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Reforming Florida’s Tax Structure

November 9, 2001
Source: Senator John M. McKay, President of the Florida Senate

I am here to talk with you about tax reform. Many of you may wonder why I am tackling such a politically difficult task as the reform of our tax structure.

I do so for the same reason that I support school vouchers for students with disabilities – not because it is popular, but because I believe it is the right thing to do. I believe this effort will make a difference in Florida, long after I leave public office next year.

Our state already faced great challenges prior to the events of September 11. Stung by the human and emotional loss, we now find ourselves grappling with the economic consequences of that devastation.

Prior to those tragedies, I believe Florida’s tax structure should be revamped. With the realization of the damage done to our economy in the last two months, particularly as a result of our over dependence upon tourism, I believe that now more than ever.

Let me first tell you why our current tax structure needs to be reformed.

In the simplest terms, we have an antiquated system requiring modernization. Today, Florida’s single largest source of revenue is our state sales tax, created in a different era by the 1949 Legislature. You can imagine what a different state Florida was at that time.

With a population of 2.25 million, Florida was the 20th most populated state. Today we are the 4th and have a population approaching 17 million. That year, along with the sales tax, the Legislature passed a $240 million biennial budget. Today, the annual budget is approximately $50 billion.

That year the Legislature deemed it necessary to outlaw livestock from our highways. Our state constitution required a poll tax, and segregation was still legal in our public schools.

The average salary for a week’s work was $40 dollars, and 17% of our workforce was employed in agriculture, compared with only 3% today. Robert E. Lee’s birthday was celebrated on January 19th, and our state budget still provided for confederate soldiers’ pensions.

Exemptions from sales tax were provided for automobiles, and to places of amusement costing less than 41 cents.

It was a different time with different needs.

In most areas, our state has kept abreast of changing times. In others, we have led the way.

We have embraced Civil Rights legislation and the concept of "one man one vote." We have made sweeping changes to our education system so that all children, regardless of means, have access to a world class education.

We have endeavored to reform Florida’s Cabinet structure, and have instituted zero-based budgeting to achieve fiscal accountability by our government agencies. We have witnessed fundamental change to our tort structure and succeeded in transforming our welfare programs to give those who want to work the opportunity to do so.

And yet, we still rely on the same basic approach to funding our state’s needs that was developed 25 years ago.

I have never been one to advocate change just for the sake of change, so let me get specific about our current system’s problems.

The key flaw is that this system does not mirror Florida’s current economy and is too subject to economic fluctuations. Consequently the current system is not capable of meeting Florida’s long-term needs.

Next year, Florida will collect approximately $17 billion annually from its sales and use tax. However, we will exempt approximately $23 billion in taxes, and it is the exempted portion of our economy that is growing the fastest. This means that we are increasingly becoming more dependent on a relatively shrinking resource.

In 1964, the sales tax applied to approximately 68 percent of Florida’s economic activity. Today, the sales tax applies to only 55 percent. Simply put, Florida’s tax system is not in sync with today’s economy. 

The disjoined evolution of the sales tax has also resulted in numerous examples of tax exemptions that make no sense. Let me give you a few: 

  • Hair care products are taxed; Hair cuts are not.

  • Laundry detergent is taxed; Dry cleaning is not.

  • Lawn Mowers are taxed; Lawn care is not.

There is no rhyme or reason to this pattern.

Finally, beyond these issues of economic efficiency, the current tax structure is basically not fair to the average household. While a broad array of exemptions protect special interest, the average Floridian pays a 6% state sales tax on many basic household purchases.

Is it fair to tax clothes or a new washing machine at a high rate, but not services by lawyers or accountants? What is sacred about these latter types of products? A fair tax structure is one that spreads responsibility equitably across all segments of society.

Our Tax structure is antiquated and should be modernized to reflect the state’s 21st century economy. As business people, each of you plan for the future. As a tax payer, you should accept no less from your state government.

Now that we’ve identified the problem, let me explain my solution. In crafting this proposal. I enlisted the aid of the business community, economists , and average citizens. My proposals are based upon the common sense recommendations and the technical advice that I received from these folks.

I propose a constitutional amendment to decrease the state sales tax rate from 6% to 4% and yet maintain the same level of revenue by broadening the base through the repeal of a variety of current exemptions. Just as we have been advised to diversify our investment portfolios, Florida must diversify its revenues sources.

A broader tax base should be more reflective of Florida’s current economy. Let me be clear that I am not proposing a tax increase. I cannot over emphasize this point – my proposals are revenue neutral. This is an initiative for smarter government, not bigger government.

To maintain fairness in the system, certain basic needs must be protected. There will be no sales tax on groceries, residential rent, health care services, prescription drugs, or the basic residential telephone service that many seniors rely upon. Everything else is on the table.

My proposal will also allow for the elimination of several antiquated and inefficient taxes. The "drink tax’" the "hospital bed tax," and the intangibles tax will be eliminated. In addition, the sales tax on utilities paid by business would be lowered from 7% - 4%.

Since its enactment in 1949, the Legislature has raised the sales tax from 3% to 6%. Any tax reform measure must protect Floridians from unnecessary increase in the future. Further, we must also be sure that any future exemptions are carefully evaluated on the basis of sound tax principle – not on the basis of politics.

Exemptions that made sense 25 years ago, or even 2 years ago may not make sense today. To achieve these protections, I will include two other components in the proposed constitutional amendment.

First, the amendment will require a 3/5’s vote of both legislative houses before the sales tax can be raised.

Second, the amendment will require a 3/5’s vote of both legislative houses before any new exemption can be adopted. These super – majority votes will help to ensure responsible policy decisions and restrict the Legislatures ability to unnecessarily raise taxes in the future.

What will the critics say? Some may say that this is just the old services tax revisited. That is not correct. While some services will be taxed under my plan, there are significant differences between the 1987 services tax proposal and this one.

That one was reactive, this one is proactive. While the 1987 legislation involved a tax increase, my proposal, while taxing products that are currently not taxed, is a revenue neutral plan that reduces the basic tax rate by ½. My proposal also safeguards against future tax increases – that one did not.

Critics will also argue that this really does represent a tax increase since, over the long term, the new sales tax base will grow more quickly than the current base. However, under my proposal, revenue growth must remain neutral for the first three fiscal years.

After that, if revenue grows at a faster rate than it would have under the old sales tax base, the Legislature will have the option to roll back the sales tax rate to compensate for the growth. But, yes, a tax structure that better mirrors Florida’s overall economy may over time produce revenues at a faster rate, a rate more consistent with our state’s growing demands in education, social services, and criminal justice.

Under this proposal, we will have a tax structure that is based on Florida’s modern economy – and that will meet Florida’s future demands in a fair and equitable way that will not place special interests above the interests of our working families – and one that will make it more difficult for politicians to raise taxes in the future.

I can assure you the time to develop that new tax system is now…not three years down the road when a loss of revenue from the estate tax and the impact of the Internet will cost Florida $4 billion per year.

Just as you repair your roof before the storm arrives, we must be prepared for a crisis, not react to one.

Florida Tax Watch recently stated that "If Floridians wish to avoid taxes that we don’t want such as the state income tax or a state property tax, then we must make our system work." That is precisely what my proposal will do.

But, support must come from the local level – from the people, from the businesses – if true reform is to occur. That is where you and your organization come in. And that is why I am here today.

I Stand before you not as a politician, but as a citizen and small businessman concerned about the of our state. I need your help to make this idea a reality, so I you to contact your State Senator and State Representative and tell them to support tax reform in order to ensure the economic stability of our state.

I ask that you join with me in this effort for Florida’s future.