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Fixing a broken tax system
A Times Editorial
Published November 25, 2007
Former Florida Senate President John McKay finally may have hit upon the political calculation that will bring special-interest sales tax breaks to a public vote. His proposal: Reduce the billions of dollars in sales tax breaks by 9 percent to pay for cutting property taxes by 40 percent.
Given lawmakers' failure to deal responsibly with either property-tax reduction or broader tax reform, this one is a twofer. It cuts property taxes for every landowner while making the sales tax less regressive and more equitable. The constitutionally empowered Taxation and Budget Reform Commission, of which McKay is a member, should welcome the opportunity.
"To me, it's just about who pays for lunch," says McKay, who still has the scars to show for his losing legislative fight in 2002 against businesses guarding their exemptions. "Is everybody going to pay for their own, or is somebody going to get a free lunch?"
By McKay's ciphering, the sales tax annually exempts or excludes roughly $100-billion worth of transactions. Many of those breaks are justified, including food and medicine and raw goods in manufacturing. But many exist mainly because of well-connected lobbyists, and some are just blatantly unfair. Why should dog food be taxed but not ostrich feed? Why should lawn mowers be taxed but not lawn services?
If the state were to remove only $9-billion of those breaks, it could eliminate what is known euphemistically as "required local effort" property taxes for schools. Though the state Constitution says that "no state ad valorem taxes shall be levied upon real estate," lawmakers get around that prohibition by forcing School Boards to raise local property taxes for them. That's the "required local effort," and it has been climbing.
The school portion now makes up roughly 40 percent of each property tax bill, so replacing that portion by closing sales tax exemptions would accomplish something no legislative effort has managed to do so far. It would result in sizeable property tax reduction for every landowner.
The taxation commission, which meets only once every two decades, has the power to place proposed constitutional amendments on the 2008 ballot, and the McKay plan warrants the commission's attention. Though some commission members may be drawn by the possibility of reducing property taxes, the better reason is to begin broadening a sales tax system that hasn't changed demonstrably in six decades.
Almost every serious evaluation of Florida taxes in the past two decades has reached the same conclusion: They are regressive, unpredictable and outdated in a modern economy. A 2003 study ranked Florida as the second-most regressive tax system in the nation, taxing the poorest 20 percent at nearly five times the rate of the richest 1 percent. At the same time, in the past four decades annual tax revenue growth has fluctuated from a high of 27 percent to a low of -3.5 percent.
Then there is the $2.5-billion gorilla. Only a month after the Legislature met in special session to cut $1-billion from the budget, the state is already another $1.1-billion in the hole for this fiscal year and another $1.4-billion for the next. Some of the same lawmakers who pledged to hold public schools harmless are now saying all bets are off.
These new numbers are without historic parallel. Even as the state continues to grow in population, it will collect less in taxes for the second straight year. Lawmakers have explained the losses by pointing to the economic and housing downturn, but they are willfully missing the broader picture: Florida's tax system is broken.
This is where the taxation commission comes in. Serendipitously, it is now at work and will be considering a number of proposals, including the one by McKay, that transcend the narrow politics of the Capitol. The commission exists, in large part, because lawmakers can't or won't tackle big issues. As House Democratic Leader Dan Gelber said recently of the latest budget news: "We're not capable of having a thoughtful discussion about this."
The taxation commission is the place for such a conversation. Florida has the dubious distinction of paying for its government with a tax system that is inadequate and unfair at the same time. That needs to change now.