Tax holidays? Or tax elimination?

By: 
Feb. 5, 2016

Imagine you're the governor or a legislator.

The state budget analysts come to you and say: “Good news. We're going to have a surplus this year between $800 million and $1 billion.”

What would you do?

1) Spend it all?

2) Give it all back to taxpayers?

3) Keep some for the state and give some back to Floridians?

Say you choose options #2 or #3. The next question becomes: How should that surplus be distributed back to taxpayers?

1) A one-time rebate to all Floridians?

2) Sales-tax holidays at certain times of the year and on certain products?

3) Eliminate the corporate income tax on manufacturers and retailers?

What is the best policy for the benefit of individual Floridians and the future of Florida?

TAX CUTS FOR MAIN STREET
As you probably have read, Gov. Rick Scott's choice is to eliminate the corporate income tax — a savings to businesses totaling about $384 million in the first year and an estimated $770 million annually thereafter.

Meanwhile, Rep. Matt Gaetz, R-Fort Walton Beach, has a different idea. He is proposing the Legislature distribute about $120 million of the surplus via sales-tax holidays.

Some of his ideas include the annual 10-day, back-to-school sales-tax holi-day on school supplies and clothes; a one-day sales-tax holiday on outdoor gear (e.g. hunting rifles, ammunition, fishing equipment, etc.); a sales-tax holiday on Black Friday for small businesses (those with less than $3.3 million a year in total sales); and a sales-tax holiday on personal computers, tablets and cellphones.

When Gaetz introduced his ideas, he told the media he wanted tax reduc-tions that would be more focused on rewarding “Main Street” — average Floridians — more so than businesses.

You get what he's doing. Gaetz's surplus distribution ideas are far more populist than those of Scott. It is, after all, an election year. And what better way to help your re-election than to stand on the campaign stump and tout, “I reduced taxes for you!”

But each of their proposals has one common element: They pick winners; they're selective in who benefits.

With Gaetz's plan, while he wants to target average Floridians, if you look at his list, it's discriminatory. Only those people who buy the particular items Gaetz has specified benefit. What about the fixed-income widow who doesn't need school shoes, backpack, hunting rifle or the latest iPhone? Isn't she just as deserving of a tax cut?

Guess what else? These tax holidays are not the savings they are touted to be. Many retailers actually increase their prices just before the sales-tax holiday. University of West Florida researchers found that Pensacola retailers actually pocketed 20% of the expected savings to consumers by raising prices during tax holidays.

Or consider the extra costs, burdens and complexity sales-tax holidays cre-ate for retailers. You must re-program your computer systems to collect the lower sales tax and make sure the lower tax only applies to certain merchandise. Some retailers end up increasing their payroll either by hiring or paying overtime to ac-commodate short surges in customers — customers who would have made the same purchases spread out over the year.

Suffice it to say, from the retailer's perspective, this is a pain the you-know-what — all for a one- or 10-day, 6% savings to consumers.

Sales-tax holidays sound great and are great populism for politicians. But they're gimmicks that discriminate and distort the market.

Now consider Scott's approach: permanent elimination of the corporate income tax.

From a fiscal perspective, Gaetz's tax holidays are safer for legislators than Scott's tax elimination. If, say, the state's projected surplus next year shrinks to zero, lawmakers easily can revoke the sales-tax holidays. A lot of lawmakers don't like Scott's idea because they worry about the future effects — especially when the next recession arrives.

From their perspective, it may be appealing to eliminate the tax when Florida is running surpluses. Those surplus revenues can cover the taxes that won't be collected by eliminating the tax. But if that surplus disappears the following year and the year after that, lawmakers either will need to cut government spending by $770 million a year or impose tax increases. They loathe either choice. They hate to give up a source of cash.

WATCH FLORIDA GROW TO #1
Scott's view is that of the entrepreneur and supply-sider. His promise to voters was to create the best business climate in America. Eliminating the corporate income tax would be another step toward that, in turn leading to more companies relocating here and giving existing companies more capital to expand and create jobs.

It's a well-proven fact that states with falling tax burdens have faster growing economies and personal income than those states with stagnant or rising tax burdens. Scott's belief is that increasing economic and job growth easily would generate more sales and real-estate tax revenues than the amount lost from eliminating the tax.

What's more, eliminating the corporate tax would put more pressure on lawmakers to keep government from growing.

As for Scott picking businesses as the special beneficiaries of a tax cut instead of all Floridians, Scott's view is an expanding economy and job market are greater benefits to Floridians than is a 10-day sales-tax holiday.

Which is better: Scott's or Gaetz's plans?

The better tax policy is to lower permanently the tax burden for all. But of the two, the better choice would be Scott's: Eliminate the corporate tax.

P.S. Lawmakers don't have the courage. They prefer gradualism — a little this year, maybe a little more next. But their goal should be to eliminate the corporate tax altogether.

Then watch Florida grow to No. 1.