Walsh Review and Comment
Tax-swap amendment will fuel the economy
This is the second of two installments on Amendment 5, the proposed "tax swap" amendment that would eliminate the state's required local effort property tax for K-12 public schools.
Don't listen to the business lobbies. Don't listen to incoming Florida Senate President Mike Haridopolos, R-Melbourne.
They don't want Floridians to adopt Amendment 5. In fact, they don't even want to let you vote on the amendment.
But Florida's economy and Floridians need Amendment 5.
This is the measure that will eliminate the state-required local school property tax, roughly 32% of your annual property tax bill. And, it will cap annual increases in property assessments on non-homesteaded property at no more than 5% a year (it would be better if that 5% were 3%).
Approving Amendment 5 will be good for Florida and good for Floridians.
Last week, we showed you how the state's required local school property tax is an insidious, corrupting, awful tax. We showed you how lawmakers routinely abuse it and how they do so each year with little detection from the public and seldom, if ever, a negative repercussion. With the authority to set county school millage rates, lawmakers decide each year how much they want to spend, and then they tell the state's school districts to do the dirty work - to impose the tax in local property-tax rates.
It's a classic stealth tax.
We cited this insidiousness as one of two reasons voters should approve Amendment 5 in November. Consider last week's installment the dark, bad side of the local school property tax.
This week, we're focusing on the bright, good side of Amendment 5 - how, if approved, it will stimulate Florida's economy and put more money in most Floridians' pockets.
But there's a catch: State legislators must do the right thing if the amendment passes. (It will require 60% of the vote.) They must show political and legislative leadership, and they must show courage, characteristics often in short supply in the state Capitol.
How you will benefit
Amendment 5 will create an economic boon, not doom.
To understand how, consider the amendment's two parts - the effects of the tax cut and the effects of the "swap," the new taxes that must be imposed to make up for the lost school taxes.
To the first - the tax cut.
It should be self-evident that if you eliminate 32% of Florida's property taxes, every property owner's wealth will increase. Everyone will have more disposable income. The full extent of that increased wealth is greater than what you might expect. As Florida economist Hank Fishkind showed us, the elimination of the required local school property tax will increase property owners' wealth by a factor of 10-to-1 (see the example in the accompanying box).
If you cut a property's taxes by $7,000, its value increases $70,000, 10 times the value of the tax cut.
So if you cut $8 billion to $9 billion in school property taxes statewide, you increase the value and net worth of Florida's property owners by $80 billion. An instant increase in wealth.
This is especially so for commercial property owners, whose holdings make up about 50% of the taxable value in Florida. Boom! - a $40 billion increase in the value of everyone's commercial land and buildings.
Now consider what happens next. Everything is "stimulative" for economic growth. Office owners who hold triple-net leases with their tenants will be able to pass down the lower property taxes to their tenants, making their businesses more profitable, freeing up more cash and profits to invest and create jobs.
With the cash flow of commercial buildings increasing, Florida's commercial market instantly will become more attractive to investors. Florida will become economically more competitive vis-à-vis other states. Fishkind used the hypothetical of Publix Super Markets. If it must make a choice of investing more capital to build stores in Atlanta or Florida, the lower tax rates in Florida certainly will persuade Publix to shift its capital back to Florida.
In short, Fishkind says, "We'll have more commercial construction. It will be very stimulative to investment and employment."
(Note to lawmakers: Did you get that? Very stimulative to investment and jobs!)
Lower property taxes will re-stimulate population growth, an essential fuel to keep any economy growing. And that, along with the lower taxes, in turn will trigger more residential construction - rental and owned.
At the same time, existing household incomes and net worths will rise. "It's hard to know the magnitude of the stimulative effect on households," Fishkind says. "But if households pay less in property taxes, they will buy other things."
Here's more good news: Landlords who own small apartment complexes and/or several single-family rental homes are likely to pass down some or all of their tax savings to their tenants as well.
Says entrepreneur Harvey Vengroff, owner of multiple rental properties in Sarasota: "Go to a landlord association meeting, and you'll hear the landlords tell you they'll lower their rental rates so they can keep their tenants." In the current economic climate, as jobs disappear, many of these residential landlords are increasingly losing tenants, which of course wipes out the cash flow to service their mortgages. Vengroff says they'd rather lower their rents and keep their tenants than go to foreclosure.
Effects of higher sales tax
Now focus on the effects of the "swap" - the $8 billion to $9 billion in new taxes that must be imposed to keep Florida's schools unharmed, as prescribed in the amendment.
The amendment gives lawmakers a variety of sources to make up what was lost in property taxes. They can increase the sales tax by a cent; cut spending (hah!); eliminate exemptions on the sales tax; or create or identify other revenue sources.
Florida's business lobbies are going ballistic over this part of the amendment, predicting the Legislature will eliminate exemptions and bring back the sales tax on services.
Fishkind suggests two avenues that likely would have the least negative effects:
• Two-cent sales tax increase
A two-cent increase on goods and services that are currently taxed would replace the lost property tax virtually dollar for dollar. In this scenario, there would be no need to tax currently exempted services.
A two-cent increase, of course, would suppress retail sales, particularly on big-ticket items such as cars and boats. Many Floridians would go to Georgia, where the tax is 4%. Internet sales also would increase.
Fishkind says the adverse effect on tourism would not be that great, largely because tourists seldom make decisions on where to travel based on the tax rates. "The elasticity on tourism is very low," he says. "They'll just spend less on goods."
While the sales-tax increase would affect adversely the poor the most, increasing the sales tax still is better than the school property tax. The sales tax is based on consumption. The property tax is much more punishing; it's a tax on an essential.
There's another benefit to a two-cent increase in the sales tax, Fishkind says. It automatically would come with a 20% discount on the "swap." Year-round Floridians would pay only 80% of the increased sales tax; tourists would pay the other 20%.
"You would cut your property taxes $8 billion, raise the sales tax and give yourself a 20% discount. And what's wrong with that?" Fishkind asks.
Although the amendment says the Legislature can increase the sales tax up to one percentage point, which some may say precludes a two-cent increase, the amendment also allows the Legislature to create or identify "other revenues" - the proverbial door opening.
• One-cent sales tax increase, plus a sales tax on energy and utilities.
"This would be only a thimble of what we're going to face," Fishkind says. "Carbon taxes are coming." So a tax on energy would encourage energy conservation.
"It's also important to remember that businesses don't pay taxes," he says. "They pass them on."
The point is if Floridians eliminate the school property tax, they must replace $8 billion to $9 billion in taxes some other way. So the question is: What is the most efficient, least economically damaging way to exact and collect the tax?
This is where political and legislative leadership and courage are required. It's disengenuous for Sen. Haridopolos and other lawmakers to urge voters to reject Amendment 5 on the bogus claim that it will doom Florida's economy. This is a dodge, their way of avoiding tough decisions.
But that's why they are elected. If Amendment 5 passes, lawmakers won't be forced to remove sales exemptions or impose a services tax - as some business groups and lawmakers claim. Leigslators will have many choices. They just need to find the courage to do what's right.
Altogether, Amendment 5 should be a no-brainer. It would eliminate a nasty stealth tax, it would add $80 billion of wealth to Florida property owners' net worth; and it would stimulate population and job growth.
"We've got to be better off," Fishkind says. "We're going to be a lot better off."