The Honorable John McKay
President
The Florida Senate
The Honorable Tom Feeney
Speaker
Florida House of Representatives
Dear President McKay and Speaker Feeney:
In my State of the State Address, I pledged to facilitate full,
honest and transparent dialogue on the Senate tax plan. To that end, I
raised several important questions concerning the impact that a
massive tax overhaul would have on Florida's business climate.
So far, the accelerated discussion of the reform plan has focused
primarily on the tax collectors in Tallahassee, rather than the
taxpayers throughout Florida. Government expansion has been the
concern, not economic growth and job creation.
Now, as this tax plan moves to the House of Representatives, I
believe it is appropriate to offer my specific thoughts and concerns
based on testimony provided to the Florida Senate; research conducted
by the Governor's Office; economic theory and principle; and my own
experience as a businessman, a former Secretary of Commerce and
Florida's chief economic development officer.
As Governor, I am also committed to represent all the people of the
State of Florida, not just those who are most vocal about reform,
whether they are business interests concerned about the impact of the
proposal or others seeking growth in government. Seemingly left out of
the debate are those Floridians who are busy raising their children,
trying to support their families with dual incomes, and going about
their everyday lives - Floridians who must shoulder the burden of tax
reform either through higher prices, lower wages, or lost jobs. While
I applaud the Senate's passion for debating Florida's system of
taxation, I have come to the conclusion that I cannot support the
proposal passed by the Senate. I cannot support a proposal that will
lock into our Constitution any plan that does not embrace the
fundamental principle that government should not grow faster than our
ability to pay for it. I believe now more than ever before that the
true issue lies not in how much the government takes, but in how much
the government spends. Regardless of its intent, this tax reform is a
government spending plan.
I will outline the specific reasons for my opposition in two ways:
by refuting six premises that provide a shaky foundation for this
proposal, and by answering critical questions as yet insufficiently
answered about the impact of the proposal on Florida's personal and
business taxpayers.
The Six Premises for Tax Reform
I believe that our tax structure is an asset, and not a liability
as some have suggested. Just consider Florida's job growth compared to
other states during the slow growth period of the last year. As the
The New York Times reported, while the nation as a whole lost one
million jobs in 2001, Florida increased employment by 138,000 jobs.
Economists, entrepreneurs, small businesses, Florida's own State Tax
Reform Task Force, and average Floridians alike believe our tax
structure is fundamentally sound.
Premise 1: We are facing a revenue crisis. Revenues are meeting
Florida's budget needs. During the 1990s, sales tax collections as a
percent of personal income actually increased, from 3.3% in FY 1990 to
3.5% in FY 2000, even as total state collections declined as a percent
of personal income over the last three years. Over the last 20 years,
growth in government spending per person has outpaced Florida personal
income per person by nearly 61 percent. Furthermore, current long-term
forecasts of the Revenue Estimating Conference suggest that over the
next ten years, sales tax collections will grow very closely in step
with total personal income.
Our taxes are growing at the same rate as the economy, and we
should not increase them. Floridians deserve a committed effort from
the Legislature and the Governor to find better, smarter, more
efficient ways to accomplish our priorities, rather than requiring our
hard-working citizens to give an everincreasing portion of their
income.
Premise 2: We will "lose" approximately $4 billion in
revenues by 2006. First, I must refute this claim on principle. Those
items and activities left untaxed do not represent a revenue
"loss" for government. If they did, then the sales tax
exemption on food, for example, would represent a significant revenue
"loss." In theory, the state could tax almost anything or
any activity, but the fact that we choose otherwise does not represent
a revenue "loss" for Florida in each case.
Regarding the $4 billion figure, Congress passed legislation that
will stop taxing people's property after they die. I support that
decision. This will impact our revenue projections by a little less
than $1 billion over the next four years.
The remaining $3 billion of the cited $4 billion is attributed to
revenue losses from remote sales, via either mail order or the
Internet. The University of Tennessee estimates cited by some reform
proponents do not hold up well under close scrutiny. The attempt to
project for every state forced the use of overly-simplistic methods,
wholly inadequate in accounting for the idiosyncrasies of each state's
economy and tax structure.
For example, approximately one-half of the $3 billion in 2006 is
attributed by the study to "trend loss," which is defined as
revenue losses due to broad cultural shifts in consumption away from
goods to services. That estimate did not use numbers from Florida's
Consensus Revenue Estimating Conference, which already accounts for
this change in consumer behavior and projects virtually no trend loss.
The study also estimates the other half of the cited $3 billion to
be the result of e-commerce losses. To generate these estimates, the
study had to make numerous assumptions about how much of the national
e-commerce estimate was taxable/non-taxable, business-to-business, and
business-to-consumer, and how much of taxes owed would actually be
paid. The heavy reliance on unverifiable assumptions to
"estimate" the tax losses is a good reason for caution when
basing decisions on the numbers.
The Florida Department of Revenue recently indicated that the
estimates of e-commerce tax losses for Florida are certainly inflated.
The University of Tennessee's estimate for 2001 is $932 million. DOR
is suggests that the number is closer to $225 million, a 76 percent
overestimate. The difference is due to disagreement on the assumptions
about how much taxable business-to-business activity will be captured.
Given the apparent error in the 2001 estimate, the 2006 estimate
should suffer from a proportionate degree of inaccuracy.
Therefore, the most important reason expressed for the need for
changes in our tax code, the $4 billion shortfall is not close to
being correct.
Premise 3: The Senate Plan will raise enough revenues to make up
the cited $4 billion. The goal of making the tax system more
"adequate," suggests that the objective is to somehow raise
more revenues than the current system provides. Based on numerous
comments made during Senate hearing and floor debate, this certainly
appears to be the expectation of some of the Senators who voted for
the measure.
Even if one assumes the $4 billion "loss" projection, the
Senate plan will not make up the difference. With revenue neutrality
required in FY 2004-05, generating an additional $4 billion in the
succeeding year or two from the base expansion would require annual
growth rates in the newly taxed portion of the base in the range of 50
to 100 percent. Given that it took the proposed base-expansion sectors
about 9 years to grow by 100 percent in the 1990's, the proposal
cannot provide a revenue increase of that magnitude, even before
accounting for the potential loss of jobs and economic activity that
could result from enacting the Senate plan.
Premise 4: The Senate plan is "revenue neutral." This
statement is clearly contradictory to the premise that the plan would
raise more revenue than the current system. If the goal is to raise
revenues, then proponents should be straightforward with Floridians
and tell them that they think current revenues are simply inadequate
and that we need to increase taxes, rather than hiding behind the veil
of "revenue neutrality."
Premise 5: The tax structure is unstable and exaggerates economic
fluctuations. Broadening the tax base, it is argued, will make tax
revenues more stable and will render vital state services less
vulnerable to disruption during economic downturns. Proponents,
however, have not demonstrated that the proposal will provide any
significant degree of state budget protection from the business cycle.
If the additional goods and services proposed to be added to the tax
base are more stable than the current tax base, all the old "less
stable" elements will still be there during an economic downturn.
At best, the plan can provide a marginal improvement in tax revenue
stability. Based on past recessions, it will certainly not protect
vital state programs from revenue shortfalls that inevitably occur in
economic downturns for all state governments.
One does not have to look beyond this recession to see that there
are many other states with broader tax structures experiencing even
worse revenue shortfalls than Florida. For example, California's
shortfall represents at least 7.7% of its total budget and
Massachusetts anticipated a deficit equal to 5% of the state's total
budget. By comparison, Florida's shortfall was 2.8%.
Premise 6: The current tax system is not fair and is illogical. It
is argued that current exemptions protect special interests while
Florida households must pay higher taxes -- that a "fair"
tax system will spread the tax burden equitably across all segments of
society (i.e. businesses should pay more taxes directly). This
argument makes good intuitive sense, and it makes good economic sense
if the goods and services taxed in "all segments of society"
are subject to the same tax rate. But one of the reasons economists
argue against levying sales taxes on business inputs, as the plan
suggests, is that taxes will pyramid up through the cost structure.
Consequently, the effective tax rate on the end product will differ
among final goods and services, depending on the mix of taxable inputs
that are used in their production/delivery. Economic theory suggests
that extensive taxation of business inputs can result in inequities in
the tax structure.
Questions About the Impact of Tax Reform on Florida's Economy and
Families
Usually during the legislative process, questions raised about
substantial reform are answered in committee hearings or in floor
debate. However, in this particular case, many questions went
unanswered, and those that were answered only raised more questions.
The following are questions that I feel are of critical importance,
but which upon our own study and reflection yield discomforting
conclusions:
How will the plan really affect businesses and jobs in Florida?
Will we be able to keep a competitive position that is the envy of
many states? Testimony from manufacturing and agricultural
representatives indicates that taxation of transportation services
would increase the costs of those industries in Florida, potentially
threatening their location in this state. Florida will be the only
state in the nation to subject freight transportation to the sales
tax. There was also testimony that taxation of transportation services
could have a significant competitive impact on Florida's air and
seaports.
Economist Dr. Hank Fishkind -- an advocate of the Senate Bill --
noted in his testimony that waterborne transportation would have
difficulty passing the tax on, which means the tax would eat into
wages, capital, and employment in that industry. As well, testimony
was given that correctly stated that the bill is
"anti-headquarters" legislation because of taxation of
inputs used heavily by headquarters operations (e.g., accounting,
legal, consulting, among others)
How will small businesses be impacted? Small businesses are the
principal driver of our economy. These enterprises generally outsource
much of their professional service needs because they cannot hire
full-time employees to provide these services. They will pay a
disproportionate amount of this new tax. While proponents claim
through hypothetical examples that small businesses will not be
adversely affected, they have not provided hard data to show that the
new taxes will be offset by the 1.5% reduction in the overall sales
tax rate.
Will the state's economic growth be adversely affected? Based on
testimony, there would be an adverse impact. Numerous repealed
exemptions are in areas that are sensitive to interstate and
international competition, and could pose a threat to the viability of
those activities in this state. Included in this group are investment
offices, consulting services of various types, motion picture/TV
production, some transportation services, research, development and
testing services, and our emerging technology companies to name but a
few.
How will this affect the size and scope of the tax bureaucracy? How
much bigger will it have to get? The Department of Revenue will
increase in size to fully implement the Senate tax plan. In order to
audit and enforce compliance of the new businesses required to file
taxes, the Department's preliminary estimates project that over 200
new employees will be needed, a 10% increase in the general tax
administration personnel. Most of the new positions will be auditors
and enforcement/collection specialists. The funding for these new
positions will require an additional $10-11 million in general
revenue.
How much more complicated will the tax code become? How difficult
will it be for both taxpayers and the Department of Revenue to fall
into compliance? The tax code will get bigger and more complex in
order to accommodate the taxation of a new set of heretofore- untaxed
activities. This means there will be new definitions, new rules for
determining where taxable services actually occur for taxation
purposes, and new rules for distributing taxable services among
different jurisdictions, to name but a few.
- In 1987 the Dept. of Revenue Emergency Rules for implementing
the services tax took130 pages (single-spaced) to explain.
- In 1987, the portion of the Florida Statutes pertaining to the
sales tax grew by 19 pages (46%) from 41 to 60, as a result of
the services tax.
- There will be a 34% increase in the number of businesses (from
500,000 to 670,000) that will have to register as tax dealers
and learn how to collect taxes for the state. The complexity
they each face will depend on the activity being taxed and the
specific rules, not yet developed, that define how they are to
be taxed.
- Public testimony, particularly from small business groups
highlighted concerns about the additional cost, in money and
time, of having to undertake this task for the state. The
maximum of $30 per month that businesses can get as a dealer
collection allowance hardly serves as adequate compensation.
Will this plan result in more tax pyramiding-or taxing taxes? The
plan will result in more tax pyramiding because it is shifting sales
taxation away from final consumption of goods and services by
households to consumption by businesses. To the extent that businesses
build the cost of the new taxes into their own prices, and those
prices are in turn subject to sales tax, pyramiding would occur. Dr.
Fishkind even testified that the taxation of transportation services
would result in pyramiding.
How will consumers really be affected? Will households actually
save money? Or will businesses just pass the taxes on so consumers end
up paying anyway? The full effects cannot be quantified with much
accuracy. Dr. Fishkind presented estimates that the average Florida
family will save $250 annually under the Senate tax plan. By Dr.
Fishkind's own admission, this is an estimate of the direct savings
and does not account for the increased business taxes that will be
passed on in price increases to consumers. Businesses will pass on the
increased taxes if they are able. Otherwise, there will be adverse
effects on wage or business income if businesses cannot pass the taxes
on to consumers. Either way, our people will pay.
Will tourists pay less and Floridians pay more? It is clear
tourists will pay less, since only some of the goods and activities
that tourists buy will continue to be taxed at 6 percent. If the plan
is revenue neutral and tourists will pay less, then Florida residents
will certainly make up the difference. In addition, in viewing the
list of services to be newly taxed, it becomes clear that most of
these services are rendered for the benefit of Floridians. Legal,
consulting, engineering, employment, accounting, banking, freight
transportation are all services provided primarily to Floridians, not
tourists. Despite Senate efforts to retain tax levels that apply to
tourists, Floridians will still be paying for the new taxes enacted,
not our seasonal visitors.
What of investment climate uncertainty? I am concerned about the
impact that passage of the Senate bills would have on our ability to
continue to attract job-creating business investment to Florida. While
the implementing bill is very prescriptive in what is exempted, there
will still be much leeway for the next Legislature to change what is
exempted and what is not. Using history as a guide, the uncertainty
will have a chilling effect on the economic development efforts of our
state. Adding an uncertain tax code to already difficult economic
times will hurt our chances to continue to recruit and retain higher
wage jobs for Florida families.
In sum, while the Senate tax plan is the product of a sincere
effort, it is clear that its flaws are in no way grounded in intent,
but in faulty premises and adverse consequences. Again, I have
appreciated the opportunity to follow the discussion on tax reform,
and restate that my conclusions are based solely on principle and
experience. They should not be interpreted as anything more than that.
History may prove me wrong on these conclusions. But, as Florida's
Governor, I have an obligation to weigh in on issues of significance
to the state, and this well-meaning reform certainly rises to that
occasion. Thank you again for affording me the opportunity to share my
perspective on this important issue.
Sincerely,
Jeb Bush
Cc: Sen. Jim King, Senate Majority Leader
Rep. Johnnie Byrd, House Speaker Designate
Rep. Jerry Maygarden, House Majority Leader
Sen. Tom Rossin, Senate Minority Leader
Rep. Lois Frankel, House Minority Leader
