Florida Tax Reform

MANATEE COUNTY, Fla. – Feb. 27, 2007 – Capping government spending. Doubling homestead exemptions. Rolling back property taxes. Repealing the state's property tax system in favor of the nation's highest sales tax. These are some of the property tax proposals flying around Tallahassee with a clamor and discord this state hasn't seen in recent memory.
State officials seem to favor at least some version of property tax reform. But as legislators meet this spring, they'll have to weigh the ire of second-home and business owners with the pressing needs of local governments that contend the expanded waistline of budgets have had to keep pace with the needs of burgeoning populations.
"I like the idea that we're being very bold in how we're addressing the issue," says state Rep. Bill Galvano, R-Bradenton. "This is the first proposal where I've seen somewhere make up the difference, and that's important to me. Having said that, I think more homework has to be done."
Perhaps the first homework lesson could be a brief overview of economic policy-making around the United States. Other states around the country have tried or are currently considering many of the reforms facing Florida today.
Colorado residents learned the hard way how government spending limits can stunt the prosperity of a state, after more than a decade of spending caps that limited the state's ability to fund education, health care and other essential services. Enacted in 1992, the Taxpayer Bill of Rights, or TABOR, awarded taxpayers rebates if more revenue was collected than could be spent under the state spending cap. Revenues were limited, but state-mandated programs such as education and prisons still had to be funded.
"Essentially, we had our foot on the brake and the gas pedal at the same time," said Evan Dreyer, from Colorado Gov. Bill Ritter's office. "In times of recession, it made it difficult to recover from pre-recessionary levels. There was a growing concern from the business community about the unintended consequences on the ability of the economy to grow."
Voters in 2005 narrowly approved Referendum C, which lifted spending caps on a five-year trial, allowing the government more flexibility to pay for essential services.
"We were seeing programs people cared about being squeezed," said Bob Kling, an assistant professor of economics at Colorado State University. "Primary education, higher education, roads. The mandatory parts were suffering. There were some very strange, perhaps unforeseen implications for the way TABOR was written."
Since Referendum C was enacted, the state's budget has been significantly less constrained and there is more funding for essential services, Kling said. State officials will decide in 2010 whether to ask voters to extend Referendum C or return to spending caps. But history shows the measure helped right that state's monetary ship.
"Ref-C was an important step in our economic recovery," Dreyer said.
Comparing solutions
Comparing other state's taxing systems to Florida's is a bit like comparing apples to grapefruit considering the vast differences among state economies and the varying demographics of property-tax payers.
Still, there's much that can be learned from what other states have experienced and are considering, according to Harley Duncan, executive director of the Washington, D.C.-based Federation of Tax Administrators. The federation is a group of state revenue and tax departments that focuses on taxing policies. Property tax reform has been the hottest issue of the year for state governments around the country, Duncan said.
The tax reform proposals from Gov. Charlie Christ and House Speaker Marco Rubio drew both praise and criticism over the past two weeks, but most of their proposals seem to at least borrow from what other states already are considering.
There have been attempts to solve assessment inequities by freezing property tax valuation levels, or limiting the amount they can go up each year. New Jersey, Pennsylvania and South Dakota are each considering some form of limiting property tax assessments, Duncan said.
Homesteaded owners in Florida already receive a 3 percent per year cap, which limits taxable values from skyrocketing along with market values.
Other states are considering controls on local government spending. Perhaps these amendments have the most momentum, since state authorities often shoulder the blame for stifling tax rates.
"It's very frustrating to have responsibility for property tax, but they're not the ones who set the tax rate or determine how much local governments are going to spend," Duncan said. "It adds to the state-local tension -- and that's why you see limits."
Rubio's plan would establish a baseline for taxation by rolling back property taxes to 2000-2001 levels, adjusted by a formula based on inflation and population growth. Local governments could decide to go over the cap with only a two-thirds vote or a simple majority if two-thirds is not possible.
New Jersey, with the nation's highest property tax rates, is considering offsetting property taxes with a 1 percent sales tax implemented last year, according to Stateline.org. The measure would save the average homeowner $1,000 a year and would restrict annual property tax increases to 4 percent.
Some states will consider using state money to "buy down" property taxes, Duncan said. States such as New Jersey, Pennsylvania and New York would provide direct rebates to taxpayers with state money. Duncan said this is the most common approach being considered, but neither of the plans on the table in Florida call for the state to provide rebates.
Florida, Duncan said, seems to be proposing some of the boldest property tax reforms, and he questioned the feasibility of some of the changes. The most drastic piece of Rubio's plan calls for voters to decide whether to abolish property taxes in favor of an 8.5 percent sales tax, which would be the highest in the country.
"I'm not aware that anyone is proposing going as far as Florida. To totally eliminate the property tax and shift to other sources of funding . . . It's pretty hard to replace the whole thing."
Dramatic proposals
Under Crist's plan, homestead property owners would see their exemptions double from $25,000 to $50,000. The homestead exemption also would become portable so that homeowners would be able to buy larger or smaller homes within the state without losing the 3 percent cap. Finally, Crist would make second-home owners and commercial property owners eligible for the 3 percent Save Our Homes cap.
Rubio also has suggested the Legislature approve a rollback of about 20 percent on all property taxes. A second phase that would require a referendum would eliminate property taxes on all homesteaded properties. The Legislature also would increase the sales tax 2.5 cents on the dollar, to implement the nation's highest sales tax. There also would be spending caps imposed on counties and municipalities.
Harvey Duncan pointed to Ohio and North Carolina as two states that have implemented successful tax reform. The state of Ohio simply repealed a homestead-like exemption for commercial and industrial business. Local governments get the money those taxes would have generated, and can allocate the funds for local projects, said Gary Gudmundson, communications director for the Ohio Department of Taxation.
Separately, a Commercial Activities Tax imposes a .26 percent on business revenue over $1 million. The first $1 million is taxed $150 and together the taxes create revenues to reimburse local governments for another tangible property tax that was phased out.
"For decades, the tangible property tax was identified as a troublesome tax for the economy of Ohio," Gudmundson said. "With it going away, the burden has shifted off manufacturing and now there's a greater inclusion of tax on the service sector of the economy."
'Wrong direction'
Jonathan Hamilton, chairman of the economics department at the University of Florida, said the real solution to Florida's tax woes is simply lowering property tax rates.
"The one thing where I'm seeing relatively little discussion, is lowering property tax rates for everybody," Hamilton said. State officials "seem to be talking about a very targeted tax rate reduction, and there are a lot of reasons why it's not the brightest idea."
Moving from property tax collections, considered a particularly stable form of taxation, to increasing reliance on sales tax "seems like a move in the wrong direction" that could eventually hurt the state's bond and credit ratings, he said. To find a real solution to local government spending, Hamilton said, "voters are welcome to elect officials who are going to cut property tax rates for them if they think they're higher than they need."
State representatives say they want to learn all they can about the current proposals being discussed. They also will take into consideration the views of property owners at forums around the state.
Rep. Ron Reagan, R-Bradenton, threw his support behind Rubio's plan. "We're responding to what the people in the state of Florida have said," he said last week. "This is going to allow more people to buy more homes."
Sen. Mike Bennett said Florida's property tax system is "truly out of whack" and he endorses change to prevent business from leaving the state. But he did not endorse the current proposal yet, saying he was "investigating" it.
"Government is not free," he added.
As Galvano said, "I think at this point, what we've done is run it up the flagpole and really start the discussions."