Nevada Governor Brian Sandoval has been hinting at a tax reform proposal since late October that could increase some tax rates in a broad restructuring of the system.

LOS ANGELES — Republicans who seized a majority in both houses of the Nevada legislature are likely to face some tough decisions about taxes as the state confronts a structural deficit.

Republican Gov. Brian Sandoval, who was easily re-elected himself, has been hinting at a tax reform proposal since late October that could increase some tax rates in a broad restructuring of the system.

The state has a $430 million shortfall for its 2013-14 biennium budget, according to a report from the Nevada Economic Forum released Dec. 3.

The Economic Forum, a panel of five economic and taxation experts from the private sector, provides the official estimates the state's budget writers are required to use.

So far, Sandoval is keeping everyone in the dark about specific proposals for the deficit until he releases his final budget in the State of the State address on Jan. 15.

The Economic Forum "report reminds us yet again that our revenue structure is not built to meet the demands of our changing economy, nor our continued increase in statewide population," Sandoval said in a Dec. 3 statement. "While I am encouraged by positive economic indicators such as job creation and the falling unemployment rate, I am also reminded that our traditional revenue sources are not keeping pace with our state's growth."

The previous Democratic majorities in the state legislature worked out compromises with Sandoval over the past four years to reach a balanced budget, but the state's political environment changed substantially on election day. Now, both the state Senate and Assembly are under Republican control for the first time in decades. The session begins Feb. 2.

"If you are following what is going on, the governor said he might have to change his own plan in terms of the change in the Assembly," said Nevada Sen. Debbie Smith, D-Sparks, who chairs the Senate's Interim Finance Committee.

Smith said there are several different avenues lawmakers can take, and they will be brainstorming ideas between now and the start of session.

Some of the Republicans elected on Nov. 5 have signed pledges to not raise taxes. Sandoval ran on similar promises when he was first elected in 2010, but appears to have softened his stance in the face of what state leaders are calling structural budget problems.

While much remains up in the air, Smith said one thing is certain — the government is underfunded.

State legislators will not know until Sandoval makes his State of the State speech exactly what set of solutions will be proposed.

"We won't know until Jan. 15 — and the change in the Houses makes a huge difference," she told The Bond Buyer.

The state's Economic Forum report projected revenues of $6.27 billion will be available to pay for a 2013-2015 biennium budget of $6.7 billion. The five-member panel provides an economic forecast several times a year on anticipated general fund revenues, economic assumptions and final revenue projections.

Sandoval, re-elected on Nov. 4 by a landslide, said he will ask his cabinet to further scale back agency budget requests to help close the gap in this biennium's budget, while also signaling deeper changes.

"As my office continues building the budget for the next biennium, we must continue to look beyond our traditional revenue sources, which are not recovering at the same pace as the rest our economy, toward funding mechanisms that compare and complement the growth of our changing economy," he said in a Dec. 8 statement.

Nevada has no income tax and there is no talk of instating such a tax.

While the governor hasn't publicly released what his tax reforms might be, determining where revenues come from is certainly on the table, said Assemblymember Paul Anderson, R-Las Vegas, recently anointed chair of the Nevada Assembly's Ways & Means Committee.

"When you start taking out millions from a biennial budget of $6.2 billion, it has a significant impact," Anderson said.

"The Economic Forum painted kind of a dismal forecast going into the session," Anderson said. "Our gaming revenues our down, our mining tax fell way short, not necessarily due to production, but to the drop in gold prices."

He added that if the state doesn't make immediate changes whether its sweeping tax reform, or something else, it will fall below the 5% minimum ending balance, plus a 1% rainy day fund, dictated by state law.

"We are very concerned about that," Anderson said.

The state has experienced changes in its marketplace with a younger generation of tourists more interested in attending shows than gambling, Anderson said. The state has a hotel bed tax, and it has an entertainment tax, but Anderson described that tax as "flawed," saying it leaves out items that it would make sense to tax and includes some that should be left out.

Paradoxically, the state's economic picture is brightening. Unemployment, which reached a height of 14% in November 2010, dropped to 7.1% by October 2014, only 1.3% higher than the national rate, according to the forecast. In early September, electric car maker Tesla selected Reno for its new battery factory, which is expected to bring 6,000 jobs; and major casino projects are underway on the Las Vegas strip.

The populations in Nevada's northern metropolis, the Reno-Sparks area, and its southern metropolis, Las Vegas, have grown resulting in a jump in K-12 student numbers. That increase in students is partly responsible for the funding gap.

An estimated 1,300 additional students are expected in 2014 adding a cost of $19.3 million and for 2015, an additional 9,400 students are expected to cost the state an additional $53 million, Anderson said.

"Many of us were expecting that type of a forecast," Smith said. "Our economy is getting better for sure, but it's not robust enough for us to solve our budget problems."

Smith chaired the Senate Finance Committee, but with Republicans now in the majority, Sen. Ben Kieckhefer, R-Reno, will take over that leadership role during the upcoming session.

On the list of issues resulting in revenue shortfalls, Smith points to the cap on property tax instituted in 2005 that slows growth on residential property taxes to 3% annually and on commercial real estate to 8% a year.

"We had instituted a property tax cap before the recession hit. A crystal ball would have been nice then," Smith said.

The cap meant the state didn't benefit as much as it could have from the boom and it takes a long time for gains to have a meaningful impact, she said.

"We don't have a lot of room here," Smith said. "We are still operating on a budget massively cut from the recession."

Nevada lawmakers made so many cuts in 2007, 2008, 2009, and 2010 that Smith said she is not sure what the total amount is, but it is probably in the billions.

"I don't know what the plan will be and if we can get the votes to solve it," said Smith. The governor "will have his ideas and we will have ours."

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