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Governor Bush's Proposal For: Manufacturing Machinery & Equipment Sales Tax Exemption Expansion

November 30, 2004
Source:  Governor's Office

Today’s Actions

Announcing support of regular session legislation to broaden the current sales tax exemption on machinery and equipment purchased by expanding manufacturers in Florida.

Principles of these Actions

  • Encourage the expansion/production of Florida manufacturers.
  • Improve the interstate and international competitive posture of Florida manufacturers, thereby attracting and retaining high-paying jobs for Floridians
  • Put expanding Florida manufacturers on the same tax footing as new manufacturers in the state, with respect to purchases of machinery and equipment
  • Make lower input costs more broadly available to manufacturers regardless of size of operation

Background

Manufacturing in Florida:

  • Almost 15,000 companies generate over 380,000 jobs in Florida (over 5% of the state’s non-agricultural workforce).
  • Most manufacturers are small business: 95% have fewer than 100 employees; 72% have fewer than 10 employees.
  • Average annual wages are almost $41,000, 22% higher than the state average of $33,500 across all sectors (2003 data from AWI).


Generally, Florida currently levies a six percent sales tax on manufacturing machinery and equipment (M&E), but allows the following limited exemptions:

  • Any M&E purchased for semiconductor manufacturing (including replacement equipment) is 100% exempt; other industries, such as space and defense, are partially (25%) exempted from the sales tax.
  • M&E purchased by new manufacturers is completely exempt if the equipment is received within 12 months.
  • M&E purchased to expand a manufacturer’s productive capacity by at least 10% is exempt after the first $50,000 in tax is paid (i.e., after the first $830,000 in equipment is purchased). [The threshold was reduced from $100,000 in 1996.] Expanding printers do not have to meet the $50,000 threshold in order to enjoy the exemption.


Because 36 other states do not tax manufacturing M&E and an additional 4 states impose greatly reduced rates of 1% to 1.5%, Florida’s current tax on inputs poses a distinct competitive disadvantage for our state’s manufacturers and discourages investment.

Current exemptions are unevenly applied across industries and favor new manufacturers compared to those already in Florida.

The $50,000 threshold in current law discriminates against smaller expanding manufacturers because they must spend at least $830,000 to begin benefiting from the exemption.

Eliminating taxation of manufacturing inputs is a top issue for Enterprise Florida and the Florida Manufacturing Association.

Proposal: Eliminate the $50,000 minimum tax threshold on expanding manufacturers

The annual cost savings to Florida manufacturers from reduced state and local sales taxes are estimated to be $34.8 million.

Q: What are the expected economic impacts of the proposal?

A: The Governor’s Office has not quantified the expected employment, output, and income gains. Nevertheless, we can reasonably expect that any measure that reduces costs for Florida manufacturers will increase the likelihood of success in interstate and international competition. Generally, taxes discourage the taxed activity. Removal of the tax encourages that same activity. This proposal will encourage manufacturing investment in Florida. We are trying to remove barriers to growth and encourage manufacturing investment in Florida. This proposal will improve Florida’s business climate for manufacturing, allowing Florida manufacturers to gain market share and grow, adding to the tax base.

Q: Why not propose complete elimination of ALL sales taxes on manufacturing M&E (including replacement equipment)?

A: Though we could expect the long-run impact of such a proposal to be positive for Florida’s economy, in the short-run we must operate within constraints posed by the state budget. A full repeal would reduce state revenues by more than $400 million annually (see following info in brackets), at least initially. The more limited proposal is a needed step in the right direction that has a better chance of securing legislative support.

[As determined in the November 2004 UCF Institute for Economic Competitiveness report, tax revenue loss for the period of FY2005-06 is projected at $322 million; loss for FY2006-07 would be $159 million; tax revenue gain of $539 million is projected by FY2007-08]