The Florida Budget Crisis

The unanticipated revenue shortfall that forced the state legislature into two special sessions at the end of last year has led lawmakers to consider fundamental changes to the state’s tax structure. The projected $1.3 billion deficit for the fiscal year that ends June 30, 2002 raised awareness of the limitations of revenue projections and the need for more sustainable fiscal policies.

In this way, last year’s fiscal crisis may prove to be a blessing in disguise. For far too long the state of Florida has allowed its outlays to expand irrespective of the state’s ability to finance them. To address this problem, state representative Rob Wallace (R- Tampa) has introduced an amendment to the state constitution, HJR 87 “The Limitation on State Appropriations Amendment,” to limit the growth of government to a sustainable level.

Wallace’s amendment would improve Article VII of the state’s constitution by limiting state spending to the previous year’s appropriation plus an adjustment for growth. The growth adjustment would be calculated with a simple formula that adds the growth of the Consumer Price

Index (CPI) to Florida’s population growth. The resulting number would then be multiplied to the portion of the previous year’s spending not financed by federal revenues to determine the state’s spending limit.

This new spending limit would take effect January 1, 2003 if Rep. Wallace’s amendment passes both houses of the state legislature by wide margins and is approved by Florida voters in the November 2002 general election. While such a painstaking process may deter some otherwise favorable to the idea, the rewards of fundamentally changing the state’s budget process would far more than offset the effort necessary to see that it passes.

The McKay Alternative

Unfortunately, the Florida Senate President, John McKay (R- Bradenton), has stolen the language of fiscal reform to bolster support for his plan to increase taxes. Instead of protecting taxpayers through fundamental reform, McKay’s proposal would lower the state sales tax on some goods to 4.5 percent, while instituting a tax on virtually everything Floridians consume in the process. Some statisticians argue that McKay’s bill would amount to a tax cut for some families, but such estimates rely on static projections about the average consumer’s budget that are unlikely to accurately reflect consumer behavior.

McKay’s proposal would shift the burden of tax collection and remittance onto the service sector of the economy, which has been largely exempt from such burdens. For instance, while hair products, like shampoo, are taxed, hair services – a haircut or perm – are not. McKay’s proposal would also ensure that financial, legal, accountancy, and most other services were subject to tax.1

Supporters of McKay’s proposal argue that Florida’s current tax system is too susceptible to fluctuations in the economy and the level of tourism. While it is true that Florida’s reliance on the sales tax, which accounts for 78 percent of general revenue, does present problems because it relies on robust personal consumption, Florida’s fiscal problem is not the volatility of tax revenue, but that policymakers disregard this volatility and use temporary periods of swelling tax receipts to grow government unsustainably.

The McKay proposal would make the state more dependent on consumption and tourism, not less. Instead of basing the bulk of state revenues on the consumption of certain goods, it aspires to base state revenues on the consumption of nearly every consumer good and service; this is casting a wider net, but still fishing in the same consumption-based waters.

At the same time, the proposal would leave the tax on hotels, rental cars, and admission fees to Florida attractions at 6 percent.2 This means that if the state budget stays the same size, tax receipts from tourism will comprise exactly the same percentage of state revenue with or without the McKay proposal. It is only when the budget grows that tourism taxes would comprise a smaller percentage of total state revenues – an outcome McKay seems intent to ensure.

McKay’s original bill taxed over 100 new services, but that number has been reduced thanks to the coordinated lobbying efforts of certain constituencies.3 While it is certainly better to leave certain services untaxed rather than subject them to the new burden, the way elected officials awarded these exemptions was an example of government at its worst. Various constituencies flexed their respective political muscles to get an exemption for their line of business. Some interests – such as trucking and insurance – succeeded in gaining an exemption for their services. Others, including accountants, have been unsuccessful thus far, but continue to pursue their carve-outs.

If McKay’s “reform” plan passes both houses of the legislature – it has already passed the Senate – it would ultimately be decided in the general election, just like Wallace’s fundamental reform. However, the McKay ballot initiative prevents voters from deciding what services are and are not exempt by rolling all of the specifics into SB1106: A separate bill that is treated like any other piece of legislation and subject to the same old Tallahassee political maneuvering and influence-peddling. Some reform.

Real Reform Requires Sustainable Fiscal Policy

Conversely, the Wallace amendment puts all of its substance into the ballot initiative and leaves the legislature to work out the fine print. It simply states that “No tax shall be levied except in pursuance of law,” and bans ad valorem taxes on tangible property including real estate, motor vehicles, boats, airplanes, and trailers. All other revenue sources would be fair game, but the amendment stipulates that total revenue would have to be less than the previous year’s appropriation, plus the adjustment.4

In the past five years the state’s budget has grown by 26.7 percent while taxes for general revenue have increased by 25.5 percent.5 The McKay proposal would further this trend by basing future tax increases on sources other than tourism. By contrast, the Wallace amendment would constitutionally prohibit unsustainable budget growth, limit future taxes, and force policymakers to make the same sort of tough decisions that businesses and families must make during an economic downturn.

During recessions, the state government experiences the same sort of downturn in revenues as businesses and families. Yet, the state government simply goes about its business as usual.

Even the budget crafted during the special session to eliminate the deficit contains nearly $1 billion in so-called “economic stimulus,” including $530 million to speed up road-building; $260 million for construction at schools, colleges and universities; $20 million for tourist marketing efforts; and $16 million for enhanced security. And over $100 million of the “cuts” are nothing more than Enron-style accounting gimmicks as outlays are technically financed through off-balance sheet accounts, including various trust funds and the state lottery.6 Yet, lawmakers pretend that last year’s budget was the product of fiscal discipline even as the state budget continues to grow faster than the personal income of its citizens.

Now opponents of fundamental reform claim that an appropriation limitation amendment would not only lead to “tough choices,” but would close fire departments and hospitals as well.

Nonsense. The Wallace amendment would simply force elected officials to face the same pressures on the state budget that families and businesses feel on theirs. Closing fundamental services like police precincts would be akin to a family balancing its budget by buying a new home entertainment system and starving the newborn. If the budgets produced by the legislature do not reflect the priorities of the citizens to whom they are responsible, the elected officials will pay the price at the voting booth.

As Table 1 illustrates, the Wallace Amendment would not force the state to make draconian cuts to its budget. Had the amendment been instituted in 1997, the 2000-2001 Florida budget would have been $1.35 billion smaller than it actually was. With a fiscal year deficit of $1.3 billion, the appropriations limitation amendment would have allowed the legislature to budget responsibly from the beginning and would have avoided two emergency legislative sessions.

The Wallace amendment is a simple reform that would insulate Florida from the budget crisis that gripped the state at the end of 2001 and protect Florida taxpayers in the process. Other proposals may be portrayed as “reforms,” but they are really just new taxes and regulatory burdens under false pretenses.

Jason M. Thomas (jthomas@CSE.org) is a staff economist at Citizens for a Sound Economy Foundation

Full Study:
PDF Version:
Issue Analysis 119:
The Florida Budget Crisis
(PDF format, 4 p. 162 Kb)

Footnotes:

1 Bousqutt, Steve. “Criticism pelts McKay tax reform plan.” St. Petersburg Times, December 18, 2001.http://www.sptimes.com/News/121801/State/Criticism_pelts_McKay.shtml

2 Kennedy, John. “McKay tries to halt ad attack on tax plan.” Orlando Sentinel, January 29, 2002. http://orlandosentinel.com/news/local/orl-loctaxes29012902jan29.story?coll=orl%2Dhome%2Dheadlines.

3 As of publication the total of new services to which the tax applies was 55. See Twiddy, David. “Newest change exempts freight, travel agents.” Tallahassee Democrat, Jan. 30, 2002.
http://www.tallahassee.com/mld/tallahassee/news/local/2567925.htm

4 Technically, in the first few years excess revenue would be transferred to the budget stabilization fund until it reaches maximum balance. At that point all excess revenue would be refunded to taxpayers.

5 Revenue Collection Summary: Five-Year Comparison of DOR Administered Tax Collections. Florida Department of Revenue. FY 1996-1997 through FY 2001-01.

6 Kurt Wenner, . “Legislature Balances Budget With a Mix of Cuts, Trust Funds and Taxes.” Florida Tax Watch, December 2001 Briefing. http://www.floridataxwatch.org/spec-session.html