A few days ago, Glen Atkinson of Reno went for lunch at a fashionable bar and grill in a local shopping center. The restaurant is popular with upscale professionals. Atkinson fell into conversation with the manager.
“He said he’s down $500 a day,” Atkinson said later.
“And what’s happening, of course, is shops are closing up around him in that mall.”
The restaurant manager was talking to an interested listener. Atkinson is an economist and pays attention to such straws in the wind. This one confirmed what he already knew from data—that Nevada is suffering in its three most important sales tax producers: Construction, car sales and restaurants.
State government is heavily reliant on the sales tax for public services, local government less so. State agencies are being crippled by the decline in revenue. Up to now, they’ve been able to cut and trim mostly from non-human budget items. But the next round of cuts will certainly mean layoffs, say state officials. As a result, when the public in the upcoming recession needs the government it has paid for, it may not be there for them.
Nevada is now paying the price for its inflated housing prices, as sales taxes—the money that pays for many services—dry up. The housing “bubble” turned out to have unforeseen dangers.
“And housing prices had to stop at some point going up, but they just so overshot the mark that we’re going to have some really severe adjustments,” Atkinson said.
It demonstrates the long-warned-against folly of treating housing as an investment instead of as a home.
“If people have a car, they can postpone buying a new car,” Atkinson said. “If they have a house … the trouble is that they’ve bought a house at $400,000 [that is] now worth $300,000 or less.” He compared it to the stock market, saying the idea is to get into the market and buy low and sell high. Home buyers, he said, are now in the position of stock purchasers who got into the market and bought high. And Nevada lives on construction, commercial and residential.
“Nevada’s budget situation goes from construction boom to construction boom. You build in Las Vegas a couple of big megaresorts. That re-boosts the revenues because they have to pay tax on the building materials, sales tax. And then that’s over, but we’ve kind of gotten used to that to continue. It goes on the local property tax then at that point … and so you start picking up some more property tax but the sales tax, it’s a huge bubble that has a short life. It’s not like clothing that you buy constantly.”
“It’s not that the houses were worth what they were worth in the bubble, but we should never have got the bubble in the first place. What that did, of course, is it really devastates the construction industry … and the construction industry has been one of Nevada’s major taxpayers. If you look at the sales tax, usually in the top three categories is construction. The other thing is automobiles, which is down, and eating and drinking places which I imagine is soft.”
Supposedly, growth pays for itself, but according to a 1999 study commissioned by the Nevada Economic Development Commission, it doesn’t. Major projects, such as shopping centers or casino resorts, cause a decline in the public’s use of social service agencies for a time after they open—but then the use of those agencies rise even higher than before the opening, possibly accounted for by the workers they have attracted to the state. On a flow chart, it looks like a check mark.
At the “Legends” shopping center under construction in Sparks, a freeway sign reads, “Retail, restaurants, casino & more” and below that, “Opening 2008”
Last weekend it was announced that most of the stores won’t be opening in 2008. They are aiming now at Spring 2009.
The Regional Transportation Commission built its new Sparks municipal bus depot at its soon-to-open downtown location in part because it was near a housing development. The development was never built.
So it goes.
There are upsides to this downturn. In the small counties, hard times mean a resurgence in mining because of superstitions surrounding precious metals.
“One thing that this whole uncertainty has done is really spurred our mining industry. … Everybody just wants to get into gold now,” Atkinson says.
But that will be of little help to the state as a whole because the mining portion of Nevada’s economy is tiny and because mining pays few taxes compared to other industries.
And housing prices will get down to where more lower income people can purchase, if they can qualify.
The controlled growth movement in Reno against which business and elected officials have railed for years now turns out to have been a godsend. The movement’s challenges to the casino industry and support for diversification are now paying off.
“I think Northern Nevada was more resistant [to growth],” Atkinson said. “You used to hear the term, ‘We don’t want to be like Las Vegas.’ So we went a different direction. … Northern Nevada is more diversified and part of that’s because the Southern Nevada casino has kept growing so fast, one boom after another.”
The result is that while nowhere in the state will get off easy in the recession, Northern Nevada will have an easier time of it than Southern Nevada.
Straws in the wind
The bad news keeps coming. These straws in the wind appeared in the last two weeks:
• Between 2006 and 2007, Nevada health insurance premiums rose 2.5 times faster than earnings, according to Families USA.
• The SurePayroll Small Business Scorecard reports that small-business staffs across Nevada shrank through the first three quarters of 2008.
• Nevada gambling revenues in August were $934.1 million, the lowest monthly total since June 2006 and the eighth straight monthly gambling revenue decline.
• Consumer Credit Counseling Services says that the average Nevada credit card debt is $20,000 per person compared to the national average of $8,200 per household.
And the impact of the mortgage crisis continues. Nevada mortgage delinquency rates top 8 percent.
But the rough stuff in an economic downturn has not yet arrived, and Nevada is not well prepared for it. The recession has not really bitten ordinary households, but the time will come when people need help. This is the time when citizens who normally have little contact with government will call on that government for the assistance they have paid for in good times.
“We have heard that in hard times, business tightens its belt,” said Nevada Gov. Richard Bryan in 1983. “Government, we are told, should do the same. It is an appealing argument, and indeed when times are tough, government should cut expenses. Government cannot, however, avoid its responsibilities. When times are tough, business loses customers. When times are hard, government gains customers, and they are customers who cannot take their business elsewhere!”
That’s not a view shared by Gov. Jim Gibbons, an advocate of the view that when businesses cut their expenses, so must government.
The Nevada Legislature next spring will have to decide whether the public services Nevadans expect in hard times will be there when they’re needed.