Tourism districts to drive industry in state
Eugenia Larmore, MBA, CMA, AVA, CFFA

Recent legislation supporting Nevada’s main industry welcomes tourist-related developments. In exchange forbuilding tourist attractions, developers receive a tax incentive to assist them in constructing the project, includingthe required infrastructure such as roads, parking, landscaping, water rights, and other services associated with thedevelopment.

The Tourism Improvement District law, passed in 2005, allows up to 75 percent of all retail sales taxrevenue generated within the district to be retained to pay for infrastructure and project costs. The tax incentive’spurpose is to attract large commercial developments to Nevada that would not otherwise be built in the state.

TheCabela’s store under construction west of Reno is an example; another is the Sparks Marina in Sparks.However, qualifying for this tax incentive is no easy task. The legislation requires that certain determinations bemade before a project can qualify for the tax incentive. Here are a few of the “determinations” that must be shownby the project in order to receive the sales tax funding incentive.

Determination 1: Residents or visitors — Who willfrequent the project?

In order to qualify for TID financing, developers must meet three major requirements. First, the development mustbring new retail and entertainment businesses into the area. Second, these new businesses must increase theamount of sales and use tax revenue collected within the county in which the development is located.

Finally, thedevelopment must also show that a “preponderance” of its sales will come from out-of-state visitors. Though theword “preponderance” is not defined in the legislation, previous projects assumed this to mean over 50 percent.

Preponderance is critical as the entire purpose of the legislation is to attract tourism to the area. It is assumed thata development that generates its sales revenue from local residents and in-state visitors only shifts sales taxrevenue from one location or retail outlet to another with limited additional financial benefit to the state. However,tourism spending contributes and adds to the overall economic health of the region.

Analysis is required to estimate the number of out-of-state visitors to a proposed project and to project the retailsales generated by these visitors. Meridian Business Advisors conducted this analysis on Cabela’s, a nationallyknown outdoor equipment store. Using information from Cabela’s other comparable stores in the U.S., MBAestimated approximately 2.5 million annual visitors to its proposed 125,000-square-foot Reno store.

Determination 2: What’s the impact on existing stores?

The legislation also requires a finding of the impact of the proposed development on existing retail sales in thearea. Not only is the “displacement” or reduction of sales at competitive area stores estimated but the overallincrease in the region’s retail sales is examined to determine the positive impact of these tourists on the economyas a whole.

When conducting the displacement analysis for the Cabela’s development, MBA found that somedisplacement would occur. Though it was impossible to predict the exact amount of displacement, it was believedthat a minimum of 20 percent of outdoor equipment sales in existing stores would be diverted or displaced to theCabela’s store. This analysis was aided by physical inspections of existing businesses, conversations with businessowners, and cooperation with the University of Nevada, Reno Bureau of Business and Economic Research.

Countering the displacement sales was MBA’s estimate that the project would have a regional economic impactthrough the construction phase and the first full year of operation of over $320 million.

Determination 3: What’s the fiscal impact on governments that will no longer get the sales tax?

Because up to 75percent of sales tax revenue can be dedicated to the development rather than be distributed to the cities, countyand state, the legislation requires a fiscal analysis to compare the estimated revenue generated by the developmentto the estimated costs associated with the provision of public services to the development.

While the legislationdoes not require a positive fiscal impact, the analysis is one of the key findings used by governmental decisionmakers in approving the project for TID financing. In the fiscal impact analysis conducted for the Cabela’sdevelopment, MBA found that even with the reduced sales tax and property tax revenue due to the development’slocation within a redevelopment district, the city would receive a surplus of revenue over the estimated life of the
TID. Other local entities are also expected to receive funding surpluses.

Determination 4: The review and approval process.

The legislation calls for an extensive review, approval and comment process by local and state governmentalagencies. If the project is situated within an incorporated area of a city, the county reviews the fiscal, economic, andpreponderance analyses in a public hearing and prepares comments for the city’s consideration.

The proposedproject, associated data and analyses then are reviewed by the Nevada Commission on Tourism which determinesthat the preponderance of retail sales will be generated by out-of-state visitors. Finally, the governor mustdetermine that the project will “contribute significantly to economic development and tourism” and not have anadverse effect on educational funding.

The governor may call on reviews to be conducted by the Department ofEducation and Department of Taxation regarding to determine the impact on educational funding.

The benefits of the TID legislation
The purpose of this legislation is to increase tourism in the State of Nevada. Some may argue that the state andlocal entities are hurt by the development’s retention of such a large portion of its sales tax revenue. However, asthe legislation is designed to attract large-scale retail and entertainment venues that would not otherwise locate inNevada, these venues generate “new” or incremental sales tax revenue for local governments. In addition, thesedevelopments are likely to generate higher property tax, building permit and other value-based revenues.

TIDs have a finite life span (usually 20 years) at the end of which the district will be dissolved and all sales taxrevenues will flow back to the original governmental entities. Finally, these developments will attract supportingbusinesses, which, in turn, will generate sales and other tax revenue and provide jobs in the area. Increased sales,employment and local purchases by supporting businesses will benefit the community through a continued cycle ofspending.

Potential amendments to TID legislation

New legislation is often amended to improve the law, account for contingencies not previously considered, orclarify language. Reno’s City Council has made it clear that Nevada contractors should take priority over out-of-statebuilders and that local residents be hired for both the construction and operating phases of the developmentwhenever feasible and possible. Likewise, purchases of goods and services for the construction and operatingphases should be made locally whenever possible. These are potential amendments that may be considered in theevolution of this legislation to ensure the development provides maximum value to local governments and to theregional economy.

As Published in the Nevada Business Journal, July 2007.  Republished in the Las Vegas Business Press, July 2008 under the title “Is Clark County Missing the TID Boat?”