Broken breaks: Tax breaks that are difficult to change
Time can render some tax breaks unequal or unfair. But once enacted, they're difficult to change or eliminate.
In 1981, hoping to tap into a growing industry and spur job growth in Florida, state lawmakers created a tax break for banks. The measure allowed banks to deduct income they earned from international banking when calculating their state corporate income taxes, effectively exempting a portion of their profits from Florida tax.
The goal was to entice banks engaged in international banking to locate their physical facilities in Florida — and, in doing so, add more accountants, loan officers and other high-earning, white-collar employees to the state's labor force. The tax break was restricted only to banks based in Florida that did international banking.
Thirteen years later, Congress rewrote the nation's interstate banking laws. The changes freed banks to begin doing business across state lines — and undermined the international banking incentive. The looser federal laws meant multistate banks could claim the Florida tax break even if their international banking facilities were in New York or San Francisco.
State legislators still haven't revised that tax break, which costs Florida about $11.5 million a year.
Corporate tax returns are confidential, and companies are circumspect when asked about whether they claim it. Wells Fargo, which has an extensive international banking business, says it does not have an international banking facility in Florida. But it will not say whether it claims the Florida deduction. Bank of America and Citigroup both declined to discuss the issue at all. All three are involved within industry groups that have lobbied in recent years to preserve the tax break, including the Florida Bankers Association and the Florida International Bankers Association.
David Schwartz, president and CEO of the international bankers association, acknowledges the flaw. But he also says there are many banks that have international banking operations in Florida — particularly in Miami, a hub for trade with Latin America — that have come to depend on the savings. That includes at least 20 foreign banks, he says, that could easily move elsewhere if the tax break were repealed.
"Right now, we're already struggling because of all the compliance costs and regulations to keep a lot of this business here," Schwartz says. "If we start taking away those types of incentives, then you may see this type of business move offshore or even to other states."
A few years ago, Florida lawmakers discussed trying to tighten the tax break to ensure that only banks with international facilities in Florida could qualify. But even that proved complicated. Industry lobbyists pitched a proposal that would have narrowed the number of banks eligible for the tax break — but also reworked the calculation in such a way that it would have greatly increased the amount of total tax savings. The idea was scrapped, and lawmakers haven't revisited the issue since.
The insurance industry benefits from an even larger tax break.
For years, Florida exempted all Florida-based insurance companies from having to pay the state's insurance premium tax. But in 1985, in a case that pitted MetLife against the state of Alabama, the U.S. Supreme Court ruled that such preferences for in-state insurers were unconstitutional. In response, the Florida Legislature revised the tax break to give all insurance companies a credit against their insurance premium taxes equal to 15% of the salaries they pay to employees based in Florida.
The break has been steadily expanded over time, including changes made about 10 years ago to enable MetLife and workers' comp insurer FCCI to benefit. Today, it costs the state about $297.3 million per year.
Much of the benefit accrues to a handful of large insurance companies. Florida Blue, for instance, saves approximately $32.5 million per year, according to its lobbyists. Property insurer State Farm saves about $25 million per year.
In 2013, the Florida Senate passed legislation that would have eliminated the tax break and used it to lower vehicle registration fees paid by Florida drivers. Legislative researchers said at the time that only one other state — Arkansas — offered a similar, across-the-board salary credit to insurers. State Sen. Don Gaetz, the Niceville Republican who was then president of the Florida Senate, called the tax break "an antiquated government subsidy for the insurance industry."
Just as banking lobbyists fought to maintain the international banking deduction, insurance industry lobbyists have worked hard to keep their tax credit. Jason Altmire, a former member of Congress who now lobbies for Florida Blue, says the salary credit is an incentive that has persuaded many insurance companies to move jobs to this state. Repealing the tax credit, Altmire says, would mean "increasing the cost of business" on insurers and slowing their future growth.
"It's counterintuitive to think that if you increase taxes and disin-centivize Florida growth that that is in any way going to help with what Florida Blue is trying to do," he says.
The industry's arguments proved persuasive in 2013. The Florida House of Representatives, led then by former House Speaker Will Weatherford (R-Wesley Chapel), rejected the Senate proposal. The issue hasn't been debated since.
A third longstanding tax break may not be so lucky.
In a fight that pits the state's two largest airlines against one another, No. 2 Delta Air Lines is lobbying Florida lawmakers to eliminate a 20-year-old break that benefits No. 1 Southwest Airlines more than any other company.
At issue is an incentive lawmakers created in 1996 in hopes of attracting new airlines to Florida. The incentive offers a full credit for or refund of the state tax on aviation fuel to any air carrier offering transcontinental jet service that increases its Florida work force by more than 1,000% and by at least 250 employees. But it uses a baseline of Jan. 1, 1996 — meaning any employees that an airline had in Florida before that date don't count toward the 1,000% growth requirement.
It has become a windfall for Southwest and other low-cost carriers who have grown into major airlines since 1996. Southwest saved about $12.6 million in 2013-14.
JetBlue Airways, which wasn't even founded until 1998, saved about $8 million.
Meanwhile, carriers such as Delta are essentially frozen out of the incentive, having lost market share and shrunk over the years relative to the low-cost carriers — particularly in Florida, where traffic tilts heavily toward price-conscious leisure travelers.
Delta has asked legislators to eliminate the growth incentive and simply roll back the aviation fuel tax rate from 6.9% to 5.4%. The airline's proposal would have reduced its own tax bill by about $2.1 million in 2013-14 — and raised Southwest's by $9.9 million.
"We look at this issue as an issue of parity with the current competition," says Delta spokeswoman Kate Modolo.
Lawmakers have also discussed reworking the incentive to make it possible for any carrier to qualify, an idea that would likely soften the hit to Southwest. But Southwest lobbyists warn that any changes are likely to force it to curtail some flights in Florida, some of which it says operate at just barely above break-even. The airline also wants lawmakers to make sure any changes don't take effect for five years because it plans its route network in five-year cycles.
Southwest says it currently flies from eight airports in Florida, carrying a million passengers to and from the state per month and employing about 4,400 workers. "An increase in the fuel tax would significantly limit or restrict our ability to invest in growing and adding air service in the state of Florida," says Southwest lobbyist Jason Van Eaton.