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THE TAX TRAP // Dare anyone say services?

Published Jul. 6, 2006

Before classes in public schools grow any larger, before universities raise tuition and entrance requirements any higher, before the social services safety net frays any further, we should go back to the tax for Florida's future.

That is what the governor and most state legislators were calling the tax on services about this time 10 years ago. They said that extending the sales tax on goods to services such as legal fees, pest control and landscaping would make the state's outdated tax structure fairer. It would expand the state's narrow tax base. And it would raise more money for schools, social services and other needs.

"Florida cannot hope to maintain its very special quality of life if its tax base is overwhelmed by its growth," Gov. Bob Martinez declared in his first State of the State address to legislators.

That statement is as true in 1997 as when Martinez made it in 1987. We have a whole decade of evidence. Add 2-million new residents and mix in an overwhelming demand for new schools, new prisons and more social services. Keep the same tax structure that was designed for the 1950s. How can there still be any argument about whether Florida desperately needs to overhaul the way it raises money to meet even the basic needs of its residents?

One reason is because the state blew it the last time it tried.

With Martinez's endorsement, the Legislature voted 10 years ago to extend the sales tax to dozens of services. But the tax for Florida's future lasted just six tumultuous months. Under enormous pressure from national advertisers, much of the media and other influential opponents, Martinez lost his nerve. He flip-flopped and demanded that lawmakers repeal the services tax.

Legislators, held like hostages in a series of special sessions, eventually caved in. The services tax died at the end of 1987, and a month later the sales tax on goods rose from 5 percent to 6 percent.

Since then, any talk of tax reform has fallen on deaf ears in Tallahassee and the anti-tax rhetoric has only grown louder. The services tax debacle hangs like a cloud over the 22-story Capitol, a constant reminder of what can go wrong even when legislators do right.

There have been a couple of uninspired attempts over the years to straighten out Florida's flawed tax policy. Gov. Lawton Chiles, the Democrat who clobbered Martinez in 1990 in part because the Republican incumbent was branded a flip-flopper, offered a complicated plan in 1992 and 1993. It never got off the ground.

The Tax and Budget Reform Commission had the power to bypass the Legislature and put initiatives on the ballot in 1992. Politics and personal agendas turned the commission into a charade that produced no real tax reform.

This spring, Chiles has lowered his sights. He wants legislators to raise the cigarette tax by 10 cents per pack to step up his war on smoking. That is not tax reform; that is simply targeting a tax for a specific need. Even this modest attempt to raise revenue is dead on arrival in the Republican-controlled Legislature.

When the services tax died, some of its strongest advocates forecast a grim future for this state. They said Floridians would have to settle for less because the state's tax base would be incapable of generating enough money to sustain the same level of services.

Their predictions turned out to be pretty accurate. To be kind, Florida has spent 10 years treading water, and it has been a struggle just to stay afloat.

Consider the plight of the public schools. When the numbers are adjusted for inflation, Florida is spending $232 less per student in general revenue now than it did in 1987. Legislators have been siphoning off the education money to pay for prisons and other needs. They have been relying on the lottery and local property taxes to cover their tracks. While the state is providing fewer general revenue dollars, property taxes are contributing $171 more per student than they did a decade ago.

By some other measures, public schools are in worse shape than they were in 1987. Many class sizes are larger. Two schools in Hillsborough are on double sessions, and a half-dozen Broward schools face double sessions in the fall. Teacher salaries have fallen further behind the national average. The dropout rate remains among the highest in the country.

Universities and community colleges have fared worse than the public schools. General revenue spending per university student has dropped by $2,040 since 1987, after the numbers are adjusted for inflation. The community colleges have been more fortunate. They have lost just $930 in general revenue per student.

But recent debates in Tallahassee have not focused on finding more money for higher education. Instead, lawmakers have wondered whether Florida can afford to continue its open-door policy for community colleges. They also have insisted that universities move students through more quickly to make way for thousands of high school and junior college graduates trying to get in.

While legislators will not raise state taxes for schools, they will divert money from other areas into education so they can avoid angering politically active teachers and parents back home. There is no similar constituency for social services, where the budget blues have been worse. Last year alone, lawmakers cut more than $400-million from social services so they could modestly increase education spending.

After adjusting for inflation, general revenue money for developmental services dropped by 25 percent over the last decade. Similar cuts have been made in alcohol, drug abuse and mental health programs. General revenue dollars for children's medical services have been slashed in half.

While education and most social services were losing ground, Florida was pouring money into prisons and Medicaid, the health program for the poor that is paid for with a combination of state and federal dollars. Spending on corrections nearly doubled in the last 10 years. Spending on Medicaid, an entitlement program, quadrupled.

Of course, the services tax alone probably would not have generated enough money to maintain spending for education and social services at 1987 levels, plus cover the staggering bills for new prisons and Medicaid. But it certainly would have helped.

Everyone agrees that the services tax would have generated more money than the 1-cent increase on the sales tax on goods. How much more that would be by now, 10 years later, is unclear. In 1987, the state government projected the services tax would generate $500-million more in 1997 than the penny increase in the sales tax on goods.

Ed Montanaro, director of the state Division of Economic and Demographic Research, is skeptical of that projection now.

"That would be asking a lot," he said. "What you would have had is a little more money, with most of it going into corrections, and you would still have that last penny (increase in sales tax) in reserve."

Dominic Calabro, president of the non-profit research organization Florida TaxWatch, has a different view.

"I firmly believe the services tax would have brought in considerably more money than the most optimistic projections," he said, citing the steady growth of the services sector of the economy.

Here is what we do know: A 1-cent increase in the sales tax on goods now would raise $2-billion a year. Extending the current 6 percent sales tax on goods to the same services that were briefly taxed in 1987 would raise $2.8-billion a year.

Curt Kiser, the former legislator from Pinellas, was the last Republican in the Senate to give up on the services tax in 1987. He still believes it was wrong to repeal the tax.

"We would be better off if we would have stuck with it," said Kiser, who is now a lobbyist. "You would be ahead dollar-wise today, and you probably would have had some tweaking so that it would be raising even more."

Outside Tallahassee, memories of the crisis atmosphere that gripped the state following the implementation of the services tax have faded with time. Opponents pounded away at Martinez and legislators on radio and television. Hundreds of people in the Tampa Bay area and elsewhere turned out at public hearings to protest the tax. A dozen lawsuits were filed, and several dozen conventions were canceled.

While real estate agents, lawyers and others were vocal in their opposition, the loudest screams came from national advertisers and the media. Rolling Stone magazine ran blank pages in Florida where ads appeared in other states. While the Times supported the services tax on its editorial pages, most other newspapers opposed it. Some published full-page ads with pictures of local legislators who voted for the services tax.

"If the tax on advertising had not been there, the services tax would be the law," said Jon Mills, the House speaker in 1987 and a University of Florida law professor now. "That was the big opposition. I know people who still say, "as an attorney, I was collecting it. It was no big deal.' And the bankers were madder about having to change things again after the tax was repealed."

Both Kiser and Mills agree that mistakes were made along the way. Kiser contended that the services tax would have been accepted if the state had not started collecting it so quickly after the Legislature approved it. More time was needed to educate the public. Mills recalled that there were legitimate problems with the way the tax was applied in the construction industry that could have been fixed. But public pressure and politics made such revisions impossible.

Florida's fight over the services tax had a national impact. Just four states had broad-based sales taxes on professional services at the time: Iowa, South Dakota, Hawaii and New Mexico. Florida lawmakers were in hot demand at national government meetings, as legislators from other states explored the possibility of adopting a services tax.

A decade after Florida's fiasco, only the same four states have a broad-based services tax.

"If Florida had not backed down, it would have have gone a lot further," said Chris Zimmerman, chief economist at the National Conference of State Legislatures. "Everybody got scared. It might have been more of a trend, because it makes so much sense."

In Florida, the arguments for applying the sales tax to services are as compelling now as they were in 1987. It would broaden the tax base, and it would be fairer to taxpayers.

Florida is one of seven states without a personal income tax, and it relies far more heavily on the sales tax than most states. Across the country, sales taxes generate about one of every three dollars in state revenue. In Florida, nearly three of every four dollars in general revenue comes from the sales tax. That makes the state far more vulnerable to economic recessions, when people buy fewer cars, furniture and other goods. The 1990-91 recession forced the state to cut more than $2-billion in spending to maintain a balanced budget.

By applying the sales tax only to goods, Florida is relying on a shrinking portion of the economy and failing to tap into the largest, fast-growing part. When the sales tax was first enacted in 1949, people whose jobs relied on the manufacturing of goods accounted for 25 percent of the work force. By 1987, that number was down to 19 percent. Now it is less than 8 percent.

Meanwhile, the services area _ lawyers, accountants, advertising, computer programers _ is the largest and fastest growing portion of the economy. More than half of all new jobs created over the next year will be in services. Yet the purchase of most of those services will not be taxed.

Extending the sales tax to services such as legal advice, accounting, lawn care, maid services, swimming pool cleaning and real estate would make the tax system fairer. Affluent Floridians are likely to use many of those services more often than lower-income residents. A 1987 study calculated that the tax on services would cost the average family $74 less than an additional 1-cent tax on goods.

In 1987, no one wanted to hear about broadening the tax base and making it more equitable.

"Those were two things that did not really get mentioned; they were obscured by all of the smoke," Mills said. "The average guy should have been actively advocating this."

In 1997, it is tough to find anyone advocating tax reform. The no-new-taxes mantra has drowned out any attempt at a sensible discussion, and the impact has been felt at all levels of government.

Voters have approved a series of anti-tax amendments to the Florida Constitution. The Save Our Homes amendment, approved in 1992, limits the ability of local governments to rely on rising property values to bring in more money. Another amendment approved in 1994 limits the rate of growth in state revenues to the growth rate in personal income. It takes a two-thirds vote in both the House and Senate to exceed the limit. The practical effect is that a simple majority vote would not be enough to enact a broad-based services tax now.

How tough would it be to get 80 votes in the 120-member House and 27 votes in the 40-member Senate to raise taxes? There is enough room under the revenue limit now to raise taxes by $771-million with a simple majority vote. Yet no legislative leaders are willing to discuss taxes.

Think it would be easier to go straight to the voters? A constitutional amendment approved last year says any tax added to the constitution would require approval by two-thirds of the voters casting ballots. Even that is not enough for some tax opponents. Petitions are being gathered to put another amendment on the 1998 ballot that would require voters to approve any tax.

Florida's financial straitjacket would be complete. The nation's fourth largest state, which ranks 41st in state and local taxes collected as a percentage of personal income, would be unable to move forward.

"They are playing with fire," Calabro said. "The biggest problem in Florida is not that its residents are overtaxed. . . . There is a case to be made for thoughtfully broadening the tax base."

Mills, who could not save the services tax a decade ago, has given up that fight to go with the flow. He is advising teachers' unions on the wording of a constitutional amendment that would guarantee that public schools receive 40 percent of the state budget. That would force the state to spend the same percentage of tax dollars on education that was spent before the lottery. Money from the lottery was expected to enhance education spending, but legislators used a portion of it to replace tax dollars that were diverted to other programs.

"It's the only way to do it," Mills said of the proposed amendment. "I don't see anything on the horizon that suggests the Legislature is willing to look at a tax."

Mills would not say whether bringing back the services tax would be preferable to a constitutional amendment that locks in education spending levels. The answer is obvious. Using the constitution to handcuff the state's spending decisions, no matter how laudable the goal, is no better than using it to restrict government's ability to raise revenues to meet the needs of this state.

In many ways, Florida's state government is better prepared to make the case for taxing services than it was in 1987. While more can be done, there has been an honest effort in Tallahassee to root out waste. Some state agencies have been consolidated. There is a gradual move toward a budgeting process that no longer assumes existing programs will receive at least the same level of funding the next year. Hundreds of millions of dollars have been stripped from ineffective or outdated programs and reallocated to others.

"The public requires that today," Kiser said. "Before, nobody wanted to do anything about it."

Now somebody needs to do something to bring back the tax for Florida's future.