Driven by a better-than-expected rollout of the COVID vaccine, a flood of federal stimulus dollars and pent-up demand to spend and travel, revenues flowing to Nevada’s general fund are projected to be more than $910 million more than what forecasters had predicted back in December.
The revised forecast is a marked improvement from the Economic Forum’s last revenue forecast from December, when the five-member panel of appointed economists and analysts projected general fund revenues of $8.5 billion over the next two years — down about half a billion dollars from the prior budget cycle. This time, the Forum projected $4.4 billion in the fiscal year that starts in July, and $4.7 billion for the following fiscal year, for a total of $9.1 billion in the next biennium — a $586 million upward revision.
The forum also projected higher-than-expected revenues in the current fiscal year, upgrading that forecast by $324 million. In all, the state expects about $910 million more for the general fund over the three fiscal years than was projected just five months earlier.
Gov. Steve Sisolak and state lawmakers built the state’s proposed two-year budget off that December projection (including about a 2 percent cut to the budget approved in 2019), meaning that the good economic news Tuesday will provide legislators with the flexibility to not only restore cuts, but to budget for additional priority projects over the final month of session.
“This is night and day different from December,” Moody’s Analytics analyst Daniel White said during the meeting. “No one thought there was any possibility of having that much vaccine manufactured by the end of the year. So that was the first miracle that kind of gets us where we are today.”
White said a smoother than expected rollout of the vaccine also helped, as did Democrats seizing control of the U.S. Senate in January. With a Democrat-controlled House and Senate, President Joe Biden’s $1.9 trillion American Rescue Plan was able to advance, and massive proposed investments in infrastructure and social programs have a path forward that was far less certain the last time the Forum met.
“It's no longer an aid package,” White said of the federal spending. “We're moving into trying to change the long run structural makeup of the economy going forward. And that has major long-term fiscal implications.”
The Forum approved the revised tax revenue projections after deciding between predictions submitted by state fiscal analysts, the governor's budget office and Moody’s Analytics. Established in 1993, the Forum meets regularly to review forecasts of the state’s seven major tax sources: sales and use tax, percentage fee tax on gaming revenues, insurance premium tax, modified business tax, cigarette tax, live entertainment tax and real property transfer tax.
Under state law, the Forum’s tax revenue projection out of the May meeting in odd-numbered years is what state lawmakers must use to craft the budget. Lawmakers are constitutionally required to balance the state budget — spending no more than incoming tax revenue.
Sisolak said he would work with the Legislature for the rest of the session “as we embark on the largest economic recovery effort in the State’s history."
"We must always remember the struggles we faced during the last year, and vow to use this opportunity to ensure we are never in that vulnerable position again," he said in a statement. "That means making strategic decisions through the lens of responsible fiscal management focused on transforming our State for future generations and developing a solid economic foundation that leaves no Nevadan behind.”
Assembly Republican Leader Robin Titus responded to the news by saying the Legislature needed to "immediately review the Governor’s budget cuts and restore funding to critical areas in education, healthcare, and infrastructure."
“Additionally, we need to encourage consumer confidence and help businesses get back to where they were prior to the pandemic," she said in a statement.
Here’s a look at highlights of the state’s major revenue sources.
Sales and use tax
Members of the Forum projected that the state would collect more than $2.7 billion over the next two fiscal years from the state’s 2 percent share of the sales and use tax, the general fund’s single largest revenue source. The forecasts represent about a 5 percent increase in sales tax collections for both fiscal years in the budget.
The Forum also opted to move forward with a projected forecast of $1.2 billion in sales tax collections for the current fiscal year, reflecting increased confidence that almost all sectors of the state economy will continue to recover over the last months of the remaining fiscal year, which runs through the end of June.
The U.S. clocked the highest rates of real disposable income on record last month, but with COVID restrictions, consumers have been less able to spend it on services and travel and have turned more to spending on durable goods. That could soon change.
“The pace of growth in consumer spending, especially over the first eight to 10 quarters of this recovery, is going to look very, very strong,” White said. “When business restrictions go away and travel restrictions go away, a lot of that is going to spill forth in terms of pent up demand in the rest of the economy and that plays very well for a tourism-dependent area like Nevada.”
Approved forecasts for the upcoming biennium were still cautious — the 2022 fiscal year forecast was on the low end of options presented to the Forum, and the 2023 adopted forecast was roughly in the middle. Forum members and tax projectors said the revenue forecasts reflected expectations that the state’s gradual return of the leisure and hospitality business will drive economic growth, but could also run into headwinds including commodity shortages or inflation.
“I expect the state to be pretty much open then and a lot of pent up demand, goods, services, tourism, all that good stuff, I'm hoping will come out of (Fiscal Year 2022), and then tempered but still strong growth in 2023,” said Nevada Department of Taxation Economist Hayley Owens.
Gaming percentage fee tax
Gaming is expected to bring the general fund $1.5 billion in the next two fiscal years, a slightly rosier projection than the $1.4 billion the Forum predicted in December.
Casinos saw their winnings at the highest levels in eight years this March, with slot win figures blowing past what would otherwise be expected under capacity limits.
“Stimulus checks have had a direct impact on the Nevada gaming activity,” said Susanna Powers of the Governor’s Finance Office. “Yet the rebound in activity is slower than what we experienced in the pre-pandemic years because I believe the business travel and convention business will not come back as quickly as the leisure travel will.”
Modified Business Tax
Economists predict that Nevada will bring in $1.6 billion in the coming biennium from the Modified Business Tax (MBT) assessed on payroll. That’s up from the $1.5 billion the Forum forecast in December.
Owens said that more than any other tax source, she has revised her MBT projections up from December.
“Definitely a much brighter picture,” she said.
There are different MBT rates assessed on different types of businesses, including financial institutions, mining companies and others. Economists projected substantial growth in financial services payrolls as the industry is buzzing with Paycheck Protection Program lending and a refinancing boom.
Mining payrolls, on the other hand, are holding steady in spite of the relatively high price of gold. Powers chalked that up to efficiencies realized when major gold companies merged (Barrick and Newmont announced they were becoming a joint venture in 2019).
Still, the pandemic may have a lasting effect on hospitality, Nevada’s hardest-hit industry. David Schmidt, an economist for the Department of Employment, Training and Rehabilitation, said that many hotel casino jobs lost in recent recessions haven’t come back — a contrast to sectors such as food service that have seen much more steady upward trends.
“This is a very mature industry and not one where we're expecting to see a lot of growth and expecting to see some potentially permanent job displacement,” he said about hotel casinos.
Schmidt, who said he’s pessimistic that unemployment benefits will be extended beyond the current expiration date in September, said DETR is focused on getting people into jobs or retrained before then to avoid leaving workers in a lurch.
Insurance premium tax
Forum members project the tax on insurance premiums will yield about $1 billion over the upcoming biennium — a slight upgrade from what they predicted in December.
Revenue from the tax dropped during the early months of the pandemic, as many insurers gave clients rebates because they were driving less. In general, though, the tax source is far more stable than others more closely tied to tourism.
“It hasn't been as sensitive or reactionary to the current business cycle,” Owens said.
Real property transfer tax
One revenue stream expected to crest and cool off during the upcoming biennium is the real property transfer tax — a $1.95 surcharge for every $500 of property value applied on home sales.
Members of the Forum accepted forecasts of $126 million in the 2022 fiscal year, but $123 million in the next fiscal year — predicting a gradual slowing of the state’s continued red-hot housing market.
Tax projectors said performance of the revenue stream is greatly affected by well-documented issues of housing affordability — saying that home prices affect tax collections, but changes in the volume of home sales and property transactions also have a significant effect on tax performance.
Analysts pointed to a variety of factors that could affect property tax performance over the next two years — eventual lifting of the eviction and foreclosure moratoriums, continued migration of Californians able and willing to pay cash for homes, potential labor shortages and the homebuilding industry struggling to keep up with demand, plus the potential of rising market rates making it more difficult for first-time home buyers to enter the market.
“This tax is extremely complex,” Powers said. “So it says what we think will happen, but they can always look in retrospect and say well it didn't happen.”
Several Forum members expressed some skepticism that amid predictions of economic growth and increased revenue collection for nearly all other tax streams, the state’s housing market would chart a different course. Members of the Forum ultimately decided to go with the legislative fiscal division’s recommendation, the highest of the three forecast options, which still predicts a 2.6 percent dip in tax collections in the 2023 fiscal year.
“Nothing very good lasts forever, which, in my world, is housing,” said Forum member Jennifer Lewis, who works as an executive at a real estate management firm.
One of the state’s newer revenue sources, the Commerce Tax — a gross receipts tax on business revenue exceeding $4 million, with different rates based on industry — is expected to raise $470.8 million over the two years of the budget cycle.
Unlike other major revenue sources, Legislative Fiscal Analysis Division Analyst Russell Guindon said that all three forecasts — the Governor’s Finance Office, Department of Taxation, and legislative fiscal division — worked on a consensus for the Commerce Tax, which operates differently than most other tax sources, as it is collected at a different time and involves tax credits against other taxes.
The adopted forecast was about 10 percent higher than the initial December forecast adopted by the Forum.
Live Entertainment Tax
The forum is projecting just shy of $180 million from the Live Entertainment Tax (LET) in the coming two years. That’s slightly lower than the approximately $183 the forum forecasted for the revenue source in December.
“It's not just, ‘is there pent up demand to come back to Vegas?’ It’s, ‘will the shows even open, when will they be profitable, when does that convention player come back?’” said Forum Chairwoman Linda Rosenthal. “This one’s a bit tougher in terms of projecting.”
The live entertainment industry has been among the hardest-hit by the pandemic and related capacity restrictions. Ninety percent of the revenue from tax — which is applied as a 9 percent charge on ticket prices for large events, with exceptions such as professional home sports games — derives from venues on the Las Vegas Strip.
Clark County officials have increased capacity restrictions to 80 percent of capacity and plan to raise the cap to 100 percent once 60 percent of eligible adults in the county have received at least one dose of the COVID-19 vaccine. As of April 29, that figure stood at about 47 percent.
Many large shows are unable to turn a profit with anything less than full capacity, which is delaying their return. They also need time to market their shows and sell tickets for events, and the same goes for large annual festivals such as the Electric Daisy Carnival.
Forecasters predict that LET revenues will rebound by the first and second quarters of calendar year 2022.
Updated at 5:03 p.m. on 5/4/21 to add statement from Robin Titus and at 6:14 p.m. to add a statement from Gov. Steve Sisolak.