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Florida tax system called fundamentally flawed

Grim-faced Sens. Eleanor Sobel, D-Hollywood, J.D. Alexander, R-Lake Wales, and Christopher Smith, D-Fort Lauderdale, listen to state budget debate Friday on the floor of the Senate. Alexander is the Senate budget chairman. Tensions ran high as the budget passed 32-8.

SCOTT KEELER | Times

Grim-faced Sens. Eleanor Sobel, D-Hollywood, J.D. Alexander, R-Lake Wales, and Christopher Smith, D-Fort Lauderdale, listen to state budget debate Friday on the floor of the Senate. Alexander is the Senate budget chairman. Tensions ran high as the budget passed 32-8.

TALLAHASSEE — Like millions of people across the state, Florida government will be living hand to mouth for the next year.

Nearly every dollar in revenue will be spent — including $5.3 billion expected from the federal government. Some trust funds built up during years of plenty will be drained.

And, unlike many of its citizens, the state can't take a second job — so it will be providing fewer services but taxing more.

Get used to it, economists and legislators say. Lawmakers will likely be back budget-cutting and tax-raising again.

The reason: Florida has a broken, "Ponzi scheme of financing government'' that relies on population growth to pay for government, said economist Sean Snaith. And with little or no population growth, the state's finances won't improve.

"Florida's tax structure is flawed fundamentally," said Snaith, director of the University of Central Florida's Institute of Economic Competitiveness, which issued a recent report on the state's troubled condition.

Snaith said that a rebound in the economy will not be enough to replace billions of dollars in federal stimulus money which will dry up in 2011. But state needs and wants will grow.

That leaves Florida lawmakers with two choices, he said: "Cut spending and raise taxes."

Lawmakers have tried to stave off that possibility. The $66.5 billion budget they passed Friday has about a $1.7 billion cushion to pay for future shortfalls.

But even legislators who pushed hardest for that reserve acknowledge they might be back next year to set aside a cushion again for what they call the stimulus "flameout."

"We saved what we could, but if we wind up with another $6 billion hole, there's nothing we can do to avoid more cuts and revenues," said Sen. J.D. Alexander, a Lake Wales Republican and Senate budget chief. He said lawmakers did all they could in one of the most challenging budget years in state history.

"This Legislature politically can't set aside $6 billion in savings when we have all these needs in this state," Alexander said.

Rep. Dean Cannon, R-Orlando, pushed for deeper budget cuts as well as a cigarette-tax increase and a gambling agreement to build a cash cushion into the budget. He said he'll "make it a priority this year and next to look at'' increasing state revenues and decreasing spending.

Florida's economy is in a perfect storm of trouble that will make it challenging to resume a growth-based economy, said the UCF report. Among the troubles: The prolonged recession is expected to reduce Florida tourism, the stock market's declines are expected to delay retirees' plans to relocate to Florida, and builders are halting construction in the face of huge inventories and little growth.

Other recent economic reports underscore the UCF conclusions:

• Population growth will slow to a trickle as only 37,000 newcomers move to Florida by 2010 — a 60-year low — according to projections by the University of Florida Bureau of Economic and Business Research.

• The number of jobs in Florida will shrink by another 4 percent in 2009 and increase less than 1 percent in 2010, state economists say.

• Tax collections will increase only $1 billion next year and another $2 billion in 2011, the economists say. Tax collections for the general revenue portion of the budget dropped $5.5 billion in the last two years.

• New home construction won't see any significant uptick until 2012, in part due to an inventory of 300,000 unsold homes, according to forecasts from the Florida Homebuilders Association.

Those dynamics concern Sen. Don Gaetz, a Republican from Niceville who spent the last four months leading the Senate's Select Committee on Florida's Economy.

"Those who believe that the federal economic stimulus will be enough to prime the pump are truly betting the farm," he said. "We can't base our economic future on selling real estate to each other and welcoming visitors. We need a clear, straight-forward economic policy for the state of Florida and, right now, there isn't one."

Even prudent financial moves like building up savings have risk.

To help set aside $1.7 billion in reserves, legislators took $600 million from dozens of spending accounts called trust funds. That brings the amount of trust-fund raids in the past year to $1.3 billion.

And the losses will soon affect dozens of programs, officials say.

For example, the Department of Environmental Protection won't be able to continue the clean up needed when groundwater is poisoned by leaky fuel tanks because of a $135 million raid on the program.

The land management trust fund at DEP and the Florida Wildlife Commission will lose $6 million intended for cleaning up invasive plants such as hydrilla — a fish-tank plant that chokes rivers — and melaleuca trees, which crowd out native plants in the Everglades.

And the state's transportation trust fund is the lowest in recent history, said Department of Transportation Secretary Stephanie Kopelousos, so the state will have to scale back some road-building programs. The Legislature took 30 percent, leaving approximately $400 million in the trust fund.

Economists predict that the state's growth-dependent economy will come back, but not until 2012 — after the rest of the nation revs up.

"It's not going to be anything like it was in the last decade or two," said Chris McCarthy, economist with the University of Florida's Bureau of Economic and Business Research.

Gov. Charlie Crist is more optimistic, repeatedly saying he is confident the state's economy will bounce back soon. But many Democratic legislators are wary.

"2011 has the potential to be an unprecedented disaster," said Sen. Dan Gelber, D-Miami Beach. "There is no way to contemplate how we close the gaps in our budget."

Gelber said that the Senate attempted to find a way to permanently close the budget gaps by broadening the tax base. But the House resisted, forcing the Senate to back down. "They didn't pull the trigger at the end," Gelber said. "We bailed some water out without patching the holes.

Snaith, the UCF economist, believes legislators missed an opportunity this year to use the crisis as political cover to make unpopular but necessary changes to Florida's flawed tax code, such as widening the tax base by closing corporate loopholes.

"I was looking for the silver lining of this crisis to allow for some very dramatic changes to take place, and I'm disappointed it didn't happen," he said. "It is an opportunity that we might have blown, and it may come back to haunt us."

Mary Ellen Klas can be reached at meklas@MiamiHerald.com

Florida tax system called fundamentally flawed 05/09/09 [Last modified: Sunday, May 10, 2009 7:11am]
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