Court ruling crafts new political realities for Sandoval

A new day has dawned in Nevada.

No matter the contours of the budget deal GOP Gov. Brian Sandoval works out with Democratic leaders of the Legislature, the state can no longer freely grab pots of local government money to balance its budget, thanks to a Nevada Supreme Court decision.

And state leaders may be forced to consider broadening Nevada's tax base beyond gaming, mining and sales tax on goods instead of patching holes in a leaky spending plan every two years, observers across the political spectrum said Friday.

"This changes the way government does business," said Billy Vassiliadis, a longtime lobbyist for the Nevada Resort Association. "They've tried to manage through crisis by reaching into certain funds, which I've always thought was a little short-sighted. Ultimately, a good thing can come out of this."

Former GOP Sen. Bill Raggio, author of the 2009 tax package, said he had long questioned the wisdom of the state siphoning local funds, yet lawmakers were previously told the sweeps were legal.

"I guess I'm one of those who said, 'I told you so,' " Raggio said, adding that he had also warned that the 2009 taxes might need to be extended if the economy didn't recover enough. "Some of that has been forgotten with all the political posturing going on. I think the governor will have to be prudent."

GOVERNOR UNDER PRESSURE TO DEAL

Sandoval, who campaigned on a pledge not to raise taxes, might pay a political price with the conservative right if he lifts some of the June 30 sunsets on a 2009 tax package to fill a budget gap of up to $657 million that suddenly yawned as the result of the high court ruling Thursday.

Yet the popular new governor might be more widely seen as a statesman who worked with Democrats to avoid a deeper crisis by crafting a budget that puts the state's welfare and support for education and social services ahead of his election promise. Backing from most of the business community, which pushed to extend the 2009 taxes for education, provides him cover, as well.

"Obviously, the governor thinks he can withstand any political challenges from the right," said Robert Uithoven, a GOP consultant who worked with former Republican Gov. Jim Gibbons, who also opposed new taxes yet lost support when he refused to work with opposing lawmakers.

Sandoval is under intense pressure to quickly revise his budget and negotiate a deal with lawmakers, who have just nine days left to work until the 120-day session is constitutionally scheduled to end. The governor will have to rally GOP caucuses in the Senate and Assembly to back him if he extends some taxes after months of supporting his no-tax-hike pledge. And Sandoval must get Democrats to sign on to his bare bones $6.1 billion budget that's short of their $7 billion proposal.

COMPROMISE IS IN THE AIR

Most Republicans are expected to go along with Sandoval, especially if he also can negotiate some money-saving reforms. And Democrats appear ready to compromise after dropping efforts this week to pass two new taxes -- a transaction fee on services and a margin tax on businesses -- that would have raised another $570 million over two years. It was part of an overall $1.2 billion tax package, which included lifting the June 30 sunsets, that was introduced late in the session with zero GOP support.

Assembly Ways and Means Chairwoman Debbie Smith, D-Sparks, was in tears at a hearing on Wednesday as Democrats cut budgets after giving up on raising more revenue with new taxes.

On Thursday, Smith was ecstatic after hearing the surprising high court decision that is forcing Sandoval to finally consider lifting some sunsets on the 2009 tax package.

"Wow. What a difference 12 hrs makes," Smith tweeted. "Compromise at last?"

LOCAL REVENUE CACHES RULED OFF-LIMITS

The Nevada Supreme Court ruled the state couldn't use $62 million it grabbed from a dedicated Clark County clean water fund. The funding shift had been approved by lawmakers in both parties during a special session in February 2010 to help fill a budget shortfall caused by shrinking state revenues.

As a result of the ruling, Sandoval must remove the $62 million from his budget. And the former judge and his legal advisers said it also means the state probably cannot use another $247 million in school construction bond reserve money for school operations, $225 million in a voter-approved diversion of room taxes and about $83 million in property tax diversions.

"The Supreme Court decision ... has far-reaching implications for how Nevada governors and legislatures will do business from this date forward," Sandoval said in a statement Thursday.

And that would be a positive change, said fiscal experts who have long said Nevada's narrow tax base has resulted in a boom-bust economy that's too unstable and must be reformed.

"Immediately, this is Sandoval's problem, but every governor going forward is going to face the same problem. Now is the time to broaden the tax base," said Robert Lange, director of Brookings Mountain West, a think tank. "If there's ever a moment where the field has changed so radically that there's opportunity for structural reform, this is it."

STATE MUST BROADEN TAX BASE

Even the Nevada Policy Research Institute, a conservative think tank, has argued in favor of broadening the state tax base by imposing a levy on services -- but in exchange for lowing the overall sales tax rate and in a revenue-neutral way so Nevadan's aren't paying more for government.

Steven Miller, vice president of NPRI, said it would be "bizarre" if Sandoval breaks his pledge not to raise taxes, despite the high court ruling because there is still too much wasteful spending now.

"Extending the sun-setting taxes will further hamper Nevada's economic recovery and discourage job creation," Miller said in a scathing statement attacking Sandoval.

Jan Gilbert of the Progressive Leadership Alliance of Nevada, however, makes the case that the Nevada economy has started to improve even with the 2009 taxes in place. She praised Sandoval for moving to extend some of the taxes, although she said his budget still comes up far short.

"This highlights the problem with our revenue structure, which has made us rely on budget gimmicks for a decade," Gilbert said. "We've never taken the bull by the horns and said we have a revenue problem. Now, there's no denying it."

Contact Laura Myers at lmyers@reviewjournal.com or 702-387-2919.