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The State Of Taxes
In the short term, however, new sources should not be needed. General revenues are predicted to grow more than $800 million in the 1997-98 fiscal year. That increase is less than current budget requests, but an amount that the state probably can live with. Of course, if the economic outlook turns gloomy, all this changes.
While the revenue picture is favorable, this would be a fine time for Florida to reform its basic tax structure and to reconsider the tax sources upon which the state relies.
One proposed change in taxes that is likely to garner strong support in some quarters is a phase-out of the intangibles tax that individuals pay on stock and bond portfolios above $20,000 ($40,000 if married and filing jointly) and businesses pay (with no deductible amount) on their accounts receivable as well as on their stock and bond holdings and related items. (At least for now, the one-time 2% tax on mortgages would not be eliminated.)
Sen. John Ostalkiewicz, R-Orlando, chairs the Finance and Tax Subcommittee, and he objects to the intangibles tax. He feels it inhibits economic development. It is a business tax that only five other states still impose. Thus, it places Florida at a disadvantage vis-?-vis other states in the race to attract business. Ostalkiewicz would like to phase out most of the tax for businesses, allow a deduction for trusts and corporations, and limit the intangibles tax on individuals to very wealthy taxpayers.
Adopted overnight, the short-term revenue losses of such a proposal would require new taxes. But phased in over time, the argument goes, the resultant long-term economic expansion would generate enough tax revenue to offset losses from the intangibles tax.
Florida State University Economics Professor Randall Holcombe agrees that the intangibles tax constrains economic growth. He also views the intangibles tax as unnecessarily burdensome in light of the relatively small amount of money it raises. Indeed, the intangibles tax on individuals provides only a little more than 1% of Florida's general revenue collections, a projected $210 million out of $16 billion for fiscal year 1997-98, with another $105 million going back to local government. By design, the intangibles tax hits Florida's wealthier citizens. But the argument that this tax helps to make Florida's overall tax structure more progressive, with higher-income individuals taxed at a higher rate, is misleading. The intangibles tax does not raise enough money to make any real difference.
Another problem is that the intangibles tax can be avoided - legally by wealthy taxpayers who know the right kind of trust fund to create and illegally by others, because very few intangibles tax returns are subjected to a detailed audit. A point in favor of the intangibles tax is that individuals may deduct it on their federal income tax return; a point against, it is the only state tax that requires affected individuals to file a tax form. About half-a-million Florida households file an intangibles tax return.
Businesses account for another half-million intangibles tax returns and revenues of roughly $475 million, with $315 million going to general revenues and $160 million returned to the counties. From a business standpoint, the tax on accounts receivable is particularly onerous because receivables usually turn into cash fairly quickly, but cash is not taxed. Also, some receivables are actually bad debts, which ought not to be taxed.
One possible legislative compromise would be to raise the deduction amount for individuals to $100,000/$200,000, with a consequence of $40 million less in revenue and 240,000 Florida households that no longer have to file an intangibles tax return. Households exempted would include mostly elderly widows and widowers, lower-middle income retirees, the young and generally people with few assets.
Of course, the Legislature is no longer the only player in tax matters. In 1994, an amendment to the Florida constitution was adopted that makes amendments by citizen initiatives easier to formulate; that year, an amendment also passed that tied the allowable increase in state revenue collections to the five-year average of income growth in the state. Currently awaiting Supreme Court approval prior to going on the 1998 ballot is a proposed amendment that would require a citizen referendum to approve any tax increase.
Whether the intangibles tax is phased out or not, when the day comes that the Legislature needs to seek new revenue sources, the logical source would be a reform of the sales tax to cover a broader range of economic transactions. Florida's primary revenue source, projected to yield more than $11.5 billion during the 1997-98 fiscal year, the sales tax hits lower income families a bit harder than wealthy families and is rife with exemptions and loopholes. The exemption on services alone totals about $9.5 billion in sales tax revenue forgone.
While the food and medicine exclusions almost certainly should be retained in order to reduce the impact of the sales tax on low income families, adding many services to the list of taxed items would bring the sales tax more in line with consumer-spending patterns. Presently, only about 55% of personal income in Florida is spent on items subject to the sales tax, a decrease from roughly 75% 20 years ago. Individuals spend more money than they used to on services, ranging from cleaning services to legal fees, that are exempt from the sales tax.
A recent survey of Florida TaxWatch members turned up almost as many complaints about the intangibles tax as about the sales tax. But the sales tax raises 18 times the general revenue money that the intangibles tax raises. If the argument is not how much the state should raise through taxes, but upon which tax source the state should rely, then perhaps the intangibles tax deserves to be phased out.
Charles E. Rockwood is a retired Florida State University Professor of Economics who chaired Governor Graham's Economic Advisory Committee.
