justice Douglas Herndon asked why similar “sunset” tax bills from the 2011, 2013 and 2015 sessions required a two-thirds vote. Powers replied that the Legislature's legal division changed its mind in 2019 after researching the issue.
Justice Elissa Cadish asked Newby why the 2019 legislation extending the DMV technology fee — a move that brought the agency an approximate $7 million in additional revenue — shouldn’t count as creation of new revenue, and whether defendants were asking the court to certify that any tax bill with an expiration date could be extended “in perpetuity” with a simple majority.
“Certainly, there could be some negative policy consequences that result from that type of interpretation in terms of the Legislature going forward,” Newby replied. “But that is a decision that the Legislature undertook on the advice of counsel to proceed that way. And, ultimately, this very well may not be the preferred interpretation...but under the circumstances, it is a reasonable interpretation. There is ambiguity within the term ‘increase.’”
Karen Peterson, representing the plaintiff Republican state senators, said that attorneys for the defendants were asking the court to “blindly defer” to the legislative branch and ignore a plain reading of the state Constitution and two-thirds provision.
“The words used in the constitutional provision are plain, they're ordinary, they're easy to understand and they're unambiguous,” she said. “And the fact that there's another party that has a different interpretation of that constitutional provision doesn't mean that the constitutional provision is ambiguous.”
She also warned that reversing the District Court’s decision and allowing simple majorities to extend expiring tax rates would begin “chipping away” at the ability of legislators to negotiate, compromise, and “fashion a piece of legislation that they can all live with so that they could get their two-thirds vote.”
However, justices appeared skeptical of Peterson’s request for attorney’s fees from defendants in the case — Justice James Hardesty said it seemed a “dangerous and very slippery slope” by asking the courts to determine the behavior of public officials in their official capacity to see if they stepped out of bounds and warranted the awarding of attorney’s fees.
“I fear this would be a never ending legal process where some legislators sue other legislators because they think they stepped out of constitutional bounds and now they're seeking attorneys fees,” he said.
The court’s decision could have a substantial effect on the roughly 22,000 state businesses that pay the Modified Business Tax, a 1.475 percent payroll tax assessed on businesses with more than $50,000 in taxable wages per financial quarter. Businesses in the finance and mining industries pay a 2 percent rate.
The current tax rate was set in 2015 through former Gov. Brian Sandoval’s efforts to raise more than $1.1 billion in new and extended taxes for K-12 education funding, but included a provision to automatically lower the tax rate if revenue exceeded projections set by the state Economic Forum.
That tax rate “buy-down” was triggered in late 2018 and was set to take effect in July 2019, but Gov. Steve Sisolak and legislative Democrats moved to keep the higher tax rates in place as a way to retain tens of millions of dollars in tax revenue. Attorneys with the Legislative Counsel Bureau issued an opinion in early May stating a two-thirds majority was not required to nix the scheduled payroll tax decrease.
The lawsuit also challenged an extension of a $1 per transaction “technology fee” assessed by the state DMV, initially approved in 2015 to help the agency pay for a system modernization project, but that was extended out to 2022 during the 2019 Legislature without a two-thirds majority vote. The DMV is asking lawmakers this session to extend the fee through 2026, following past complications and delays with the system modernization plan.
The decision is coming later than either side likely expected — Republicans initially said they hoped for a decision before October 2019, and Democratic legislative leadership wanted “clarity” on the matter before the start of the 2021 session. Republican Senate Minority Leader James Settelmeyer said in a statement Monday that he was “confident the Supreme Court will recognize the historical significance of this provision and uphold the District Court ruling.”
Monday wasn’t the first time the case had gone to the state Supreme Court — the state’s highest court actually issued an important procedural ruling in mid-2020 allowing attorneys with the Legislative Counsel Bureau to represent defendants in the case, even though the plaintiffs were also state lawmakers.