Econofists

Econofists

GOVERNMENT WATCH by Mark Gordon | Managing Editor

A prominent panel in Tallahassee continues to debate tax policy that could ultimately become a decision all Florida voters will make. The latest kink: Inviting the Legislature into the process.

TALLAHASSEE - The battle of economists held recently at the state capital over how Florida can reshuffle its school tax system turned into a four-hour political war of attrition.

And when the battle was over, there was one clear group of winners, one mostly clear group of losers and a third group - Florida residents - that are clearly being left in limbo.

The winners are a conglomerate of small business owners and other practitioners in a wide range of so-called service industries, from lawyers to farmers to engineers, who saw an effort to add a sales tax to their work get squashed.

"I have a real problem with services taxes," said Susan Story, president and chief executive officer of Gulf Power Co. and the chair of the state committee that hosted the debate. "I think more small businesses will fail if there is a services tax."

The losing side, meanwhile, is a small group of political officials, some former and some current, who were hoping the state would finally be ripe for major overhaul of its tax structure. That side, which includes longtime tax reformers such as former state Senate president John McKay and current Lee County Property Appraiser Ken Wilkinson, avoided a total loss by agreeing to move ahead with some type of tax reform plan, albeit a much less potent one. McKay's failed proposal, as it has in past years, included taxing all of the service industries.

Finally, the matter of how all Floridians will fare in this fight over the next few years lingers with uncertainty, starting with that less potent tax reform plan. That plan is a proposal on changing how the state collects about $9 billion in school taxes that could become an amendment for statewide vote in November. If voters approve it, state legislators in 2010 will then have several options to collect that $9 billion, including raising the state's sales tax by one percentage point, eliminating hundreds of exemptions and cutting the state budget.

To further put the entire state's residents in limbo, there's this: The prominent economists paid to analyze and debate the big-picture issues of McKay's proposal didn't study the impact of substituting budget cuts for services taxes. And what's more, trying to guess which options the Legislature will choose is virtually impossible.

"If you want the Legislature to modernize the tax system," McKay said before the fight was decided, "then you can't give them an out by letting them cut the budget."

But Patricia Levesque, who sits on the tax panel with McKay and Story and is the executive director of former Gov. Jeb Bush's Florida Future foundation, doesn't look at the potential amendment as an out. Instead, Levesque, who led the effort to protect service industries from being taxed, said her proposal gives the Legislature more flexibility in deciding how much - or how little - it wants to tinker with the tax structure.

'A bad tax'

The battlefield for the debate was actually a standing-room only meeting held by a committee of the Taxation and Budget Reform Commission Feb. 25 in the Senate Office Building.

The commission, a panel of statewide experts that meets every 20 years to study tax problems and propose amendments, had itself a doozy: McKay, a Commission member, sponsored a proposal designed to broaden the state sales tax structure by eliminating hundreds of exemptions and exclusions on services.

McKay's positions was, and still is, that the newfound money the state could raise by taxing what it has previously not taxed could be used in lieu of the property taxes every Floridian homeowner currently pays for schools, what's known as required local effort. That would save Florida homeowners anywhere from 25% to 40% on their property tax bill.

The McKay proposal was met with two-pronged opposition.

One side was the vocal group of service providers, a broad group including accountants, attorneys, Realtors and even farmers. Lawyers and lobbyists for those groups told the committee that a tax on services would be akin to a death sentence for many small businesses.

Indeed, taxing services, said Ben Parks, a spokesman for the Florida Farm Bureau, would be like infecting the entire agriculture industry with citrus canker. Added Parks: "It will be a slow death."

Others who spoke during the public hearing part of the debate were more subdued. Penny Harmon, a Tallahassee-based Realtor and a former mayor of the city, said taxing a Realtor's services would be a complicated procedure. "We may not like what we have now," Harmon told the panel, "but at least we know what it looks like."

Levesque, who submitted an amendment to McKay's proposal that didn't include taxing services, carried that side of the debate for official purposes. The 11-member committee voted 6-5 to approve Levesque's amendment. It then unanimously approved the altered McKay proposal, which will now go before the full 25-member commission, where it needs at least 17 votes to pass.

Dueling economists

The second prong of the opposition to the McKay proposal was the initial focus of the meeting: A debate between Hank Fishkind and Tony Villamil, two of the most well-known economists in the state.

Fishkind, of Orlando-based Fishkind & Associates, sided with McKay, that the current $8 billion system of providing school taxes is broken. "This is just an $8 billion bad tax," Fishkind said. "It erodes public confidence."

But the solution, argued Villamil, of Coral Gables-based Washington Economics Group, isn't to broaden the tax base by eliminating services-based tax exemptions. Villamil and an associate, Robert Cruz, appeared before the committee during a Feb. 12 meeting and surprised several members by stating that McKay's proposal could cost 53,000 jobs in the state.

While those economists backed down somewhat from those comments when they spoke Feb. 25, they remained steadfast in their opposition to the McKay plan. "We are looking at slower economic growth from this proposal," Cruz said.

One aspect of the economist's debate that could have been the driest proved to be a lively exchange. The crux was over software models the opposing economists used to project what would happen to the state's economy under the McKay proposal.

The Villamil/Cruz camp used a software model designed to study economic impact known as a REMI, as it is designed by an Amherst, Mass.-based economics software firm called Regional Economic Model, Inc. That study resulted in Villamil's initial job loss projections and other potential problems with the McKay proposal.

But Fishkind studied the REMI results, in addition to using his own model to study the McKay plan. And he said the REMI model produced results that were internally conflicted, such as job losses combined with population growth. Said Fishkind: "This is the wrong model for a property tax analysis."

Under questioning from the committee, Cruz stuck by REMI, which he said has been used by hundreds of researchers and in thousands of reports. "This model has been vetted and this model has been tested," Cruz said. "It is the Gold Standard of economic analysis."

REVIEW SUMMARY

Issue: Overhauling Florida's sales tax system

Agency. Taxation and Budget Reform Commission

Key. A proposal to broaden Florida's sales tax by eliminating exemptions to service-based industries didn't pass a statewide tax policy committee.