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Lawmakers don't shy away from tax exemptions

Closing loopholes would mean higher taxes for many legislators, who, a survey shows, take advantage of the legal breaks.

If the Legislature ever addresses the gaping loopholes in Florida's corporate income tax, it won't have to look far for people with a stake in the issue.

Many key lawmakers don't pay a penny in corporate income tax on their businesses.

At least 18 of the 34 legislators who shape state tax policy benefit from the current tax code, a survey by the St. Petersburg Times shows. Several other lawmakers are employed by tax-exempt nonprofit agencies funded by public money.

Combined, these policymakers have interests - or once had interests - in at least 50 businesses that are exempt from Florida's corporate income tax, the Times found.

"Politicians are certainly entitled to take advantage of the tax laws," said Richard Pomp, an expert on state tax and professor at the University of Connecticut Law School.

"The question is whether their own self-interest interferes with them making a dispassionate, objective determination of what's in the best interest of the state of Florida. If that decision is skewed by their own tax situation, then we certainly do have a conflict of interest."

Legislators who use state tax law to their advantage say there is no connection between the Legislature's longstanding reluctance to close corporate loopholes and their desire to keep their own tax bills low.

As part-time politicians, they say, they organize their businesses on the advice of tax attorneys and accountants, the same way ordinary folks do.

"I don't think that the fact I have a (tax-exempt) Subchapter S corporation puts me in any kind of violation with anything that any other citizen in the state should do," said Senate President Jim King, R-Jacksonville. He owns a rental property firm that doesn't have to pay state corporate income tax.

In its survey, the Times examined the business holdings of the state's four most powerful legislators and the 30 members of the House and Senate tax committees.

The survey found that:

Like King, the lawmakers poised to assume leadership of the Legislature in November - House Speaker-designate Allan Bense, R-Panama City, and Senate President-designate Tom Lee, R-Brandon - benefit from rules that exempt certain types of businesses from paying an income tax.

Gwen Margolis, the Dade County Democrat who heads the Senate Finance and Taxation Committee, has at least two businesses that legally avoid the tax.

Her counterpart in the House, Finance and Tax Committee chairman Randy Johnson, R-Celebration, earned almost $150,000 in 2002 as chief executive of a nonprofit agency that is exempt from the corporate tax.

According to the Times survey, at least six legislators who serve on tax-writing committees said they do pay corporate income tax on their businesses.

How do they feel about paying while most opt out?

"I have no animosity," said Rep. Ralph Poppell, R-Vero Beach, owner of a boat-trailer manufacturing firm. He declined to reveal his corporate tax bill for competitive reasons. "I don't know if I'm in favor of the corporate income tax at all, but it's something I choose to pay," he said.

John Jennings, vice president of the Orlando construction firm once run by his sister, Lt. Gov. Toni Jennings, said the family business pays about $100,000 in income taxes every year, including $13,000 to Florida.

The firm refuses to use tax loopholes because "that's the way our father taught us," Jennings said.

The lieutenant governor no longer is an officer or employee in the 56-year-old firm, but she maintains an ownership stake in a blind trust, said spokeswoman Alia Faraj. Jennings, who listed her net worth on Feb. 1, 2002, at more than $2.9-million, also has a "minority percent" interest in two limited partnerships, Faraj said.

Jennings' brother called the corporate income tax "the price of doing business in Florida." He criticized companies that refuse to pay their fair share and said the Legislature or Congress should enact stiffer guidelines to curb corporate tax dodging.

If the tax code didn't have all the loopholes, "I personally believe our taxes would be less," he said.

When Florida voters approved the corporate income tax in 1971, they hoped to shift the tax burden to some of the wealthy businesses that flourish here.

It didn't happen.

As the Times reported in October, 87 percent of Florida's estimated 1.5-million businesses are not required to file a state income tax form, much less pay the tax. Of the 238,455 companies that did file a return in 2001 (the last year statistics were available), almost 90 percent paid nothing. And 98 percent of the taxes came from just 2.2 percent of the corporate filers.

Moreover, corporate tax collections as a percentage of state revenue - now at less than 5 percent - have steadily fallen as businesses work the loophole-riddled tax code to shave their tax bills.

Cash-strapped Florida loses more than $1-billion a year in possible revenues because of corporate tax exemptions, deductions, additions and subtractions.

The costliest are exemptions for so-called "flow-through businesses," which are increasingly used by tax-averse executives, including many Florida officials who have a hand in crafting tax laws.

Accountants call them flow-through businesses because their income, deductions and credits flow through to the individual owners, who report the items on their personal tax returns.

But in Florida, flow-through businesses escape the tax entirely because the state doesn't have a personal income tax.

Gov. Jeb Bush, who invested in several tax-exempt businesses before he entered elective politics in 1994, argues that flow-through businesses should be spared from paying the corporate tax because they are generally small businesses with one or two employees.

In the 1980s and '90s, Bush had an interest in six Subchapter S corporations, a type of flow-through entity. Among them was a company that marketed water pump equipment to foreign countries.

He also had a stake in at least three partnerships, unincorporated businesses that like S corporations are generally not subject to a corporate income tax. These included the Jacksonville Jaguars football team.

After his election in 1998, Bush placed his assets in a trust. The trust consists of cash, mutual funds and partnership interests totaling $848,000 as of Dec. 31, 2002, according to the governor's most recent financial disclosure form. He also had cash, property, an income tax refund, life insurance and a vested interest in several retirement plans, which brought his assets to more than $1.4-million on Dec. 31, 2002.

At least two states without a personal income tax, Texas and Washington, tax some types of flow-through businesses, just as they tax regular corporations. Other states are trying to close flow-through loopholes.

Not Florida. Instead of plugging flow-through exemptions, as a state commission recommended in 1992, legislators and successive governors have promoted policies encouraging businesses to bypass the corporate tax.

Consider limited liability companies, or LLCs. They enjoy liability protection just like a corporation while giving their owners more management flexibility. In 1998 and 1999, the Legislature voted unanimously to exempt LLCs from paying corporate income taxes.

Among the legislators who voted for the exemptions was Lee, the Brandon Republican in line to become president of the Senate in November.

Like mushrooming numbers of Floridians, Lee now has a limited liability company.

"It had nothing to do with politics," he said.

According to his most recent financial disclosure form, Lee, who had a net worth of more than $1-million on Dec. 31, 2002, reported $100,000 of stock in a homebuilding company that does pay corporate income tax. He also reported $255,000 in TAL Holdings LLC, an investment firm exempt from the tax. Lee said he organized that business in 1998.

He said he is concerned that some businesses receive tax benefits at the expense of others.

"The time has come for the Legislature to take a comprehensive look at tax policy, not with an eye toward raising more revenue for government, but to make sure we have as many people pulling the wagon as we can, instead of having so many people in the wagon and only a handful pulling," Lee said. "Tax policy shouldn't be a matter of convenience or the squeaky wheel gets the grease. It should be a matter of what's fair."

Sen. King, the man Lee will replace, sounded a similar note in November, when he urged fellow legislators to close some corporate loopholes. At the time, King said he was stunned by inequities that allow many companies to get "a free ride on the backs of those who are paying."

But a day before Sen. Walter "Skip" Campbell, D-Fort Lauderdale, a critic of corporate tax breaks, was to begin a drive to close some corporate tax loopholes, King asked him to resign as chairman of the Senate tax committee.

Now King has signaled that corporate tax reform is a dead issue - at least for now.

"As far as there being any giant, mammoth change in Florida's tax laws? I don't anticipate some" during the legislative session that begins Tuesday, he said.

King, who was worth more than $4.7-million on Dec. 31, 2002, has at least two S corporations, including Tomahawk Investments, which he owns with Cathy Whatley, past president of the National Association of Realtors.

Tomahawk buys and rents homes to military officers and executives in Duval County.

King said his Jacksonville accountant suggested the S corporations as a tax-reduction strategy. There is no connection, he said, "between the few hundred thousand dollars that I have invested and the $50-billion that we work with in the state budget system. One is not even remotely related to the other."

Sen. Margolis, who was picked by King to replace Campbell as leader of the tax committee, also owns businesses that don't have to pay a corporate tax. JLGM Corp. is an investment property firm organized as an S corporation; Margolis Family LLC is an investment limited liability firm, organized to transfer money to her children.

"It's all recommended by tax attorneys," said Margolis, a developer from the Dade County community of Aventura with a net worth of more than $3.2-million last May.

When Floridians set up tax-exempt businesses, it has more to do with avoiding federal tax than state tax, she said.

She said she would like to examine corporate tax loopholes, but the former Senate president recalls what happened in the 1980s when the Legislature enacted tax reform.

"The business community swooped down on us and it was repealed," Margolis said. "You know when you're knocking your head against the wall."

House leaders are even more adamant about protecting tax breaks for business.

In fact, House Speaker Johnnie Byrd, R-Plant City, recently said he favors eliminating the corporate income tax.

"People say the state corporate income tax has people who don't pay it, so we should go out and find Sub S's, and others who don't pay it, and make them pay it," Byrd said.

"The real thing you should do is try to phase out the corporate income tax, so that you would draw all these businesses to Florida to create their headquarters here and bring in high paying jobs so we can be a magnet for corporate headquarters and other corporate business," Byrd added.

Byrd, a candidate for the U.S. Senate, is a partner in a law firm that is subject to state income tax. He did not know how much it paid, according to campaign spokesman Wayne Garcia.

With a net worth of $253,853 on Dec. 31, 2002, Byrd also has an interest with several of his law colleagues in a rental property partnership that is not subject to the corporate income tax. And he is an unpaid director of a nonprofit Alzheimer's research institute that is seeking tax-exempt status, Garcia said.

Rep. Bense, widely regarded as the second most powerful House member behind Byrd, has interests in six S corporations, including a heating and air conditioning repair firm, a timber harvesting company and a construction firm.

With a net worth of more than $8.5-million last June, Bense said his business enterprises were organized based on an accountant's advice to avoid "double taxation." The speaker-designate noted that he pays federal personal income tax at a high rate, at least 35 percent.

"I've never gotten into tax shelters or offshore trusts," said Bense, who reported making $775,089 in 2002 along with his wife, Tonie. The couple's federal income tax bill was $252,825 that year, and they also paid $12,383 in property tax and $85 in intangible tax.

"I don't think it's healthy for the economy if people who owe a million dollars in income tax have a million dollars in credits and hence pay no taxes," he said. "If you make income, you ought to pay taxes."

Besides the growth of flow-through businesses, Florida also has seen an explosion of tax-exempt nonprofit agencies over the past decade.

While some states are cracking down and even revoking the tax-exempt status of institutions deemed not charitable, Florida rarely challenges such organizations.

Of the 34 legislators surveyed, at least six draw, or once drew, salaries from public agencies or nonprofits funded in part by public money.

The highest-salaried nonprofit executive is Rep. Randy Johnson, R-Celebration, president of the tax-exempt Central Florida Sports Commission.

Johnson has a profile of recent pay hikes that many Floridians could not have duplicated. In 1997, he reported making $93,750 for working 60 hours a week at the sports commission. In 2002, he made $149,877 for a 40-hour week. (The sports group also provided him with a $12,000 expense account.)

"I make no excuses for the living that I make," said Johnson, whose net worth rose from $35,000 in 1998 to $350,140 in 2002. "I've made my money the old-fashioned way, a little bit at a time."

Johnson called the commission, which promotes sporting events in the Orlando area, one of the largest and most productive sports commissions in the United States. It draws more than 40 percent of its $2.1-million in revenue from the public and local governments.

As chairman of the House tax committee, Johnson wields a lot of influence. He said charitable organizations, including his own, already undergo "an enormous amount of scrutiny."

He also downplayed a Senate committee report that said corporate tax dodging costs the state more than $500-million a year in revenue. (That number doesn't include the hundreds of millions in revenue lost because of flow-through exemptions.)

"I think that we actually collect more taxes because we have a business-friendly environment," Johnson said.

The tax writer who lists the most flow-through businesses is Rep. Edward L. Jennings Jr., a Gainesville Democrat with a net worth of more than $1.1-million on Dec. 31, 2002. Records show Jennings, a builder who develops affordable housing in poorer communities, has played a role in at least nine S corporations - but not to avoid tax, he said.

Rather, he said, small businesspeople like himself increasingly use S corporations to shield their officers from liability.

Jennings' Democratic colleague on the House tax committee, Rep. Kenneth Gottlieb of Hollywood, also has interests in several property-related businesses that don't have to pay an income tax.

"You can't compare my business to Rooms To Go," said Gottlieb, referring to the Seffner-based furniture retailer set up as an S corporation. Rooms to Go pays no Florida income tax despite posting $1.3-billion in sales last year.

Gottlieb, a lawyer who listed his net worth at more than $1.1-million as of last May, said some businesses get off light in Florida - but not his.

He pays plenty of other taxes, he said, and struggles to pay the bills "just like the guy down the street."

- Times staff writer Steve Bousquet, researcher Kitty Bennett and computer-assisted reporting specialist Connie Humburg contributed to this report.

Read the St. Petersburg Times' complete report on Florida's corporate income tax at www.sptimes.com/loophole