Updating Florida's tax structure
© St. Petersburg Times
The year was 1983. Gov. Bob Graham wanted a tax increase for education. Winn-Dixie was one of the business lobbies opposing it. T. Wayne Davis, a vice president, explained why.
"We need people who can run cash registers and bag groceries, not high-tech workers," he said.
Nearly a generation later, most Florida business leaders decry Florida's meager high-tech talent pool along with the educational system they hold to blame. None extols a future in bagging groceries; indeed, Winn-Dixie now encourages shoppers to scan and bag their own.
"Skilled labor are in short supply in many industries," says a recent critique by the Florida Chamber of Commerce. "Basic education skills are weak. . . . Florida has long marketed itself as a low-tax state, but one price of low taxes is lower government services. Compared to other states, the resources per capita that Florida spends on economic development or on its economic foundations -- notably for education and infrastructure -- is below average."
Facing a roomful of scowling lobbyists who oppose tax reform, Sen. Ken Pruitt, R-Port St. Lucie, put the issue more succinctly:
"Do you want mediocrity or quality? When you think of North Carolina, what do you think about? The Research Triangle. When you think about the California university system, what do you think about? Silcone Valley. When you think about the universities in Florida, what do you think about? . . . Football."
It is the tax system that's fundamentally at fault. A revenue base once adequate to train checkers and baggers is essentially the same as it was then. The sales tax rate is now a penny higher, at 6 cents on the dollar, but there are also at least 150 more specified exemptions eroding the base.
When legislators added ostrich feed to the exemption list 10 years ago, one asked another, "Why are we doing this?"
"Big Sam (Rep. Sam Mitchell of Vernon) needs it," he was told. "We've got to help him out."
That's the way Florida tax law has most often been made. The sales tax yields less revenue, about $17-billion a year, than it exempts. The services that were excluded at the start and the 300 categories of goods or commodities specifically exempted then and since would yield an estimated $23-billion at present rates.
You'll be hearing a lot about Florida taxes this year. Senate President John McKay, R-Bradenton, aims to crown his 12-year legislative career by asking voters to approve a constitutional amendment that would overhaul nearly the entire state tax system. The sales tax rate would be cut to 4.5 percent with no guaranteed exemptions except for groceries; health services and prescription drugs; residential rent and "basic" telephone service; goods for resale, such as contractors' and manufacturers' raw materials; employee salaries and benefits; and sales of real estate and stocks, bonds and other intangibles.
Services, such as those of attorneys, accountants, barbers and advertising media, which were left entirely out of the 1949 sales tax on retail sales, would automatically be included, unless specifically excluded by legislation.
McKay and Pruitt, who is managing the legislation, had intended to leave to a subsequent session the key choices of what other goods and services to exempt. In a switch forced by opponents, they are preparing a bill to spell out the choices now. Voters would know what would be taxed and what would be exempt before voting on the constitutional amendment in November. Subsequently, it would take a three-fifths vote of each house, instead of a simple majority, to enact any more exemptions or raise raise the basic tax rate beyond 4.5 cents.
Goaded by criticism from opposing lobbies that the reform would be a tax break for tourists at Floridians' expense, McKay and Pruitt announced last week that the tax rate would remain at 6 percent, an exception, for transient rentals and rental cars.
The amendment requires the Legislature to make the first year's tax yield "revenue neutral," meaning no more money than the state would have collected without reform. In later years, however, the broader tax base would grow at a faster pace. The Legislature could, of course, create even more exemptions or reduce the rate yet again.
How much faster the base would grow would depend on how many exemptions the Legislature grants.
The goods and services that McKay and Pruitt propose to leave exempt, in addition to those specified in the constitutional amendment, are these:
Money lending by banks, insurance premiums, construction costs, real estate and insurance services, residential electricity and heating fuels, water, fuel purchased by public and private utilities, sewage and garbage collection services, automobile trade-ins, nNewspaper, magazine and broadcast advertising, fees for broadcast rights and programming syndication, tuition charges, school lunches, school books, sales of religious items, religious tapes for the blind, sales or leases to churches, in-house meal purchases by residents of homes for the aged, charitable organizations, sale of U.S. and state flags, items purchased or leased by veterans' organizations, firefighting equipment purchased by volunteer fire departments, items purchased for resale and for export, agriculture and forestry services, seeds, feed, pesticides and other items for agriculture, maintain the present partial exemption on farm equipment, electricity used for manufacturing, space and defense manufacturing and engineering, sale or use of satellites and other space vehicles, prescription and nonprescription drugs and medical supplies, hospitals meals and rooms, health insurance premiums, purchases of guide dogs and supplies, occasional or isolated sales, and purchases by government.
The staff of the Finance and Taxation Committee estimates that these exemptions would total $12-billion at the 4.5 per cent rate. Another $5.2-billion in goods and services that are presently exempt would be liable to the tax. The proposal leaves room for another $1-billion in exemptions before it would begin to eat into present revenue.
The list caters to many but not all of the special interests that oppose McKay's plan -- notably agriculture and the broadcasting industry. They continue to oppose it, however. This week, the sponsors may announce yet another change, which would leave the repeal of the intangibles tax and drink tax to the Legislature instead of specifying it in the constitution as McKay first proposed. He had wanted to cut the tax rate by a third, to four cents. Now the target is to cut it by a fourth, to 4.5 cents.
"I'll take that all day and all night," he said.
Gov. Jeb Bush has said little about the plan. Bush's office declined a request for an interview on this subject. To a list of written questions, spokeswoman Katie Baur replied, "Our position has consistently been that this is a big idea worthy of debate. No more, no less." Among the questions Bush would not address: Does Florida need to broaden its revenue base, as McKay insists?
"If you watch the trends in the state budget, we've got a heck of a mess that's about to hit us right between the eyes . . . a $4-billion hole in the budget," says McKay. Of that, $1-billion owes to Congress phasing out the federal tax credit for state estate taxes, which effectively repeals Florida's estate tax. McKay attributes the other $3-billion to the mounting loss of sales tax revenue to internet, telephone and mail-order merchandise sales. Inevitably, he warns, the Legislature will be unable to cut so much out of the budget and will have to raise taxes in less efficient ways.
The lobbies fighting him -- which appear at the moment to comprise half the world -- don't seriously question either of McKay's basic assumptions: that his reform would, over time, generate more money and make the budget less vulnerable to recessions or other emergencies that depress the tourist trade. But they claim it's too drastic, too hurtful to themselves. Some, invoking purity, say such details should be trusted to the Legislature rather than engraved into the Constitution. It's the political equivalent of B'rer Rabbit's preference for the brier patch.
The Florida Association of Broadcasters launched a bare-knuckled attack. Among other things, their TV spots equate a tax on services, though paid by the consumer, to a tax on the income of the provider.
"I would have opposed this bill," said a much-lobbied senator, Steve Geller, D-Hallandale Beach, "until I read it."
It's a familiar, old-fashioned struggle between public interest and special -- or if you prefer, selfish -- interest. Faced with the uncertain but likely prospect of paying taxes on top of what they pay their lawyers, accountants and other service providers, even at only 4.5 percent, many Florida businesses seem to prefer the devil they know. Professions and trades that would have to collect the tax from customers are howling that it would put them out of work. (Even my barber says so.) Accountants, in particular, contend they'd lose clients to firms in Atlanta or elsewhere. In theory and in law, Floridians would still owe the tax wherever the service was performed, but collecting it would be another story.
What these people won't tell you is that accountants, lawyers and other professionals in other states have a competitive disadvantage larger than Florida's proposed services tax. All but six other states tax personal income, an expense that helps to set the fees they charge.
The issue recalls the phony argument that Gov. Reubin Askew famously refuted when he campaigned in 1970 on a promise to enact a corporate income tax. When an opponent in the Democratic primary charged that it would make Floridians pay more for their purchases, Askew sent out for shirts from Sears stores in Florida, which didn't tax Sears' income, and in Georgia, which did. The shirts were priced the same.
Askew's corporate tax, which yielded about $1.3-billion last year, marks the only successful tax reform since the sales tax was enacted in 1949.
You're also going to hear a lot, as legislators already are, about the reform that failed: the 1987 attempt to extend the sales tax to services, which some blame for Republican Gov. Bob Martinez being defeated for re-election.
Contrary to most of what you'll hear, McKay's plan is not Martinez's. McKay's plan is revenue-neutral at the outset; it should cut taxes for most Floridians, including many small businesses, and raise them for only a relative few. Martinez's raised them for everyone.
McKay's affects exempt goods as well as services. Martinez's did not. McKay's would allow several years for implementation. Martinez's was given barely six months to take effect, producing flaws -- such as too much double taxation -- that contributed to its repeal, under lobbying pressure, just before it was to take effect.
Most important, it would guarantee to Floridians that their groceries, prescription drugs and household rent would never be taxed, and make it harder than ever to raise the rate on what is taxed. There have been periodic threats to tax groceries ever since the sales tax was adopted in 1949, and any legislature sufficiently desperate to balance a budget could raise more than $2-billion simply by taxing food. McKay's amendment says they couldn't.
Hank Fishkind, an Orlando economist who is advising McKay, asserts most households would realize overall tax cuts averaging $110. Many businesses would save also, he contends, taking into account substantial reductions in the tax on electricity and heating fuel, from which only households are now exempt. Specific savings would depend on what the Legislature actually exempts.
Martinez's effort to broaden the tax base is memorable not only for its failure, but for the best and most succinct explanation of what remains wrong with the system to this day.
"Currently," he told the Legislature on April 7, 1987, "state government's principal source of revenue for funding much-needed public services is the sales tax. And this sales tax is now levied only on sales of goods.
"The growth rate of this limited revenue source simply does not keep pace with the costs of meeting the rising demands for public services. Additionally, each year the federal government withdraws more and more of its resources from state and local governments. Thus, each year we fall further and further behind in terms of matching our resources with our needs.
"Some have suggested that we respond to this problem by raising the basic sales tax rate from 5 percent to 6 percent. This might cure our revenue shortfall for the next couple of years, but the short-term revenue problem is merely a symptom. Structural defects in our tax base is the disease, and we must treat the disease, not the symptom. . . .
"The fastest growing sector of our economy is personal services, not sales of goods. If revenues are to keep pace with growth over the long term, then we must extend the sales tax to services.
"The demand for services is much less subject to fluctuations in the economy than the demand for goods. If revenues are to be stabilized in the face of economic downturns over the long term, then we must extend the sales tax to services.
"Purchasers of services are more affluent as a group than the population as a whole. If we are to make our tax system more fair over the long term, then we must extend the sales tax to services."
No governor has talked that way since. Lawton Chiles (1991-1998) broached the subject but never dared present it to the Legislature. Meanwhile, as Martinez essentially predicted, two recessions a decade apart decimated budgets and reversed progress. In 1991, desperate legislators repealed the appropriation for the seven-period school day, which they had hailed as a landmark reform. Leon, Sarasota and a few other counties managed to fund the seventh period from other sources, only to face cutting back now because the Legislature has once again met a crisis by slashing the budget.
On repealing the services tax, Martinez and the 1987 Legislature plugged the resulting budget deficit by raising the tax rate on merchandise from 5 cents to its present 6 cents. That cost the typical Florida family an estimated $74 a year more than they would have paid on account of the services tax.
Had the services tax stayed on the books, state economists say this year's budget could have begun nearly $5-billion -- about 10 percent -- richer. Though it would still have suffered from the recession and Sept. 11, the budget cuts would not have pierced to the bone. Florida schools might still have seven periods to enrich the curriculum. Perhaps the universities could boast about more than football.
Even from a sympathetic viewpoint, however, there are troublesome aspects to McKay's plan.
The supermajority votes it would require to raise the tax rate beyond 4.5 percent. Merely 17 of the 40 senators or 49 of the 120-member House could thwart the will of a majority. This is McKay's olive branch to conservatives in the House, who would like to make it even harder to pass any tax, but the only constitutional precedent for it is the three-fifths rule that Askew had to concede to enact the corporate profits tax.
At the Senate's first hearing, Geller and Sen. Walter "Skip" Campbell Jr., D-Fort Lauderdale, noted the danger that the Legislature might grant so many exemptions that the state would lose money and would be unable to raise the tax rate if only to break even.
McKay's plan hasn't even a sponsor in the House, whose fiercely conservative, economically libertarian leadership has promised him only a "fair hearing," nothing more. Where McKay once counted all or nearly all 40 senators in support, he may need all his influence just to assure the 27 necessary to propose a constitutional amendment to the people. The potent broadcasting and agricultural lobbies are so implacably opposed that they've refused to endorse the plan even in exchange for exemptions. Just as ominously, there is a near-total silence from the so-called "progressive" business community upon whom McKay has counted for public support. Though his arguments echo the Florida Chamber of Commerce's long-standing positions on tax and education reform, the Chamber was conspicuously absent at Pruitt's first committee hearing Jan. 8. McKay has more truth on his side than his opponents do, but not nearly as much ability to make himself heard.
He does, however, have the power to thwart what uncooperative legislators might want, especially the new congressional district that House Speaker Tom Feeney craves. The Senate's tentative districting plans would open the seat to a wavering Republican senator, Ginnie Brown-Waite of Brooksville, and force Feeney to take on an incumbent Republican congressman. The House's failure to accept that could produce a stalemate in which a court would have to write the entire congressional districting plan. Moreover, his allies say McKay is prepared to block legislative redistricting, the budget, and everything else on the session's agenda to get his plan through. As that would leave everyone's political fate to the courts, it would be an extreme test of the Senate's support for its lame-duck president.
Hardly anyone in Tallahassee gives his tax reform much of a chance. Even sympathizers say it may take years for his warnings and proposals to bear fruit.
But there is no other practical way for the budget to grow, other than to raise the state tax rate to 7 cents, which would tie it with Mississippi and Rhode Island as the nation's highest and make it even more regressive -- that is, weighted against the poor and middle-class. A 1996 study by Citizens for Tax Justice, a liberally oriented Washington think tank, branded Florida the second most regressive state overall, and fifth worst in the proportion of taxes paid by the poorest of its citizens. Here, state and local taxes cost them roughly 14 percent of their income, more than four times the percentage that the richest Floridians pay.
Citizens for Tax Justice is in the final stages of updating the study, and Florida is likely to look even worse because the intangibles tax, paid largely by the rich, has been cut by more than half.
It's what many legislators predicted when they unsuccessfully fought the 3 percent selective sales tax that was ultimately passed in 1949.
". . .I firmly believe in the Democratic principle, that taxation according to ability to pay is the soundest and most equitable method," said Sen. Raymond Sheldon of Tampa in a statement typical of many. "The sales tax is the reverse principle."
Sheldon's defeat was the crowning victory for industrialist Ed Ball and other men of wealth who had spent the first half of the century ensuring that others would bear Florida's burden.
The 1923 Legislature led the way by proposing an amendment to prohibit income taxes. Overwhelmingly adopted by the voters in 1924, it remains the only state constitutional ban on income taxation. Six other states don't tax incomes, but their legislatures could if they chose.
In 1934, the homestead exemption amendment, a measure born of Depression desperation, took most homes off the tax rolls except for debt service.
In 1935 and 1937, Ball began the campaign for a sales tax. Though that was blocked, the 1939 Legislature proposed (and the voters in 1940 adopted) a constitutional amendment repealing real and personal property taxation for state purposes. (That's why Florida can't tax the value of automobiles, as many other states do.) A Ball employee was House speaker at the time.
"No other state in the Union has gone to such unreasonable extremes in this matter as we have gone, by the use of exemptions and by limitations on taxing power," protested Rep. Winder H. Surrency of Sarasota.
The Legislature contributed little to the schools in those days. When it finally took on that burden in 1947, the sales tax became inevitable.
As Surrency and others foresaw, there was nowhere else to turn.
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