Florida’s Taxation and Budget Reform Commission, the constitutional agency required to examine the state’s fiscal underpinnings, is taking a generalized look at sales tax exemptions that could include the exemptions on most services.
The commission’s Finance and Tax Committee has voted to submit two proposals, one on sales tax exemptions and one on sales tax exclusions, for further consideration by commission committees. And commission member John McKay has filed a proposal mandating property tax relief to be financed by sales tax reform.
“I would describe it as fulfilling the constitutional mandate of reviewing the sources of financing for state and local government,” said Tallahassee attorney and commission member Martha Barnett of the two committee proposals. “In order to review you need not only to have a lot of background education, but also the structure of the tax, the fairness, the basis, how it’s collected . . . that’s where we are on these two [proposals].
“It’s way too early to get nervous about the revival of the services tax. It’s still a preliminary stage of review by the commission. But I would also say those who are interested in the possibility should be vigilant, because if we are going to do anything constitutionally we have to do it by May 4.”
Under the constitution, the commission meets every 20 years to review the state’s fiscal operations. It is empowered to directly place constitutional amendments on the ballot, without legislative approval, for voters’ review. To meet the deadline for the November 2008 election, the commission must submit any constitutional amendments by May 4.
But the commission does not have to rely solely on amendments. It can also make recommendations to the legislature on policies or law, Barnett noted.
The services tax matters are listed as “CP,” or constitutional proposals, by the commission. If they were to pass as recommendations to the legislature, it would require a simple 13-member majority of the 25-member commission. If they were to be sent directly to voters as constitutional amendments, that would require a 17-vote supermajority. Voters, in turn, would have to approve the amendment by 60 percent.
Commission member Susan Story, chair of the Finance and Tax Committee, noted the commission is functioning like a mini-legislature. Any member or any of the commission’s four committees can make a proposal, former House Speaker Alan Bense, chair of the commission, refers that idea to one or more committees for debate and action.
Only when a proposal has passed all of its committees of reference will it be taken up by the full commission.
Like Barnett, Story, president and CEO of Gulf Power Co., said members of the Finance and Tax Committee acted only generally in submitting their two proposals, with the goal of providing a vehicle for further debate and action, if commission members want to do something.
“There are some topics regardless of people’s feelings that deserve a full discussion and debate,” she said.
“We had seven (commission) meetings around the state for public input. There’s so much angst out there. Most of the input was on property tax,” Story added. “You can’t deal with property taxes without looking at sales taxes because those are two engines for state and local governments.”
Linking the two is precisely what McKay’s proposal does, with the goal of providing property tax relief to Floridians.
“Approximately 45 percent of ad valorem taxes go to the K-12 schools; that varies from some counties to below 40 percent to some in excess of 50 percent,” said McKay, a former Republican state Senate president who was active in sales tax reform efforts during and after his Senate service. That percentage, he said, is the required local effort and does not include taxes pledged to repay bonds for school construction and other projects, which would not be affected by his proposal.
“My proposal says that portion of the school ad valorem taxes referred to as required local effort should be eliminated and that school funding source should be replaced by removing a like amount of sales tax exemptions and exclusions,” he said.
Those school property taxes currently raise $9 billion, McKay said, so $9 billion of sales tax exemptions and exclusions would have to be removed. That job would fall to the legislature. (Generally speaking, exemptions apply to the sales of tangible personal property; exclusions apply to a wider arena, but frequently are used to refer to services taxes.)
That will not necessarily lead to a widespread return of the services tax, he noted, since both goods and services are exempted and excluded under current laws.
“It (his proposal) doesn’t say services; it doesn’t say widgets; it doesn’t say (sports stadium) skyboxes,” said McKay. “It leaves it to the legislature to make that decision.”
It has the advantage of providing broad- based property tax relief, not just for homestead owners, he said, and also because about 15 percent of sales taxes are paid by visitors to Florida.
Behind his proposal are some grim numbers provided by state economists and experts, he said. Those include that given Florida’s aging population and housing market trends, the property tax will not be able to keep up as a realistic funding source for local governments. Even if the state had an income tax — a political impossibility, McKay said — that would be insufficient.
That only leaves the sales tax, he said, and underscores the importance of examining exemptions and exclusions.
It’s estimated that the state foregoes around $23.5 billion annually through sales tax exemptions, McKay said. He explained that in order to be eligible for a sales tax, a good or service must be listed in state statutes, and then to be exempted, it must be listed in another statute. Excluded items are not eligible to be taxed because they are not listed in state statutes.
That could amount to another $100 billion in lost revenues, McKay said, but probably most of those unlisted exemptions are probably necessary, covering such things as raw materials or items used in manufacturing. The state does currently tax some services, such as pest control, nonresidential cleaning service, auto mechanics, detective services, and burglar protection services. Legal services are an exempted, not excluded, service, under current laws.
“I don’t think for a moment anyone is going to start taxing raw materials, but there is a huge population that avoids taxation, mostly for very positive reasons but sometimes not,” he said.
“I hope members will understand their charge under the constitution is to try to anticipate budgetary and taxation needs of Florida for the next 20 years,” McKay added. “Just to say everything is hunky-dory and we don’t need to be concerned about the current property tax crisis would be very short-sighted.”
Looking at long-term needs is the reason cited by Story and Barnett for the Finance and Tax Committee’s actions in filing its two proposals to look at exemptions and exceptions.
There are some details in the proposals, but Story and Barnett said those are unimportant, and the proposals are more like shell bills, with final details to be filled in later if the committee decides to go forward.
“I don’t think a person on the committee, including me . . . would say that is the way I would want to file it,” Barnett said. “The bill itself is really a shell proposal (with the details to be fleshed out later).
“When you have an economy such as we have that is increasingly dependent on the sales tax . . . you need to regularly review the tax base to make sure it can meet the needs of the state, projecting out 20 years from now, as our commission is required to do,” Barnett said. The commission also must look that the tax system “is appropriate based on five and 10 years from now.”
“We are forced to look at the entire pie. We can’t just look at the spending side. We have to look at the revenue side,” said Story. “I think it’s critical that we look at all of the big issues, and I think all of our members take very seriously their responsibilities.”
If the commission does turn to services taxes, Barnett said it will be important to remember the lessons from the 1987 services tax effort, which was repealed after six months and replaced with a hike in the sales tax rate. She noted that 1987 tax did apply to most legal services, but for constitutional reasons exempted fees for criminal defense work.
Story said although the commission’s public hearings are over, members still welcome input, and comments sent to the commission are shared with all members.
“We are spending a lot of time making sure the citizens are heard,” she said.
For more information about the commission, pending proposals, and for ways to comment, visit www.floridatbrc.org.
— Courtesy the Florida Bar News