How to Cut Taxes in Nevada for the Most Bang for the Buck: the State Sales Tax

In this article, we focus on the most efficient ways to cut Nevada taxes, and we make a case for cutting the Nevada sales tax.¹ In particular, we highlight how cutting the Nevada sales tax would have the following effects:

• Broad benefits for Nevada residents

• Low loss of state revenue

• Maintain Nevada tax revenue from tourism

A cut in the Nevada sales tax would affect the broadest base across Nevada residents, would influence high- and low-income households similarly, and would stimulate consumer demand.

1. Nevada fiscal landscape

Nevada is a state that has seen its total state tax collections and sales tax collections higher than its 15-year trend for the last three years (since Q2 of 2021, see Figure 1). And the state’s total reserves and Rainy Day fund balances are still at historical highs (see Figure 2). The state legislature has an opportunity next year to cut taxes in a way that maintains fiscal balance and provides the most benefit to Nevada residents. Taxes that could be cut include Nevada business taxes, property taxes, and sales taxes.

Figure 1: Nevada tax revenue collection as percent of trend: 2008Q3 to 2023Q2

Figure 2. Nevada Rainy Day fund and total reserves as a percentage of general fund expenditures: 2000-2023

Nevada is one of 9 states with no state tax on individual employment income. This is one of the reasons why the Nevada total state and local sales tax burden ranks 14th highest among US states. You can also see in Table 1 that 4 of the top 15 highest sales tax states are ones with no state individual income tax.

Without a state employment income tax, Nevada relies heavily on its state and local sales and use taxes and on its taxes on tourism. Figure 3 below shows the percentages of total state tax revenues of each broad category of tax revenues for Nevada fiscal year 2022-2023. State and local sales and use taxes represented 70.5% of total state tax revenue.

Table 2 below shows the detail of Nevada state revenue subcategories for fiscal year 2022-2023. In addition to tourism affecting the sales tax, many of the tax revenues from tourism are also in the “Other taxes” category, which represented in total 5.3% of Nevada state tax revenues in FY 2022-2023. The largest tourism tax revenue streams were from the lodging tax ($256 million), short term car lease fee ($97 million), live entertainment tax ($80 million), intoxicating beverage tax ($51 million), and transportation connection tax ($40 million).

2. Nevada sales tax landscape

We present evidence here that points to the Nevada sales tax as the most beneficial area to cut taxes for residents of the state. Other alternative reforms include cutting the state’s business taxes, insurance and real estate taxes, mining taxes, and tourism taxes.

Nevada has a minimum sales tax rate of 6.85%, with optional additional local sales and use tax rate of up to 1.525% extra (a maximum total sales and use tax rate of 8.375%). Table 3 breaks down the minimum sales tax rate of 6.85% into its components. The first two categories represent the 4.6% state sales tax rate, with the third row 0.5% going to county government and fourth row 1.75% going to city government. The fifth category is the optional local sales and use tax rate, which ranges between 0% and 1.525%.

The distribution of total state and local sales and use tax rates across Nevada’s counties is show in Figure 4. The most rural and least populated counties have the minimum sales and use tax rate of 6.85% (Esmeralda, Eureka, Humboldt, and Mineral), while the most populated and most visited for tourism Clark County (includes Las Vegas, Henderson, and Mesquite) has the maximum sales tax rate of 8.375%. Washoe County (includes Reno and Sparks) has the second highest population in the state, the second most tourism, and the second highest sales tax rate of 8.265%.

The Nevada sales and use tax covers most retail goods, vehicles, and restaurants (prepared food). Goods and services that are not covered by the state sales tax include farm machinery and equipment, groceries (unprepared food), and most professional services.²

3. What are the most efficient taxes to cut on consumption goods?

We want to address two measures of efficiency in this section. The first is distributional equity, which can loosely be defined as an efficiency measure. We want to broadly avoid reforms that benefit or make worse off one group of the Nevada population more that other groups. For example, a regressive tax makes low-income residents worse off than high-income residents. Conversely, a progressive tax penalizes high-income earners more than low-income earners. We want to avoid both extremes.

The second measure of efficiency can be referred to as economic distortion, deadweight loss, or behavioral effects. These inefficiencies are related to how much people change their consumption decisions when the price of the good changes. The economic term for this response behavior is price elasticity, which is the percent your consumption of a good decreases in response to a one-percent increase in the price of that good.

We start with distributional equity. Figure 5 shows the share of total expenditure for eight broad consumption categories for households with different income levels. These data come from a national sample of consumers.³

The primary pattern that emerges from Figure 5 is that most of the consumption categories represent fairly constant shares of total expenditure for households across the income spectrum. High income households spend the same percentage of their total consumption dollars on these goods as low income households. This is particularly true of the “Other, taxed” category, which includes most of the Nevada consumption goods that fall under the state sales tax. This category also represents the biggest share of expenditure for all incomes.

The exceptions to this constant expenditure share across income pattern are “Owned dwellings” and “Rented dwellings”, both influenced by the property tax (highlighted in red and orange, respectively). For higher income households, a larger share of consumption expenditure is spent on owned dwellings and a lower share is spent on rented dwellings. As such, a cut in property taxes would benefit high income home owners and low income renters most.⁴

In terms of distributional equity, a cut in the Nevada sales tax rate would have the broadest base across Nevada residents and would influence high- and low-income households similarly.

The second measure of efficiency of a tax is how much economic distortion it imposes. When you create or increase a tax, you increase the price of the good. This price increase makes consumers choose to buy less off that good. How much less they buy in response to a price change is called the price elasticity of demand.⁵ For this reason, the price elasticity of demand is a good proxy statistic for the degree of distortion a tax imposes. In other words, if you impose a tax on a highly elastic good (like “Leisure” goods shown in Table 4), you’ll create the biggest drop in demand for that good.⁶

Looking back at Table 2, many of Nevada’s entertainment industry taxes are in the “Other taxes category”. The ideal Nevada tax cut would maintain its taxes on tourism, while mostly cutting taxes on Nevada residents. Most of the categories of retail goods that fall under the Nevada sales tax would also be categorized under the “Non-durables” consumption goods category in Table 4. This category has a relatively high elasticity compared to the other categories and, therefore, fits the criterion of a category that would benefit from a tax cut. In other words, the estimated -0.816 elasticity on non-durables in Table 4 suggests that a cut in the Nevada sales tax would significantly benefit Nevada consumers because they would increase their demand for those goods.

4. What would be the effect of a Nevada sales tax reduction?

In this section, we estimate the size of the loss in state tax revenue from a 0.6 percentage point reduction in the Nevada state sales tax. We assume that the change would take place in 2025, although any policy change would more likely take place in FY 2025-2026. We assume a growth rate in sales tax receipts of 4% for the three fiscal years between the most recent data FY 2022-2023 and FY 2025-2026. This is a conservative growth rate assumption compared to the 21.32% and 6.73% growth rates between the prior two fiscal years, respectively.⁷

We present the estimated revenue loss in Table 5 both with and without the behavioral response as estimated by the -0.816 elasticity in Table 2 due to the lower price from the reduced sales tax.

In the static case in which we assume no change in demand from the sales tax reduction, we estimate that the 0.6 percentage point reduction in the Nevada sales tax would reduce state revenue by $254 million in FY 2025-2026, a 13% reduction.⁸ Given the historically high reserves in the state, this reduction is within the realm of fiscally feasible policies. But the actual cost in revenue loss is likely to be much lower.

The last row of Table 5 shows our estimate of revenue loss from the 0.6 percentage point reduction in the Nevada state sales tax if we incorporate the estimated price elasticity on nondurable goods from Table 4 of -0.816. This means that for every 1% decrease in the price of nondurable consumption, consumers will on average increase consumption of those goods by 0.816%. The 0.6 percentage point decrease in the sales tax represents an average 7.3% decrease in the price of those goods across the state. The estimated price elasticity means that quantity demanded would increase by about 6.0% in response to the average 7.3% price decrease. We estimate that the revenue loss with the estimated increase in demand from the policy change would only be $153 million, a 7.9% decrease in revenue.⁹

5. Conclusion

Nevada’s current fiscal health provides an opportunity for the state to implement some pro-growth policies that make its residents more likely to stay, make prospective residents more likely to move to the state, and encourages businesses to locate and grow in the state.

Cutting the state sales tax will have the broadest effect on Nevada residents and will affect them similarly across the income spectrum. Also, cutting the state sales tax will leave Nevada tourism revenues relatively untouched.

The strongest case for cutting the state sales tax is that the decrease in sales tax rate will be partially offset by an associated increase in demand by Nevada consumers. This increase in demand would represent a tangible increase in standard of living for residents across the income spectrum.

1. All analyses, figures, and tables in this article can be recreated, replicated, tested and modified using the materials in the associated GitHub repository https://github.com/OpenSourceEcon/NV-SalesTax. Benjamin Hill was my research assistant and CGO Fellow during the 2023-2024 academic year during my time at the Center for Growth and Opportunity. Ben is currently an undergraduate student majoring in economics at Utah State University. Ben is from Reno, Nevada (Washoe County) and wanted to work on a project dealing with his home state’s tax policy. In researching Nevada, Ben was instrumental in coming up with the state sales tax as a topic of focus. He dug through all the state policy and data files and also corresponded with Nevada Department of Taxation employees with our questions. Ben presented a preliminary version of the results in this article at the Annual Conference of the Association of Private Enterprise Education on April 8, 2024 in Las Vegas, Nevada.

2. See page 3 of the online document, “Sales and Use Tax General Information” on the State of Nevada Department of Taxation website, accessed May 22, 2024. This document has a larger list of covered categories of goods, but it is not exhaustive. See also the “What is Taxable?” section of the “Sales Tax Information & FAQ's” page on the State of Nevada Department of Taxation website, accessed May 22, 2024.

3. This Figure comes from Figure 3 of Christian Baker, Jeremy Bejarano, Richard W. Evans, Kenneth L. Judd, and Kerk L. Phillips, “A Big Data Approach to Optimal Sales Taxation”, NBER Working Paper #20130, National Bureau of Economic Research (May 2014). The data are from the 2011 Consumer Expenditures Survey. See Table 4 in the appendix of Bejarano, et al (2014) for a full description of the categories.

4. While it is true that combining the “Owned dwellings” and “Rented dwellings” consumption categories into a single category called “Housing” would have more of a constant expenditure share pattern across income categories, the populations in these two categories are quite different. This is evidenced by their nearly inverse patterns. “Owned dwellings” are a normal good, and “Rented dwellings” are an inferior good. It is, therefore, helpful for distributional analysis to identify them separately.

5. Much of microeconomic theory revolves around the price elasticity of demand. Here is a nice three-part video series from the Federal Reserve Bank of St. Louis on the price elasticity of demand, albeit slow and simple. Technically, the price elasticity of demand is the percent that quantity demanded changes in response to a 1-percent change in price. The value of elasticity varies across individuals, and is likely a function of income, the availability substitutes, and even the size of the price change.

6. A more technical definition of this general principle of public finance is the “inverse elasticity rule.” In a theoretical model in which a number of commodities have no cross-price elasticities, the welfare maximizing tax given a revenue requirement places the highest tax rates on the commodities with the lowest absolute value of elasticity. See Oxford Reference, “Inverse Elasticity Rule”; William Gentry, “Optimal Taxation”, The Encyclopedia of Taxation and Tax Policy, edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, Urban Institute Press, 1999; Chris Jones, “Optimal Commodity Taxation”, Applied Welfare Economics, Oxford Academic, 2005.

7. See the respective tables on the second page of the Fiscal Year 2021-2022 and Fiscal Year 2022-2023 annual reports of the State of Nevada, Department of Taxation.

8. This amount is calculated from the FY 2022-2023 sales and use tax receipts from the 4.6% state portion of the Nevada sales tax (see the first row of Table 2), grown by three periods of assumed 4% growth to $1.948 billion = $1.731 billion x (1.04^3), then depreciated by the percent decrease in the state sales tax rate -13.04% = (0.040 - 0.046) / 0.046.

9. The calculation for the revenue loss estimate in the last row of Table 5 is complex. All calculations are available in the spreadsheet tab5_revloss.xlsx on the GitHub repository. But a summary of the steps and intuition is the following. We calculate a weighted average of the percent decrease in the total sales tax rate across counties using the 2021 population estimates from the Nevada Department of Taxation Annual Report for Fiscal Year 2022-2023. This weighted average percent decrease in sales tax rates is -7.298641%. We then multiplied the implied price x quantity without the sales tax by 0.816 x 0.07298641 = 5.955691%. This percent increase in quantity demanded with the 13% decrease in the state portion of the sales tax from 4.6% to 4.0% results in the 7.86% decrease in tax revenue shown in the last row of Table 5.