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Florida Budget Deficit Sharpens Debate On Taxes

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By CATHERINE DOLINSKI

The Tampa Tribune

Published: September 22, 2008

TALLAHASSEE - Florida's continuing revenue shortfall - projected to be in the billions of dollars this year and next - is unprecedented. The partisan dispute over it is anything but.

Democrats, worried that budget cuts will harm education, courts, child welfare and services to seniors, want to find new sources of revenue to support spending. Republicans want to shrink government, and the budget that comes with it.

Economists say the decision is more complicated and that Florida's economic health may depend on state leaders' willingness to move beyond one of the most fundamental fault lines dividing them.

Yet even among economists without elections to worry about, settling on the "right" approach isn't easy.

"Tax increases would not in general be more harmful to the economy than spending reductions," Nobel Prize-winning economist Joseph Stiglitz argued in 2001 during the post-9/11 economic downturn.

A professor at Columbia University, Stiglitz said in an interview last week that his 2001 analysis holds equally true for states today - and where individual states go, so goes the country, affecting all taxpayers. "Congress enacted a $150 billion stimulus package. That will all be undone if the states contract their spending," he said.

State spending flows directly into a state's economy, Stiglitz reasoned, supporting jobs and local businesses. Wealthy taxpayers, on the other hand, tend to save more of their incomes than other people do, bringing the economist to his next point.

"If you increase taxes on upper-income individuals, it has the least effect on consumption," he said. "Poor people consume every dollar they get, unlike rich people who don't."

Absent an income tax, Stiglitz said, one of the easiest ways to tax the rich is to increase property taxes on a state's priciest residences.

"I admire a Nobel Prize winner, but if he ran for office, I promise you, he'd change his mind," said incoming House Speaker Ray Sansom, R-Destin, who co-chaired the joint Legislative Budget Commission that approved state spending of $672 million from rainy-day funds this month.

Lawmakers have already carved about $6 billion out of state spending during the past year, with Sansom presiding in the House as budget chief. Last week, he reiterated his objection to raising taxes of any kind: "There are a lot of things that need to be done before anyone hits the panic button."

Economist Tony Villamil backs that approach.

"The last thing you want to do is increase taxes on the average citizen," said Villamil, who was state Tourism, Trade and Economic Development director under former Gov. Jeb Bush. He is now business school dean at St. Thomas University in Miami.

"States like California that have increased fees and taxes are generally doing much worse that those that are holding the line. If you raise the tax rate, you just slow the economy further," he said.

Villamil, however, did not rule out raising the cigarette tax, which Democrats want but Sansom opposes.

Florida's cigarette tax rate lags behind most states, said Robert Bradley, who was budget director under the late Gov. Lawton Chiles. Not only would raising the cigarette tax place the least burden on families, it is among those taxes that Florida can reap from tourists, said Bradley, now a public administration and policy professor at Florida State University.

"It's hard to argue against it," said Rep. Ted Deutch, D-Boca Raton, who sponsored an unsuccessful proposal to raise the cigarette tax by $1 this past spring and is filing a similar bill for the 2009 session. "First and foremost, it's a public health matter; all the data shows that best way to keep kids from smoking is to increase the price, which will simultaneously raise $1 billion."

Sansom called increasing the cigarette tax "an easy way out." He's more interested, he said, in looking for ways to minimize wasteful spending and inefficiencies. The state, he said, will have to live within its means.

State analysts project a $1.47 billion shortfall this fiscal year and more than a $3 billion shortfall next year.

Jerry McDaniel, budget director for Crist, told the joint budget commission on Sept. 10 that the governor is interested in "broadening the general revenue base." But that doesn't include a tax increase on cigarettes or anything else, McDaniel said later. Instead, he is looking into diverting funds that once fed the state's general revenue account but now enrich trust funds dedicated to specific program areas. McDaniel declined to specify which revenues or trust funds could be targeted.

Mike Haridopolos, Senate Finance and Tax chairman, said he would consider raising the cigarette tax - but only in the interest of improving the tax system, not as a means of raising revenue. If that or any other tax rises, he said, one identified as unfair should fall. His prime candidate: the cell phone tax, currently about 18 percent statewide.

Haridopolos, R-Melbourne, would apply the same rule to repealing sales tax exemptions, another strategy that Democrats would like to use to raise money. There are $12.3 billion in sales tax exemptions on Florida's books, not including the $23.4 billion in tax "exclusions" for services.

Democrat Nan Rich of Sunrise, who sits with Sansom on the joint budget commission, said she would object to any sales tax increase because it would hurt people with low incomes. "But if we broaden the tax base by losing exemptions, we could pick up additional funding."

Rich is worried about Crist and lawmakers making permanent a 4 percent spending holdback that is in effect for all state agencies.

David Denslow, economics professor at the University of Florida, said there's good reason to worry. "The standard story during a recession is that while the private sector has cut back, the public sector should as well," he said. "The problem is, those cutbacks in the public sector are not always efficient. You're most likely to cut back in areas where the effects will be felt later: investments, like maintaining roads, and children. That's going to have a big cost later."

Sansom said closing tax exemptions or other tax loopholes is tantamount to raising taxes, which he rejects. But Denslow likes the idea of broadening the sales tax base starting with the unpopular approach of taxing consumer services, such as dry cleaning and hair care. They are ripe for a tax, he said.

According to state estimates, dry cleaning and laundry services would be worth $64.6 million a year if taxed. Personal services, including hair cuts: $87.3 million.

If he truly had his druthers, Denslow would also lift what is probably the most protected exemption by both political parties: the grocery tax exemption, valued at $2.65 billion.

"It would make the sales tax a little bit regressive," the economist acknowledged. "But who's going to suffer the most from spending cutbacks? That would be the poor as well."

Reporter Catherine Dolinski can be reached at (850) 222-8382 or cdolinski@tampatrib.com.

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