Tax Justice Digest stories about Florida

Seven tax-related ballot proposals ranging in quality from "highly regressive and irresponsible" to "completely inconsequential" are now set to be on the November ballot in Florida.  Proposed by a “reform” commission that meets only once every two decades, the small scale of most of the proposals is surprising.  Preferential property tax treatment for marinas, farm land and housing livestock, as well as for owners who improve their property with windstorm protection or renewable energy products, are among the proposals for which Florida voters have apparently had to wait twenty years.

But there is one very serious change to the state tax structure that has left progressives wishing the Commission would have stuck to making only minor changes.  Well aware of the existing $3.4 billion budget shortfall facing Florida, the Commission has nonetheless proposed that school property taxes be abolished at an annual cost of $9 billion.  In order to meet the requirement established by the Commission that school funding not decline as a result of this change, it was recommended that the legislature raise the sales tax rate by one percent, eliminate numerous sales tax exemptions (on both goods and services), and cut spending.  In addition to these ideas, the Commission helpfully suggested that the legislature might try to find “other revenues”.

A 1% sales tax hike is expected to raise less than half of the revenue needed to replace school property taxes, so expansions of the sales tax base appear imminent if the proposal gains approval in November.  Expanding the sales tax base is good policy, assuming that it is done carefully, but doing so would ideally be coupled with much better targeted tax cuts.  An across-the-board property tax reduction of the kind proposed here will provide huge benefits to those wealthier individuals with the most valuable homes.

And as if all of this wasn’t bad enough, the Commission has also proposed tightening the caps on increases in a home’s assessed value (criticized in the Digest just a few weeks ago) for homes not occupied by the owner.

Taxation’s Own Digital Divide

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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.

A Florida commission appointed primarily to examine the state’s tax system has so far been a significant disappointment.  Lying dormant for decades before assembling like cicadas every 20 years, the commission is empowered to propose changes to Florida law and to place constitutional amendments directly on the ballot. The commission is supposed to be an independent body removed from politics, but that's not obvious given the inequitable and unsustainable proposals that it's spending most of its time on.

Despite Florida’s well-documented budget shortfalls, and the increasingly desperate attempts to fill them (see here, here, here, and here), many members of the commission remain committed to poorly targeted property tax cuts that will cripple state finances and will benefit the wealthy far more than those truly needing relief.  The most recent bit of property tax "reform" proposed within the commission is a “super exemption” of 25% of a home’s value from taxation. This would be available for all homes valued at over $50,000, and would be provided to homeowners regardless of their ability to pay their tax bills.  The proposal would also extend more generous property tax cuts to businesses. It would also allow homeowners who benefit more from the existing (and convoluted) property tax relief system to retain those benefits rather than switching to the “super exemption”. 

As a small gesture to those concerned with the massive hit the state budget would take as a result of this change, the sales tax would be raised temporarily (for three years) to offset a portion of the cut. No solution for the inevitable revenue shortfalls beyond the first three years has been proposed.

The commission has until May 8 to make its final proposals.  If the terms of the debate going on within the commission do not change by that time, May 8 could be a very troubling day for those concerned with tax justice and the adequate funding of state and local programs.
This week in the Georgia House, lawmakers voted overwhelmingly (166-5) to approve property tax cuts, including the elimination of the state's car tax, that will cost the state more than $750 million when fully phased in. Republican Speaker Pro Tem Mark Burkhalter doesn't seem concerned with offsetting the lost revenue. Responding to concerns about the plan’s price tag, he says, "It's very simple. You cut taxes, the economy grows. The economy grows, Georgians prosper. The best way to stem off any recession is to cut taxes. Not to clam up, go home and wait for the storm to pass." We've learned on the federal level that tax cuts simply don't pay for themselves, but clearly legislators in Georgia want to try their own experiment with this flawed (and dangerous) economic myth. The House-passed bill contains another misguided property tax change – a 2% cap on annual increases in a home’s value for tax purposes (the cap would be 3% for businesses). 

The Georgia Budget and Policy Institute issued a report adding up the costs of the state House's handiwork related to taxes this year and found that the tax bills passed this session would cost as much as $113 million in FY 2009, $473 million in FY 2010, and $798 million in FY 2011.

Coincidentally, the Oklahoma Senate passed a proposed constitutional amendment last week also dealing with caps on increases in a home's taxable value. In this case, the cap would be decreased from 5% to 3% (the 5% cap would remain intact for businesses).  Assessment value caps of this sort have recently received much attention in Florida. The unfair way in which these caps provide the greatest relief to long-time residents (creating vastly different property tax bills between neighbors with similar houses) recently drove Florida residents to amend their constitution to patch over the problem in a very imperfect way.

Rounding out the recent trend in debating poorly reasoned property tax cuts is Arizona, where the House narrowly approved a measure to permanently repeal a portion of the property tax that is currently suspended.  Allowing the tax to take effect again would raise about $250 million annually for the state, significantly reducing the projected $1.2 billion revenue shortfall for the current fiscal year.  If the plan passes, cuts in public services could be the result.

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 rejectedMany 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: Confused Yet?

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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.

On Monday, a Florida court derailed (for the moment) a legislative effort to put an expensive local property tax cut on a special January 2008 ballot. The property tax proposal, which was referred to the ballot by the state legislature earlier this year, would create an optional "super-exemption" of as much as $195,000 of a home's value from the property tax. But the proposal would also gradually phase out an existing tax break, the so-called "Save Our Homes" cap, that restricts the annual growth of a home's assessed value to 3 percent. The court argued that the wording of the ballot measure was misleading, partly because the language says that "everyone" will get a bigger  exemption (which isn't true because the plan is optional), and says that the proposal would "preserve" and "revise" the existing Save Our Homes tax cap (when a less Orwellian wording would be "phase out").
 
If the wording is confusing, it's certainly not because the legislature didn't have enough space to explain itself properly (the 255-word ballot description can be found here), but more likely because lawmakers wanted to perpetuate the "free lunch" worldview that has characterized the state's fiscal policy over the past decade. But the court's decision does reflect the harsh reality that the ballot is simply the wrong place, in general, to make fiscal policy decisions. The combination of political pressures and the complexity of tax language makes it very unlikely that voters will ever be given a full and accurate description of the proposals they're being asked to evaluate.
 
Opponents of the January property tax vote may have won the battle, but the war continues. State lawmakers are now debating whether to appeal the court decision or to take time in a scheduled special legislative session next week to fix the wording of the ballot proposal in a way that would keep it on the January ballot. But as one editorial board notes, a better solution would be to put this complicated decision back in the hands of officials who have both the time and expertise to design property tax reform properly.

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