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Supplementing Governing’s Back to state report | Introduction Florida Supplemental Report Tax Environment One of seven states without an individual income tax, Florida is constitutionally prohibited from instituting one. That leaves more than three quarters of the state’s tax revenue to be derived from some type of sales tax. Florida is second in the United States in reliance on sales tax revenue, trailing only Washington, which derives more than 78 percent of its revenues from sales taxes.
There have been several attempts to change and reform Florida’s tax system during the last two decades. In 1987, then-Gov. Bob Martinez signed into law a bill taxing nearly all services statewide, after a sales tax study commission had recommended the plan. When advertisers and other newly taxed groups opposed the law, political turmoil ensued, and Martinez withdrew his support. He requested that the legislature rescind the law, which it did. That experience largely has kept Florida—and states throughout the country—far from considering an extensive services tax. But in 2002, then-Senate President John McKay picked up the torch once again, this time with the intention of reforming Florida’s sales taxes. His proposal would have closed about 100 tax loopholes and reduced the statewide sales tax rate from 6 percent to 4.5 percent in a revenue neutral manner. But, McKay found significant opposition to the bill from Gov. Jeb Bush and the Florida House. When his proposal failed in the House, McKay persuaded the legislature to pass a bill adding a constitutional amendment to the fall ballot. The constitutional amendment would have established a 12-member legislative commission with the authority to review—and eliminate — more than 300 exemptions. If seven members of the commission voted to end an exemption, the full legislature would have had two years to override the decision; if the legislature did not take action, the decisions of the commission would stand. McKay’s ballot question died in appellate court, which ruled that the ballot summary did not sufficiently advise voters that the constitutional amendment would give lawmaking authority to the commission. Now retired from the state legislature, McKay has broached the idea of trying a tax reform effort again in the future. The state’s corporate and intangible taxes have complicated the tax reform effort. Corporate income taxes—which have been diminishing in recent years — are limited by Florida’s constitution to a rate of 5 percent, with a 3/5 vote necessary to raise the rate beyond that. (It now stands at 5.5 percent.) The intangibles tax—a tax on stock and bond holdings — is gradually being abolished, and Florida will lose about $800 million annually in estate tax receipts when the federal estate tax (to which the state tax is coupled) is fully phased out over the next several years. A constitutional change, voted on by the legislature and approved by referendum in 1994, established that revenue growth is limited to the prior year’s revenue plus a five-year rolling average of personal income growth. Excess revenues go to the budget stabilization fund. When the fund reaches statutory maximum, the excess is rebated to taxpayers. For fiscal year 2004, that revenue limit stands at $31.9 billion, while estimated revenues are $25.5 billion. Recent Tax Developments • Florida ran a sales tax holiday during back-to-school season from 1998 to 2001, but discontinued the program in 2002 and did not re-institute it for fiscal year 2004, despite arguments from some legislators to do so. • Gov. Jeb Bush signed a bill establishing a tax amnesty program to run July 1 through October 31, 2003. The amnesty will be the state’s first since 1992. The state hopes to raise at least $75 million through the amnesty, which applies to all state taxes administered by the Department of Revenue except the unemployment tax. • The legislature did not pass the streamlined sales compliance tax bill during the 2003 legislative session. Budget Information Without a state individual income tax to add volatility to tax receipts, Florida’s budget has been spared some of the roller coaster ride that other states have experienced in recent years. It has not escaped fully unscathed, however. Tourism took a hard hit in the fall of 2001 after September 11, and the legislature was forced into two special sessions to deal with declining revenues halfway through the 2002 fiscal year. During those sessions, lawmakers cut about $1 billion from the budget and froze the rollback on the intangibles tax. These moves enabled the state to meet its 2002 revenue projections. The 2003 budget was balanced with about $1 billion in non-recurring funds. Three months before the end of the fiscal year, the state’s Revenue Estimating Conference group reduced its revenue forecast for the year by about $27 million. In August, 2002, Moody’s returned Florida to a “stable” outlook from a negative outlook. Budget negotiations for 2004 were complicated by several factors, including a $300 million reduction in estimated revenue growth by the Revenue Estimating Conference for fiscal year 2004. But weighing even more heavily on the budget plans were voter mandates to shrink class size, fund a statewide pre-kindergarten program, build a high-speed rail system and assume court costs currently borne by counties. Lawmakers eventually passed a $53.5 billion budget by using $1.3 billion in one-time funds—including about $800 million from trust funds—raising fees by about $150 million and cutting non-education spending. Adequacy Florida’s tax system is unbalanced, with more than three quarters of state tax revenue generated by sales taxes. In the short term, the lack of an income tax has enabled Florida to avoid some of the volatility in tax revenues experienced by states like California, but sales taxes have also suffered during the recent economic downturn. As sales taxes are less elastic than income taxes, they are likely not to spring back as quickly, which means Florida’s recovery may be slower than income tax states. In addition, in the long term, general sales taxes are a declining source of revenue. While tourism continues to generate billions each year for the state, sales from tourist goods and souvenirs can no longer be counted upon to support the state’s economy and quickly growing population. According to the Office of Program Policy Analysis and Government Accountability (OPPAGA), the share of Florida taxable sales as a percentage of total state income has dropped from about 70 percent in the 1970s to 54 percent today. The 1999 legislative session was a big year for tax cuts in Florida. The legislature approved close to $1 billion of Gov. Jeb Bush’s proposed $1.2 billion in tax cuts, with about $500 million in assorted cuts to business taxes and a plan to gradually eliminate the politically unpopular intangibles tax. That levy is a tax against stock and bond holdings (though not against specifically designated retirement funds). The gradual rollback originally was slated to fully eliminate the tax within several years but was postponed in 2001 and 2002 by slowing revenues. Now reinstated, the state cut another $118 million from the tax in the 2004 budget (from a total levy of more than $700 million) and plans to fully end it in 2005. As the intangibles tax and the estate tax are phased out, a multi-billion dollar revenue hole is opening, with nothing yet determined to fill the gap. The state faces several big-ticket items to pay for in coming years, including the bullet train, assuming county court operations, providing universal pre-kindergarten and smaller class sizes. Fairness The fairness of Florida’s tax system was at the heart of the tax exemption battle. Sales taxes tend to be more inherently regressive than income taxes, because they are levied according to the type of purchase, and not the ability of the taxpayer to pay. Lower-income residents ultimately pay a larger share of their income to taxes than do higher-income residents under such a tax system. This is slightly mitigated by the fact that Florida does exempt groceries and utilities from its general sales tax, which lessens the tax burden on lower-income residents. However, the difference between the percentage of income paid by the wealthy and the poor is striking. According to the Institute on Taxation & Economic Policy study, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” the lowest 20 percent of income earners in Florida pay 14.1 percent of their income in taxes, while the top 1 percent pay just 2.7 percent. The amount of exemptions built into Florida’s tax code increases disparities among taxpayers. Without a clear, statewide philosophy about which goods and services are determined to be exempt or non-exempt, it becomes difficult to ensure that residents of similar economic situations are treated in a like fashion.
Florida could generate significantly more sales tax revenue and increase fairness by ending some of the many exemptions that have been handed out over the years (one example: fishing rods are taxable; chartered fishing boats are not.). Extending sales tax to additional services could also be expected to increase equity and generate substantial tax receipts; According to a recent report by Florida TaxWatch and the Center for a Competitive Florida, the exemption of personal services and entertainment/sports services costs the state $455 million a year. Management Florida stands out from other states in the administration of its tax system. The Department of Revenue is considered one of the nation’s leaders in measuring performance. The General Tax Administration has 19 legislatively approved performance measures, which track such activities as the average number of days needed to resolve audit disputes (down from 318 in 1995 to 143 in 2002) and the percent of taxpayers who voluntarily comply with tax laws (up slightly from 96.8 percent in 1995 to 97.6 percent in 2002) Florida’s Revenue Estimating Conference is well respected through the state and consists of staffers from both the House and Senate, as well as members of the Governor’s office and the Economic and Demographic Research office. Members must agree to the revenue estimate, and when any of them determines the estimate is veering off track, they can call a new conference to adjust the figures (as seen in late 2001). According to Florida TaxWatch, Florida’s Revenue Estimating Conference has generally done a good job in estimating annual general revenue. Since 1990, the average error (up or down) in estimated revenue compared to actual revenue has been 3 percent (2 percent since 1993). The Revenue Department has made successful use of technology. A first-generation integrated system was implemented in the early 1990s and a new integrated tax system was implemented earlier this year. About 78 percent of the state’s revenues are collected electronically. Florida prepares a tax expenditure report that itemizes the value of revenues foregone via tax breaks. However, it has no capacity to determine the impact of state taxes or changes in the tax code on taxpayers of all income levels, according to the State Assets Development Report Card, Corporation for Enterprise Development, Oct., 2002 According to the Center on Budget and Policy Priorities, Florida is one of 17 states that lack a significant tax incidence analysis capacity. In recent years, the Department of Revenue incorporated OPPAGA’s recommendation to improve the performance of the compliance enforcement process. It has developed an enforcement operations work plan that is designed to shift resources toward areas with higher returns on investment. One recurring recommendation for the department has been to improve its audit selection. A 1999 OPPAGA audit estimated that the Department of Revenue could generate an additional $30.5 million annually in audit recoveries if it examined the rate of return received from audits of different types of tax account and increased coverage for the types of accounts that produce the highest return. Department officials said that the new computer system would aid audit selection, but longer term, they are planning a more significant redesign of the audit process. Local Issues Counties are allowed to levy local sales taxes on the first $5,000 of a personal property purchase. Most counties’ sales tax rates are between .5 percent and 1.5 percent and are levied in addition to the state’s 6 percent rate. In recent years, counties have criticized the tax cuts at the state level, arguing that those cuts have forced more expenses down to the counties and forced them to raise property taxes to compensate. A homestead exemption gives residents an exemption on the first $25,000 of assessed value. One bonus for the locals: as the state continues to pick up the total cost of the court system, between $300 million and $400 million in expenditures will be shifted from the counties to the state. Noteworthy Programs • All tax filers who pay more than $50,000 must file electronically, which has led to the high percentage of online filing. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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