State Budget Fuss
Those who leveraged their homes during the housing boom into lifestyles they’re now having trouble supporting may take comfort, if cold, in the fact that the state of Florida essentially has done the same thing.
Overall, the state budget rose by more than 36% between 2002 and 2006. But consider one particular source of the revenue the state used to pay for that growth. Between 1998 and 2002, documentary stamp taxes — assessments paid on documents related to deeds, liens and mortgages, mostly involving real estate transactions — averaged 5.6% of total annual taxes collected by the state. By 2003, that percentage had begun rising, to more than 8%. By 2005, more than 12% of all taxes and fees collected were coming from doc stamp taxes; that year, the state took in nearly $2.5 billion more in doc stamp receipts than it did in 2002.
Prudent financial managers ought to know the difference between a windfall and a pay raise. And it should have been apparent that the increase in doc stamps’ share of overall revenue represented a short-lived bulge generated by the real estate boom and not a fundamental change in the tax structure that would provide a long-term, deeper revenue stream. But state lawmakers, as they developed budgets in the boom years, made no allowance for the difference between non-recurring windfall dollars and the level of receipts the state traditionally got from doc stamps. Like many consumers, banks and other businesses, our lawmakers decided to act as if the gravy would go on flowing forever, and spent accordingly.
When you and I get pinched financially, we can give up a vacation or wait to buy a new car. But since government spending is political, it tends to be more structural and therefore less easily reversible than consumer spending. Once added, government programs and employees can be ignored, mismanaged and underfunded, but are difficult to eliminate.
And so the state has built a budget for itself that it can’t sustain. As the post-boom economy shrinks, the doc stamp revenue that grew to provide more than its share of revenue is causing more than its share of pain. Best guesses as of this writing are the state is more than $2 billion in the red this year and could need to reduce the budget by another $5 billion next year. With state revenue projections falling by the month, balancing the books for the current and next fiscal year may be the only issue that matters for the state Legislature in the coming session.
The red ink continues to pool, and it’s becoming clear that it will take both additional revenue and spending cuts to make the numbers add up. Gov. Charlie Crist and Republican lawmakers are still officially holding their noses at the idea of tax increases, but there seems to be some sentiment emerging that an increase to the cigarette tax could be palatable. But even optimistic estimates of how much that could generate still leave next year’s budget several billion in the hole. Will the governor close state offices a day a week? Will lawmakers consider the idea of coupling, say, a 5-cent, one-year-only increase in the gas tax with some economic-stimulus type of infrastructure spending?
The Legislature’s book-balancing challenge may end up being no more than an exercise in political arithmetic — finding some combination of broad cuts and revenues that makes the numbers add up. A more productive and strategic approach is one that CFO Alex Sink — the state’s only top leader with real business experience — has advocated since she came into office. As she told Florida Trend back in May, the state’s budget woes have created an opportunity for it to actually look hard at what it does and decide whether it should keep doing those things — to break that engraved-in-stone dynamic that comes when government spends.
Sink says the state should avoid further across-the-board slashing. Spending on public safety and essential services should be maintained, but managers should comb through each agency looking for efficiencies like those recommended in a recent Florida Tax Watch report. Agencies also need to look at whether they’re charging appropriate fees for their regulatory services, and the state Department of Revenue should review whether it’s collecting all the fees and penalties owed to the state, she says. Only then, Sink believes, should the state look at issues like taxing internet sales and removing tax exemptions.
The Legislature has a once-in-a-lifetime opportunity to restructure state spending in a healthier way. But in striking whatever balance it ends up choosing between spending cuts and additional revenue, the Legislature might keep something in mind.
By my calculations, for at least the last nine years, the total taxes and fees collected by the state each year — sales and use taxes, corporate taxes, fuel taxes, communications tax, waste tire fees, etc. — have consistently amounted to around 4.6% of Florida’s gross state product. From year to year, that relationship hasn’t varied by more than three-tenths of a percent. Economic ups and downs over the past decade didn’t change it. Nor did the various tweaks the state made to its tax system during that period. Those tweaks included significant moves like dropping the state’s intangibles tax, which nominally lopped a billion dollars off the government’s tax receipts.
Ultimately, however, even that measure had less to do with how much money the government took in than how well the economy did. For every $100 the economy of Florida generates, the state seems to get about $4.60.
In that context, the Legislature should look at taxing and cutting guided by which approaches will ultimately help the state’s economy grow over the long term. If we want the government to have enough money do its job, the best prescription is always a healthy economy rather than taxation.
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