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Nevada Suit Challenges Proposed Business Tax for Schools

By Catherine Gewertz — November 22, 2000 3 min read

A coalition of Nevada businesses is asking a state judge to block a proposed 4 percent tax on companies’ profits that would raise an estimated $250 million a year to benefit public schools. The plan is an unconstitutional “back door” income tax, the group argues.

The lawsuit, filed in state district court in Carson City last month, seeks to keep both the legislature and Nevada voters from considering the proposed tax, which was sponsored by the Nevada State Education Association, the state teachers’ union.

The proposed tax is in the form of an initiative, which in Nevada means that the legislature must consider the measure after sponsors collect enough signatures in 13 of the state’s 17 counties. If lawmakers do not approve it within 40 days, it automatically will be placed on the November 2002 ballot.

Kenneth Lange, the executive director of the NSEA, an affiliate of the National Education Association, said the tax is badly needed because too little of the state’s annual $1 billion budget for K-12 education finds its way directly into classrooms.

Kenneth Lange

The initiative petition cites an “unprecedented crisis in funding” of the state’s schools, created by skyrocketing growth in the student population paired with per-pupil spending that ranks 36th in the nation.

Over the next decade, enrollment in Nevada’s public schools is projected to rise by 15 percent, a growth rate second only to Idaho’s, according to the National Center for Education Statistics. The 217,000-student Clark County school system, which includes Las Vegas, is one of the fastest-growing in the United States; it plans to open 14 new schools this school year alone.

Proceeds of the proposed tax could be used only for measures that enhanced student learning, parent involvement, teaching, and student accountability. Districts would be required to report quarterly on how the proceeds were spent. To avoid overburdening the smallest businesses, the tax would be paid only on annual income exceeding $50,000, which Mr. Lange said would exempt nearly one-fourth of Nevada businesses.

Mr. Lange, who said Nevada’s lawmakers and residents should not be deprived of their right to consider important issues, criticized the lawsuit as “not worth the paper it’s printed on” and “a tactic to slow things down and muddy the waters.”

But Samuel P. McMullen, a lawyer representing the business owners and trade associations that filed the suit, said the proposal raises serious constitutional issues. He said the proposed tax would have the same effect on small-business owners as a personal-income tax, which is illegal in Nevada.

He also criticized the measure as an infringement on the legislature’s responsibility to set spending priorities and allocate funding. “The teachers are trying to control how the budget is spent,” Mr. McMullen argued. “That’s no way to run a state.”

The NSEA gathered nearly twice the number of signatures required to certify the tax proposal. But the lawsuit challenges the measure on procedural grounds, claiming irregularities in the way the signatures were collected and validated.

Valuable But Volatile

Nevada would not be the first state to earmark business-tax proceeds for education. Alabama and Utah, for instance, have long had corporate income taxes dedicated to public schools, said Arturo Perez, a senior policy specialist for the National Conference of State Legislatures in Denver.

States that enact business taxes for schools can find them a valuable supplement to their education budgets, but they must be aware of volatility caused by economic fluctuations, said Elizabeth I. Davis, a senior policy analyst at the Rockefeller Institute of Government’s fiscal-studies program in Albany, N.Y.

“Education is something that needs a fairly stable source of income,” she said, “and corporate-profits taxes are not going to be a stable source of income.”

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A version of this article appeared in the November 22, 2000 edition of Education Week as Nevada Suit Challenges Proposed Business Tax for Schools

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