Tax Justice Digest stories about Florida

Earlier this month, Apple announced that it had surpassed Wal-Mart as the largest music retailer in the United States, citing data from market research firm NPD for the first two months of 2008.  The announcement will hopefully help to draw more attention to a long-standing shortcoming in some states' tax systems -- namely, their inability to tax electronic commerce properly.  Simply put, the form a transaction takes should not affect the amount of tax it might incur.  Someone who downloads the latest Mariah Carey album from iTunes should pay the same state sales tax as someone who purchases the CD at his or her local record store, and a hotel reservation made through Orbitz should result in the same amount of revenue to the state as one made over the phone or in person. 

Yet, flaws in state tax laws mean that purchases of intangible goods -- like a downloaded version of E=MC2 -- are often not subject to the same sales taxes levied on purchases of tangible goods.  For example, California loses an estimated $500 million in sales tax revenue each year because it makes such a distinction between tangible and intangible goods.  A proposal to move towards ending that distinction was defeated in the Assembly’s Revenue and Taxation Committee this past week, the victim of lobbying by the American Electronics Association, Yahoo, Microsoft, and others.

Similarly, states and localities continue to lose vital tax dollars due to hotel reservations made via the Internet.  That is, online travel companies like Hotels.com frequently avoid paying the correct amount of taxes by maintaining that they only owe tax based on the wholesale price they paid to the hotels for the room reservations they offer, rather than the retail price they charge their customers.  Different jurisdictions have taken different approaches to this problem. A number of cities have brought lawsuits against hotel resellers, while the state of South Carolina recently served one such company with a bill for $6.3 million in unpaid sales taxes.  On the other hand, Florida, predictably, has the worst idea. A bill before one House committee -- and backed by Expedia -- would let online travel companies keep this tax break, at a cost of $22 million in forgone revenue. 

Not all property tax cuts are created equal.  Though the intent is to shield homeowners from property tax hikes in times of strong growth in housing prices, it is the unintended consequences of caps on increases in a home’s taxable value that have gained these measures attention in recent months.

By effectively limiting the amount by which one’s tax bill can increase, these provisions primarily benefit those long-term residents whose taxable home values have been suppressed for the most years.  Since this creates huge inequities in tax bills between neighbors who have lived in their homes for different amounts of time, Florida voters in January passed a “portability” measure that allows long-time homeowners to take their tax savings with them to a new home upon changing residences.  This obviously does nothing to assist first-time homebuyers, or correct a host of other potential problems that states with such limits have been experiencing.

In Michigan, where housing prices have actually been on the decline, homeowners are continuing to see increases in their property taxes as previously suppressed “taxable values” are using the housing slump to catch up with actual “market values”.  This development, in addition to baffling and infuriating homeowners, provides an excellent illustration of exactly how convoluted these tax limits make the property tax system.  In their poorly conceived attempt to keep property tax bills from getting “out of control”, state legislators have created a system where the property tax barely resembles a tax on the actual value of property at all.  Only under one of these ridiculous assessment-capped regimes could decreases in a home’s market value lead to increases in a home’s taxable value.

Aside from destroying the common sense connection between the actual value of one’s property and the tax one pays, such limits also constrain local revenues without regard to the rising costs faced by local governments.  South Dakota county leaders, facing increasingly grim budgetary realities created by a 3% cap on increases in taxable value, have had to resort to petition drives to raise needed funds.  After a recent failed attempt to try to get an alcohol tax increase on the ballot to make up for revenue shortfalls, one county commissioner remarked that “we need to find a source of revenue…We’ve opted out of the property tax limitations five times.  I don’t think that was ever what the Legislature intended to happen”.  Given that local budgets primarily consist of law enforcement and education expenses, South Dakota residents should feel very fortunate that their state allows county governments to opt out of these overly restrictive limits.

In last week’s Tax Justice Digest, we warned that May 8 could be a dark day for Florida taxpayers if the Commission charged with proposing tax-related constitutional amendments did not abruptly change direction.  Well, that dark day may have already come, now that the Commission has tentatively approved a massive property tax cut, coupled with regressive sales tax increases to partially offset the revenue lost by that hike.

On the heels of fairly substantial property tax reforms approved by voters just this January, this proposal, which many are already considering a sure-bet to reach the November ballot, would eliminate most school property taxes in the state, with a cost to government of $9.6 billion.  $3.3 billion of that would be offset with a one cent sales tax hike.  The remaining $6.3 billion addition to Florida’s existing $3 billion budget shortfall would be offset by removing numerous sales tax exemptions, taxing services, reducing spending, and in the meantime, hoping for strong economic growth.  One member of the commission summed up the plan fairly well, stating "a sales tax is a regressive tax … we're not doing anything here except changing who pays the bill".

Unfortunately for Florida’s children, (who just recently had $500 million cut from their schools’ budgets) though much of the responsibility for funding education will simply be shifted to lower-income Floridians, significant cuts in education spending will also almost certainly occur.  If the measure gains the approval of the voters, the legislature will be responsible for determining the methods for dealing with the loss of revenue.  The opposition to removing sales tax exemptions and taxing services runs so strong in the legislature that these regressive tax increases will likely not be carried nearly far enough to offset revenue losses, should the plan pass.  Cuts in spending should therefore be expected to be quite deep.

Simply put, the commission’s plan is a failure by any number of measures.  It makes Florida’s tax system even less fair, leaves inadequate funding for even the most vital public services, and, as one member of the Chamber of Commerce stated, "nothing in this proposal will fix the brokenness" of Florida’s property tax, which levies vastly different taxes even on neighbors with very similar homes.  Hopefully by proposing a plan so extreme that it has spurred opposition from groups as varied as the Florida Chamber of Commerce, teachers’ organizations, and advocates for the poor, the Commission has made it likely that Florida voters will vote down the plan in November.

The Florida Taxation and Budget Reform Commission meets only every twenty years and is supposed to be free of political pressures. Florida has the country's second most regressive tax structure, mainly because it has no state income tax. The state is facing a multi-billion dollar fiscal shortfall according to this Center on Budget and Policy Priorities paper. 

Now would be the perfect time for the Commission to come forward and offer creative revenue-raising ideas. Yet, as a Palm Beach Post editorial rightly states, the Commission "is wasting its opportunity to update the state's outmoded tax structure." Even a proposal that would broaden the state's sales tax base and close loopholes appears to have been rejected. Many businesses cling to their unjustified exemptions from the sales tax. As the Palm Beach Post explains, "The argument that customers of lawyers, accountants and architects will go to Georgia to avoid a 6 percent tax has achieved almost magical reverence in Tallahassee." Broadening the sales tax base would go along way toward modernizing the state's tax structure and filling the state's budget hole. The inability to think outside of the politically popular box continues to plague Floridians. 

Commission members and other policymakers would do well to read the Florida Center for Fiscal and Economic Policy's brief describing how the quality of life in Florida compares to that of other states. For example, Florida has the 2nd highest percentage of uninsured children in the country and is 50th in per capita funding for higher education. Florida is the perfect example of residents getting the government they pay for.

Lost in the excitement over the presidential primary, Florida residents on Tuesday also voted to approve a property tax cut that will unfortunately do nothing to eliminate the increasing unfairness in the state tax system. 

Florida already has property tax "caps" which create strange inequities between long-time homeowners and more recent homeowners or new residents.  The measure approved on Tuesday includes more tax cuts almost exclusively for Florida homeowners, while renters and businesses should expect to see little change -- aside from future budgetary crunches, since this tax cut is unfunded.

One of the largest components of the cut doubles the amount of a home’s value that homeowners can exempt from taxation. Another is a new option for homeowners to continue to enjoy accumulated property tax savings upon changing residences. This measure neglects newcomers to the state while carefully guarding the property tax advantages enjoyed by long-time residents. In fact, it appears so discriminatory and inequitable that lawsuits have already surfaced challenging its constitutionality.

Florida's property tax reform debate may finally be nearing an end - and, then again, it may not.  During a special session in June, the Legislature put a plan on the January 2008 ballot to allow homeowners to choose between their existing "Save Our Homes" property tax assessment caps and a so-called "super-exemption" of up to $195,000.  That plan was then removed from the ballot by a Leon County court in September because it would have been too difficult for voters to understand.  Then, last Monday, the last possible day to do so, the Legislature approved an alternative plan to increase the existing homestead exemption and to permit current residents to take their "Save Our Homes" assessment caps with them when they move, thus putting property tax reform back on the ballot.  Yet, as the Miami Herald points out, the state's Taxation and Budget Reform Commission, which itself has the power to put matters before the voters, could come up with another approach for the voters to consider next November.  What's more, creating "portability" for "Save Our Homes" may well violate the U.S Constitution, as an analysis by Walter Hellerstein and others found back in February.

Given the particulars of the Legislature's latest plan, a different approach would certainly be warranted.  As the St. Petersburg Times observes, the Legislature's latest plan "... takes what's wrong with the current property tax system and amplifies it. The unfair advantage long-time homeowners have over more recent home buyers would be extended. The shifting of the tax burden from homesteaded property to non-homesteaded property would be exacerbated. And the cost for making matters worse would be indefensible."

The Miami Herald offers its compiled coverage on the whole sorry saga here.