Are Cellphones a "Sin?" Florida Thinks So

In virtually every state, some of the items we consume are taxed at higher rates than the general sales tax rate. These tend to be items that are consumed by two categories of people: tourists from other states and "sinners." A good example of the first category is hotels, which in Washington DC are taxed at 14.5 percent, more than double the regular sales tax rate. This is seen as a good way of dinging visitors from around the country, since any DC resident who stays in a DC hotel is, in fact, staying less than 10 miles away from their actual home. Typically, the second category includes alcohol, cigarettes, and (more or less) gasoline-- things that we generally wish people would consume less of.

Then there are cell phones. It's hard to describe using cell phones as an inherently damaging activity (unless you're driving at the same time), apart from the subtle but real damage it arguably does to our social fabric. But Florida, like many states, has decided to tax the heck out of cell phone use, with combined state and local tax rates approaching 20 percent in some areas.

Once upon a time, there was a pretty good argument for considering cell phones a "luxury" that could be taxed at a higher rate because its consumers could afford it. (Remember Gordon Gekko's lunch-box-sized cell phone in "Wall Street?) But now these phones are pretty universal, and a growing number of consumers are abandoning their land lines entirely and living on a cell phone. Given this change, cell phones are approaching the vaunted status of "necessity" currently enjoyed by food, clothing and shelter.

So why tax this pseudo-necessity at a rate three times higher than the regular sales tax rate? Because it's easy, says one analyst:

Kurt Wenner, a senior analyst with Florida Tax Watch, also said government has a penchant for taxing utilities because companies pass through the taxes to all consumers through their bills. "It's an easy way to do it," Wenner said.

This is exactly right. High taxes on utilities have historically been an easy thing for lawmakers to do because the costs get passed straight through to consumers.

Current legislation would take baby steps toward equalizing the tax treatment of phone and other services-- but the real question Florida lawmakers should be asking themselves is, why baby steps? Why not tax this form of consumption at the regular sales tax rate right now? The most likely answer-- that lawmakers are too busy finding creative ways of blowing tens of billions of dollars on poorly designed property tax "reform" schemes-- isn't very comforting.

Orlando Sentinel: "Go Halfway" on Tax Reform

The editorial board at the Orlando Sentinel sees little progress in the never-ending legislative debate over property tax cuts:

[N]egotiations between the Senate and House on two wildly different tax-cut plans have gotten nowhere. They do little to fix inequities in Florida's property-tax system, which gives longtime homeowners a big break while their new neighbors pay much more for the same services. Nor are they closer to preventing local governments from enjoying huge spikes in their budgets simply because of a run-up in property values, as Florida has seen in the past four years.

But the Sentinel takes the defensible-but-odd position that anything is better than nothing, so the Senate's package should be adopted by virtue of being the least costly approach:

It's better to slow down, adopt the Senate's more reasonable approach to tax relief and then rely on a special commission to take its time and thoughtfully study tax reform.

It's understandable that any long-term observer of state tax politics would laugh ruefully at the "let's have a tax reform commission" solution. But this might be exactly the time for such an approach. If (as currently seems to be true) both houses have dug in their feet in support of suboptimal tax-cut plans, maybe the best thing for lawmakers to do would be to go home, cool off and come back-- either after the commission has started meeting or else early this summer-- to try and cobble together something sensible. It's transparently true to this outsider's eyes that when the most obvious reform option-- a personal income tax-- is simply not on the table, everyone needs to take a deep breath, check their ideological luggage at the door and start asking questions about what it will take to make the Florida tax system sustainable.

Property Tax Talks Underway

This is the week that House and Senate conferees have set for negotiations over how exactly to cut local property taxes this year. The Miami Herald gives a concise update on what the big issues are-- and how little progress was made in Monday's opening session:

No deal on how much local governments should roll back their tax base. No decision on whether or how people could transfer tax savings from a primary residence to a new home. Nothing on swapping out homeowner property taxes for sales taxes.

With the most obvious (and fairest) tax reform choice--that is, an income tax-- off the table, the remaining choice facing lawmakers this week is whether their poorly targeted property tax cuts should be done in a way that is (a) unaffordable or (b) unfair. Not much of a choice.

Rubio Tax Plan: Who Loses?

The South Florida Sun-Sentinel's Harriet Brackey has a thoughtful piece on who would win--and who would lose-- under the sales-tax-for-property-tax swap that House Speaker Marco Rubio has pushed through the House:

For whom would an increase in sales taxes be a burden? The poor, certainly. Younger people. Those in the work force.

This terse but accurate summary is worth unpacking.

The regressive impact of sales taxes on Florida's tax system is a no brainer, and has been well documented by ITEP in the past. No major tax levied by state or local governments (including the property tax) hits low-income families harder. Shifting further away from property taxes and towards sales taxes would further shift Florida's property tax load onto the very poorest residents of the Sunshine State.

Less obvious is Brackey's assertion that "younger people" would be hit hard, but it makes sense on a moment's reflection. Younger people are, in general, poorer, which means they'll get hit hard by a sales tax hike. And they're less likely to own homes, which means they'll benefit less from homeowner property tax cuts.

Even less obvious, to me was Brackey's assertion that "those in the work force" would get hit hard. But the story makes sense once she tells it:

Frank Williams, an economist for the Florida Legislature's Office of Economic and Demographic Research and co-author of the study, said another important finding of that study was that people who aren't retired pay a greater proportion of their income in sales taxes than retirees. "The burden of retirees was about half that of working families," Williams said. "They don't buy as many taxable goods."

So the question of the day is: how can the House leadership defend a tax cut that shifts the tax load onto young working people? Not very Reaganesque....

House Passes Property Tax Cut Bills

The Florida House of Representatives has passed legislation that would take the first step towards eliminating homeowner property taxes across the state, replacing some of the revenue loss with an increase in the state sales tax rate.

The Associated Press gives all the multi-state context you really need on this one:

The proposed state constitutional amendment...could make Florida the only state in the nation without either a personal income tax or property taxes on primary homes, known as homesteads.

Any financial planner will tell you that diversification is a pretty good thing-- and any parent will tell you that putting all your eggs on one basket is a bad idea. Apparently Florida House leaders haven't been listening to either of these two constituencies...

A More Sensible Approach to Property Tax Reform?

As the House majority draws its line in the sand on property tax reform, Orlando Sentinel columnist Mike Thomas has a better idea about how to pay for cutting property taxes.

He suggests a three-pronged plan for coming up with the state revenue needed to pay for big property tax cuts:
1) A 25-cents-per-gallon hike in the gas tax.
2) Increasing the tax on real-estate transactions. His ballpark suggestion is a base tax of $750 for each home sold, with a higher tax for more expensive homes.
3) Expand the sales tax base to include services.

There are good things to say about each of these ideas. Taking them in order:
1) You can make a good case that transportation funding in Florida is woefully underfunded. You can also argue (as Thomas does) that we should be discouraging people from driving as much as they currently do.
2) A real-estate transaction tax could raise a fair amount of money, and could be designed in a way that would hit more expensive homes harder.
3) It's absolutely the best single change that could be made to Florida's sales tax, and is much smarter than the House majority's approach of simply increasing the tax rate.

Now for the bad news:
1) The gas tax is regressive. Hiking it would make an already-unfair tax system even worse from a fairness perspective. And the two goals Thomas implicitly has in mind for the gas tax hike (raising revenue to pay for property tax cuts, and encouraging people to scale back their driving) are at cross-purposes with each other.
2) Even if you enact a real-estate transaction tax in the sort of graduated way Thomas is suggesting, it's likely to remain regressive. And this sort of tax has no provision for distinguishing between low-income families who can barely scrape together enough in mortgage payments to own a home and wealthier families for whom a $750 tax is hardly noticeable. The value of the home is something of an indicator of ability to pay, but this would still hit low-income families hard. (A similar idea in North Carolina is riling up developers as we speak.)
3) As with the gas tax, expanding the sales tax base would take the single biggest, most regressive tax Florida state government currently uses and make it an even bigger piece of the revenue pie. It would make the sales tax fairer in the sense that it would treat more (if not all) consumer transactions the same way, but it would do little to mitigate the overall regressivity of the Florida tax system. And from a balance perspective, it's the wrong thing to do. The major source of imbalance in Florida's tax system is that it relies much more heavily than most other states on the sales tax-- and not at all on the income tax. This change would make this imbalance worse, rather than better.

Which leads us to the question of what would be a better approach. Thomas' ideas could be improved on at both ends.

First, the property tax side. Thomas accepts uncritically the idea that we should be doing away with property taxes on homes:

I think property taxes are evil. So like the House, I eliminate them on homes.

Well, that's a pretty big jump. Even when properly administered, property taxes are never the fairest taxes in the world. (And when poorly administered, as in Florida, they're a nightmare that makes pretty much everyone angry and frustrated.) But they're a historically important revenue source, and a stable one-- and there are sensible reform options available to make them work much better in Florida.

What are these options? How about repealing the "Save Our Homes" tax break and replacing it with a targeted "circuit breaker" tax credit for fixed-income families, and maybe expanding the homestead exemption. People aren't talking about these options-- but that doesn't mean they shouldn't be. In any event, Thomas gives up on the property tax far too easily. Reform, rather than repeal, should be the mantra of Florida policymakers on the property tax.

On the revenue-raising side, Thomas has the luxury of not being an elected official, so he's got nothing to lose by bringing up the income tax question. It's a no-brainer from an economics perspective: in pretty much any form you can devise one, the income tax is fairer and more sustainable than any of the revenue sources Thomas comes up with.

It's also worth rehashing the question of whether outright repeal of the intangible property tax was a smart idea. It's technologically easier to administer this tax, in some ways at least, now than it used to be. There ought to be a way to reinstate this tax-- and if Florida does, its property tax base will much better reflect each family's overall ability to pay than it currently does.

This is pie-in-the-sky stuff, for sure. And Thomas deserves kudos for touching not one but two "third rails" of Florida politics in his recommendations. But I think anyone who's coming up with their own ideal plan for Florida tax reform needs to start off by explaining why we shouldn't be talking about an income tax.

"Duplicitous" Tax Reformers in Florida House?

As any Floridian who hasn't been living under a rock knows, the property tax debate this spring has devolved into a contest to see who can cut taxes the most-- and the fastest. For those of us who think that state governments should be the primary source of funding for elementary and secondary education, it's bad enough to see state lawmakers talk of forcing local property taxes downward without providing replacement state funding. But now, as the St. Petersburg Times editorial board notes, the legislature is taking one step further-- forcing a more-than-$500-million increase in some local property taxes to pay for public education.

At a time when House and Senate leaders are speaking boldly about their big plans to cut local property taxes, it's a bit counterintuitive to require locals to increase them at the same time:

Under both the House and Senate spending bills, the "required local effort" property taxes for schools next year would jump by 7.4 percent, or $545-million. By comparison, the Senate's new "Savings Now" tax reform would force cities and counties to reduce property taxes by $1-billion. In other words, for every $2 local governments cut property taxes, the state would raise them by $1.

You've got to admire the genius of this. State lawmakers get to make grandstanding statements about how they're going to force locals to curtail their out-of-control spending habits by cutting property taxes, but then go behind the scenes to make locals do what state officials don't have the backbone to do themselves: provide sufficient funding for schools. It is, indeed, a "duplicitous" approach to tax reform, as the Times suggest.

Car Tax Lessons for Florida?

Florida lawmakers are running away from the property tax, at least in their rhetoric, as fast as they can. And no form of property tax arouses more bile than a tax on motor vehicles. So it's interesting and instructive to see a form of property tax on cars being floated as a local revenue-raising option in Indiana.

The developing debate over how Indiana local governments ought to be funded has centered, so far, on the local property tax and the conditions under which locals should be allowed to levy income taxes to pay for property tax cuts. But there's a new game in town: Rep. Chet Dobis suggests allowing local governments in northwestern Indiana the option of levying a "wheel tax" of up to $50 per vehicle to pay for an expanded commuter rail system.

As a fellow Dem, Rep. Linda Lawson, helpfully points out, the car tax "is one of the most hated taxes... the people in my community... would be just outraged if we gave them another tax." And that certainly seems to be true wherever you look. Opposition to the car tax almost single-handedly got former Virginia Governor Jim Gilmore elected and helped to give California Governor Gray Davis the boot. And if Connecticut voters aren't currently buying Governor Jodi Rell's plan to repeal that state's car tax, it's not because they like paying taxes on their cars.

But that's not, in itself, a sufficient reason to deny the car tax a place in a state's revenue system. Anti-tax sentiment is easy to channel, and the ease with which the car tax can be vilified is at least partially due to the number of syllables it takes to pronounce it. ("no car tax," "no death tax," "no food tax," all lend themselves very well to soundbites and slogans.)

You can also make a good case that a properly functioning property tax should take account of all kinds of property that most states currently don't tax, whether it's your car or your stock portfolio or that $3,000 Rolex. Property is wealth-- plain and simple. When states decide (as most have) that they're not gonna tax the value of your Rolex or your car or your stock portfolio, what's left is the one kind of "wealth" that is least recognizable as such-- homes. For many people, homes aren't a luxury and they aren't wealth-- at least not usable wealth.

So I've got a fair amount of sympathy for recognizing that the property tax should apply to things other than homes. Having said that, the wheel tax proposal seems like the wrong way to go, for three reasons:

1) The proposed wheel tax would be a flat-dollar amount. Maybe $10, maybe $50. But the biggest Bentley would pay the same tax as the tiniest Toyota. By comparison to the more sensible approach of taxing cars based on their value, the wheel tax proposal would be sharply more regressive-- a much worse deal for low-income families-- because $50 is a much bigger share of income for someone earning $10,000 a year than for someone earning $100,000 a year.

2) Car taxes can be written off on your federal income taxes (if you itemize) if they are based on the value of the car. If they're just a flat dollar amount, they can't. So the choice to impose the flat wheel tax basically means deciding that Indiana doesn't want the federal government to pick up part of the tab. A flat-dollar wheel tax leaves federal money on the table.

3) A "flat-dollar" tax is about as slow-growing a revenue source as you can invent. The only thing that can make revenues go up from year to year is an increase in the number of cars. (By contrast, income and sales tax collections increase, more or less, automatically with inflation.) The amount this tax brings in from each existing car actually shrinks a little bit each year: $50 a year in 2007 is worth a little bit less, after inflation, in 2008, a little bit less in 2009, etc.

As another lawmaker points out, Dobis deserves "all the credit in the world" for bringing up what is being described as a "political third rail." (Seems like Indiana has more third rails than the New York subway...) And it would be a good thing if this proposal resulted in some enlightened deliberation over the future of Indiana property taxes. But it's certainly not the fairest-- or most sustainable-- way to fund Indiana's transportation funding needs.

Of course, Florida doesn't have anything that resembles a car tax. The state's constitution would have to be changed if lawmakers wanted to levy one. (A thing that is true of most needed reforms to Florida's system, by the way.) But it would be nice if the ongoing property tax debate could be extended to think more generally about what the property tax really ought to apply to. It's hard to argue that cars universally ought to be excluded from taxation, and to the extent that the Florida debate centers on fairness, folks should be discussing the fairness of taxing homes while NOT taxing cars and intangibles.

Maybe that's a debate for 2008....

Seniors Get a (Bigger) (Unfunded) Tax Break

Earlier today, Governor Bill Crist signed into law a bill increasing the allowable local property tax homestead exemption for fixed-income seniors from $25,000 to $50,000. In 2007, "fixed-income" means just over $24,000 a year.

On its face, this is a terrific and bold move by the legislature and the governor. Floridians should absolutely be concerned about sheltering seniors from excessive property taxes, and fixed-income seniors in particular. And this homestead exemption seems like a fine way to do it.

But it's not that bold a move, and here's why:

(1) Florida voters already decided that they like this idea, overwhelmingly supporting a ballot initiative allowing counties this option last fall.
(2) The new homestead exemption is optional, and is an option to be exercised by county governments-- not the state. In fact, as the House of Representatives' fiscal note on the bill notes, it won't cost the state a dime.

That doesn't mean it's free, of course. The same fiscal note adds:

However, if every jurisdiction adopted the exemption at $50,000 it was estimated that this would result in a $3.1 billion dollar loss in taxable value.

And that loss in taxable value would have to be made up by the counties-- not the state.

So it's great that the state is giving counties more options. And this particular option is quite well targeted to the folks who need the most relief. But this is a politically cost-free call for state lawmakers.

As he signed the bill, Governor Crist noted,"We have an obligation to provide our state's seniors the utmost respect and dignity." Very convenient for him that the state doesn't have an "obligation" to spend a dime paying for it....

Property Tax Reform: A Zero-Sum Game?

The Palm Beach Post's S.V. Date captures quite well the basic political dilemma facing Florida lawmakers as they seek to fix the state's property tax inequities. Here's the lead:

If a property tax system unfairly put hundreds or even thousands of dollars in your pocket each year, would you vote to change it?

Indeed. Unfair or not, plenty of Florida homeowners are doing just fine, thank you, under the current "Save Our Homes" tax break. But Save Our Homes does nothing for businesses, renters, snowbirds, and first-time homeowners. If these groups are to get property tax relief, the revenue loss has to get made up in some way, and none of the options sound especially palatable to lawmakers: the options are either to
(1) hike property taxes on everyone else (meaning homeowners currently protected by Save Our Homes), or
(2) come up with a new state revenue source to pay for property tax cuts (which means some kind of state tax hike).

Approach #2 is politically off-limits, it seems, because the only state tax anyone is talking about increasing is the one that's already among the highest in the nation: the sales tax. Meanwhile, the more sensible option (enacting an income tax) is politically taboo.

Which leaves approach #1, which Date characterizes as a "zero-sum game."

And, as Date points out, if you put anything before the voters that takes away the "Save our Homes" break, the numbers say it's gonna lose

:[H]omesteaders, as politicians know, are more likely to turn out to vote than non-homesteaders. How much more likely?
Webster, R-Winter Garden, estimated that two-thirds of all voters who actually vote at the polls are homesteaders.
Operatives for the Democratic and Republican parties said voter turnout ranges by geographic area from 60 percent to 90 percent.
University of South Florida political scientist Susan MacManus said that for special elections - as in the sort of election Crist and lawmakers would prefer later this year - the statewide figure could approach 80 percent. That's why Webster and others agree that it may be difficult to pass a proposal that does not somehow further help homesteaders, even though they are the one group that already enjoys a huge financial benefit.

All of which means that lawmakers need to come up with a way to relieve property taxes on the businesses and renters who are being hit hardest currently, but in a way that leaves most people better off. Not to be a broken record, but can you say "income tax?"

TaxWatch Report Gets it Right on Internet Transactions

A new brief from the Florida TaxWatch group takes a breather from the seemingly endless property tax debate to remind us that there are other kinds of tax loopholes to be closed. The TaxWatch brief on the streamlined sales tax project cites data from the University of Tennessee estimating that in 2003, Florida lost $1.1 billion in sales tax revenue because it was unable to collect sales taxes on "remote sales"-- that is, Internet-based or mail-order transactions.

There's a pretty straightforward argument to be made that Internet-based retail transactions ought to be taxed. If you can buy something on the Net tax-free, but the same item would be taxed at a bricks-and-mortar retailer, that discriminates against the bricks-and-mortar store-- and discriminates against the (likely lower-income) folks who don't have access to the Internet. The sales tax you pay shouldn't depend on how you buy a thing. For a more detailed defense of this position, check out our policy brief on this topic here, which covers pretty much the same ground as the TaxWatch piece.

TaxWatch president Dominic Calabro argues that "Florida should not raise or institute new taxes until the state makes every reasonable effort to collect the taxes that are already legally owed and not collected."

Is this a sensible position? Well, mostly. Calabro is absolutely right that Florida lawmakers need to get on board with the streamlining project, not least because doing so would make Congress more likely to do its part to allow streamlined states to collect sales taxes on Internet transactions. But Florida can't make this happen on its own. In the end, Florida can only start counting this money when Congress passes enabling legislation-- and it's not obvious that folks on Capitol Hill are ready to do this.

So there's a decent chance that if Florida lawmakers literally adopt Calabro's recommendation and refuse to hike any other tax until this problem gets fixed, they could be waiting a long time. And that's why Calabro is only "mostly" right on this point. But kudos to TaxWatch for taking a principled, if unpopular, stand on broadening the sales tax base.