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Florida’s Tax Structure
Florida’s constitution prohibits lawmakers from implementing a personal income tax. The state’s primary source of revenue is through the sales tax. Other sources of revenue include the documentary stamp tax on real estate purchases, real estate taxes, and motor fuel taxes. • Overall, Florida has kept taxes low and has refrained from creating new ones even as other states have done so. • The last tax increase was in 1988, when the legislature increased the sales tax by 1 percent. • One key debate involves whether to tax goods purchased in other states. While local businesses lobby to have buyers pay the tax, it is sellers that should pay it—in the state where the good is sold.
Florida is one of seven states with no personal income tax, and there is very little chance that will change because Florida’s constitution prohibits the state levying one, and a constitutional amendment would require voter approval. Voter approval of a personal income tax is so unlikely that even those who would strongly favor a state personal income tax do not suggest it because it would be both politically unpopular and politically infeasible. So, the absence of a state personal income tax is not a political issue in Florida, but it does have a major impact on Florida’s tax structure when compared to most other states. Florida’s biggest source of tax revenue by far is its sales tax.
Table 5 shows tax revenues, in millions, for Florida’s major tax revenue sources. There is a substantial increase in dollar amounts over time, partly due to inflation and partly to Florida’s population growth. Recalling that total state appropriations for 2013/14 were $74 billion, tax revenues of $48.7 billion in that year mean that only about 66 percent of appropriations are financed by taxes. The vast majority of the other third of the budget is financed by federal grants.
In nominal terms, Florida revenues had always increased year-over-year up through the 2005/06 fiscal year. Then the force of the recession, coupled with the collapse in the housing market (which was particularly severe in Florida), pushed total tax revenues from $46.2 billion in 2005/06 to $38.7 billion in 2008/09, a decline of 16 percent. The decline is noteworthy in light of the fact that for at least a quarter of a century before the decline, total tax revenues never had a year-over-year decline.
A big contributor to the decline was the decrease in sales tax collections—by far the largest tax revenue source in Florida—which fell from $21.9 billion in 2006/07 to $18 billion in 2009/10. In terms of percentage, though, the biggest hit came in the decline of documentary stamp taxes, which are levied mainly on real estate transactions. Documentary stamp tax revenue fell from $4.1 billion in 2005/06 to $1.1 billion in 2009/10, a decline of 73 percent, as a result of the collapse of the real estate market. There was also a substantial decline in revenue from the intangible property tax, but this was due to the elimination of the tax on personally owned intangible property in 2008.
Table 6 shows those same individual taxes as a percentage of total tax revenues. The “Other” category of taxes and fees makes up a big percentage of revenues, but individually, each of those taxes or fees is a small part of the budget. This category includes beverage licenses and fees, corporation filing fees, various excise taxes, and tuition and fees at state universities. By far the single largest source of tax revenues is the state sales tax, which has fluctuated between 40 percent and almost 50 percent of total tax revenues during the entire three and a half decades shown in the table. The corporate income tax occasionally brought in more than 6 percent of tax revenues in the 1980s, but in recent years it has been responsible for between 4 percent and 5 percent of tax revenues. Motor fuel taxes bring in slightly more than the corporate income tax, and they go into a trust fund earmarked for transportation—mostly roads.
The documentary stamp tax and intangible property tax are separated out even though they are minor sources of revenue because of recent changes in their collections. The documentary stamp tax is levied on the registration of real estate transactions, and brought in 8.8 percent of total tax revenues in 2005/06, during the real estate boom. By 2009/10, it brought in only 2.6 percent of total tax revenues. The substantial decline was due to the collapse of the real estate market. In the case of the intangible property tax, the tax was repealed in 2008 for individuals owning intangible property like stocks and bonds, so the big decline in revenues was due to a change in the tax structure.
Table 7 shows state taxes as a percentage of gross state product. There has been a downward long-run trend in total state taxes, with fluctuations within that long-run trend. Through the mid-1990s, total tax revenues grew as a share of GSP and were consistently more than 7 percent of GSP through most of that decade. Total tax revenues declined as a share of GSP through the first decade of the 21st century, hitting a low of 5.14 percent in 2008/09, but they have have rebounded to 6.08 percent of GSP in 2013/14. The dip was associated with the recession, so it would be difficult to view the rebound over the past five years as a trend, but it does appear that about a third of the decline from revenues (around 7 percent of GSP) is due to the combined declines in documentary stamp and intangible property tax collections.
Sales tax revenues as a share of GSP were consistently above 3 percent through 2005/06 before declining to under 2.5 percent by 2008/09; they have risen by 0.25 percent since then. As the largest source of Florida’s tax revenues, any decline in sales tax revenues will be a source of concern for policymakers. As a result, the design of Florida’s sales tax has stirred more policy debate than other state taxes. Figure 5 shows all state taxes and specifically sales tax revenues as a percentage of GSP; the decline in both is apparent in the graph. Total taxes have had a downward trend from the early 1990s. Sales tax revenues remained relatively level at slightly above 3 percent of GSP during that time, but a substantial decline shows up after 2005, and while the recent trend is up, sales tax revenues as a share of GSP are still well below their average over the past two decades.
Florida’s Sales Tax
Florida’s sales tax was originally implemented in 1949 as a tax on the retail sale of tangible goods. As originally defined, the tax excluded the taxation of services. The degree to which services should be covered by the tax has been the subject of periodic policy debate in the state for a long time. The sales tax is technically a sales and use tax, with the tax on use essentially being sales tax owed on items consumers use but for which sales tax is not charged. A use tax is owed if a sales taxable item is purchased in Florida but sales tax is not charged. For example, if an item is tax-exempt because it is bought for resale but subsequently used in a business or for personal use, or if an item is purchased out of state and delivered to Florida without sales tax being paid. This last category looms larger in the policy debate as more purchases are made over the Internet.
The state sales tax rate was originally set at 3 percent in 1949; it was raised to 4 percent in 1968 and again to 5 percent in 1982. The rate was finally increased to 6 percent in 1988. Looking at table 7, the 1983/84 rate had just been increased to 5 percent, and since 1988/89 the rate has been 6 percent. Florida also allows counties and school districts to levy local option sales taxes that can add as much as 1.5 percent to the sales tax rate, but this revenue goes to the local governments and is not reflected in the tables.
Florida’s sales tax was originally established as a tax on the retail sale of tangible goods, so services were specifically excluded from the sales tax base. This places the tax treatment of goods on a different basis from the tax treatment of services, as many critics have observed. Proponents of a services tax offer examples, noting that if someone buys hair clippers to cut hair at home, sales tax is charged on the clippers, but if someone goes to a barber for a haircut, no sales tax is charged. Similarly, if someone buys a lawnmower, sales tax is charged on the mower, but if someone hires a lawn care service to mow the lawn, no sales tax is charged on the service.
These are compelling examples but less relevant to Florida’s sales tax than they at first appear. Ideally, a sales tax would tax all retail sales only once. Yet in Florida (and in every state with a sales tax), many retail purchases (such as services) are not taxed, whereas many nonretail purchases are. In Florida, about half of all sales tax payments are paid on nonretail purchases. Going to the examples in the previous paragraph, business equipment is sales taxable in Florida, so when the barber buys the clippers or the lawn service buys the lawnmower, they pay sales tax on those items. Businesses that buy computers, cash registers, and most other business equipment pay sales tax on those purchases. Florida also taxes the purchase of construction materials, so when houses, apartments, office buildings, and shopping centers are built, the construction materials going into them are subject to sales tax.
This is a source of inefficiency because those nonretail purchases are double-taxed. If a business buys a cash register, that is a part of the cost of doing business, which must be factored into the retail price of its sales, so the cash register is taxed once when the business buys it and then again when its cost is included in the final price of the retail sale. But because Florida relies so heavily on its sales tax, it would be politically difficult to propose eliminating all nonretail purchases from the tax base—despite the original intent of the tax to be a tax on retail sales only.
While some nonretail sales are taxed, many retail sales are not. Florida specifically exempts groceries and medicines from sales tax, as do many other states, and as already noted, most services are exempt. As the economy has shifted toward the production of more services, policymakers have argued that the sales tax should be extended to services. Note that many services already are taxed—for example, restaurant meals. The biggest push to tax services came in 1987, when the Florida legislature passed a very comprehensive tax on services.
While there is a strong economic argument for treating the retail sale of services the same as the retail sale of goods, the bulk of the revenue that would have been collected under the 1987 services tax was not to come from retail services, but from intermediate services, which would have resulted in double taxation. Legal services, consulting services, accounting services, advertising, and almost all other services would have been subject to Florida’s sales tax. This double taxation would have been inefficient. Economic efficiency may play some role in the design of public policy, but the way policy affects powerful interests has a bigger influence, and in this case, those service providers whose services would be subject to the tax provided formidable opposition. Especially vocal were advertisers, whose business was communicating with the general public in a persuasive way. The result was that a few months after the services tax was passed, it was repealed and replaced with an increase in the overall sales tax rate from 5 percent to 6 percent.
Senate President John McKay led another serious push to extend the sales tax to services in 2002. That proposed tax would have been very similar to the 1987 tax; it met with very similar opposition. Ultimately, the status quo remained.
Politically, one problem with passing a services tax is that legislators have to vote to do it, and voting for an extension of the tax base like this is politically unpopular. The result is that even legislators who might personally favor a tax on services might not vote for one. Another strategy that has been suggested is to limit exemptions to the sales tax to a specific number of years (say, five years), after which they would have to be approved by a majority of the legislature or they would expire. Defining services as exemptions to the tax would mean that legislators would have to vote in favor of not taxing services every five years, or those services would be taxed. This tactic would change the default option (if no action is taken) from exempting services from the sales tax to taxing them unless a vote is taken to retain the exemption.
The political attraction of requiring an affirmative vote to maintain an exemption is strong. First, those who want a tax on services would not actually have to vote for one. All legislators would have to do is take no action. Gridlock would be a possibility, in which case no action would be taken and a services tax would automatically take effect. A second, and possibly larger, attraction is that every five years, anybody who is selling anything that is not subject to a sales tax would have to lobby the legislature to keep their sales untaxed, under threat that the legislature might tax their sales by simply doing nothing and not voting to extend the exemption. Under this regime, businesses would be forced to engage in rent-seeking activity to try to buy the support of the legislature, just to keep things as they are. This “rent extraction” can be very costly for businesses, but potentially profitable for legislators who are able to get campaign contributions and other support in exchange for maintaining the status quo for those businesses.
Looking at the political incentives, extending Florida’s sales tax to services would almost surely mean taxing intermediate services like accounting, consulting, and advertising, because if the tax were limited to the haircuts and lawn care that proponents use in their examples, the tax would raise almost no revenue; there would be little point in expending any political capital to collect it. But there are many political incentives to sunset the exemption of all services. So far, the political interests opposing the taxing of services have been able to hold their ground. This is one area in which term limits may alter the incentives of those in the legislature, many of whom are attorneys. Once their terms are up they will go back to their law practices, and legal services will be taxed if a services tax like the one in 1987, or the one proposed in 2002, is implemented.
Taxing Internet Purchases
As e-commerce becomes more common, many states are looking for ways to tax Internet purchases. A look back at table 7 gives no strong indication that Florida’s sales tax revenues have been adversely affected by the move toward e-commerce. Sales tax collections as a share of GSP remained above 3 percent up through 2005/06, when the housing market collapsed and the economy entered the recession. Recall that construction materials are sales taxable in Florida and one reason for the decline in sales tax revenues as a share of GSP since 2005/06 is the decline in construction. Since bottoming out in 2008/09, sales tax revenues as a share of GSP have risen, and a revival of the construction industry should push revenues up more.
One argument for taxing Internet purchases is that under Florida’s sales and use tax law, taxpayers legally owe the tax, but it is difficult to enforce and they are not paying it. It is even unclear, from reading the Florida Statutes (FS), that Internet purchasers actually owe the tax. Florida Statutes section 212.05 states, “It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of selling tangible personal property at retail in this state, including the business of making mail order sales, or who rents or furnishes any of the things or services taxable under this chapter.” This quote from the FS makes it appear that it is the Florida retailer who owes Florida sales tax when a sale is made—even if to an out-of-state buyer—rather than the buyer being liable, regardless of the location of the seller. As this statute reads, Internet sellers in Florida who are selling to out-of-state buyers are exercising a taxable privilege. It is the sellers, not the buyers, who are exercising the taxable privilege.
Setting the details of the law aside for the moment, sales taxes are normally remitted to the jurisdiction of the seller, not the jurisdiction of the buyer, just as FS 212.05 says. If a Floridian goes to New Orleans and buys something, the Floridian pays Louisiana sales tax, not Florida sales tax. Similarly, if an Ohioan comes to Florida for a vacation and buys something, the Ohioan pays Florida sales tax, not Ohio sales tax. In keeping with the way sales taxation actually works for retail sales, if Internet purchases were to be sales taxable, the tax should be paid in the seller’s jurisdiction, not the buyer’s. If a Floridian buys something from a New York seller (regardless of whether the purchase is made in person or over the Internet), New York would collect the sales tax from the seller, as it already does when visitors buy goods in New York. Similarly, if a Kansan buys something via the Internet from a Florida seller, the seller should remit the sales tax to Florida, as would be done if the sale were done in person. Further, this appears to coincide with Florida law as written in FS 212.05.
Nearly all Internet tax proposals are to levy the tax on buyers, for good political reasons. The interest groups that lobby for the taxation of Internet purchasers are representatives of retail sellers within those states. The “brick and mortar” retailers argue that their sales are sales taxable, so Internet sellers that do not charge sales tax have a competitive advantage over them. To level the playing field, buyers should pay sales taxes on their Internet purchases. While the argument sounds persuasive, the government goods and services paid for by those local taxes are much more associated with the sellers than the buyers. The retail outlets have local police and fire protection, their customers use the local roads to get to their stores, and the employees of local retailers send their children to local schools. In contrast, the Internet buyer stays off the roads, and the businesses that require the local police, fire, and other services are in other states. This is another reason why the tax should be remitted to the seller’s jurisdiction, not the buyer’s.
This argument that Florida retailers should pay Florida sales tax when they sell over the Internet to out-of-state buyers is a political nonstarter because the interest groups that lobby for taxation of Internet sales represent Florida retailers, and they want to place taxes on their competitors, not on themselves. Arguing that sellers, rather than buyers, should pay the tax would be arguing that in-state businesses should be paying more in taxes, and of course no in-state businesses are going to lobby for taxes to be placed on them.
The problem with taxing buyers is that the Supreme Court ruled in 1992 that states cannot require businesses that do not have a physical presence in the state to collect and remit sales taxes for purchasers in the state. Regardless of Florida’s use tax law (and as already noted, it is unclear that buyers are obligated by it to pay sales tax on Internet purchases), Florida cannot require the sellers to collect and remit the taxes, and buyers almost never volunteer to remit use taxes themselves. One way to collect the taxes would be to have individual states agree to require sellers in their states to remit sales taxes to the buyer’s state. The Streamlined Sales Tax (SST) project was designed to provide just such an agreement among the states. Once implemented, the participating states would require businesses in their states to remit sales taxes to the buyers’ states.
The SST agreement was adopted in 2002 and has been amended more than 30 times. It is now 206 pages long. Florida is not among the participating states, but there is continuing interest among some Florida legislators to join the agreement. Doing so would be a questionable move for Florida for several reasons. First, the sales tax is Florida’s largest source of tax revenue, and joining would mean that Florida’s sales tax would have to be redesigned to conform with SST guidelines. Floridians should be very leery about having their largest tax base put under the control of a multistate consortium made up mostly of people from states with tax laws that are very different from Florida’s. Florida is a low-tax state, and has no personal income tax, so the desires of SST members from other states may be at odds with what would be best for Floridians.
The issue goes beyond what is in the agreement today. Even though the agreement has yet to take effect among the cooperating states, it has been amended on average more than twice a year since it was originally written. Florida could join today and find that it was party to a very different agreement in a few years. Nonetheless, the issue will be an ongoing one in Florida because of the strong lobbying efforts from interest groups representing Florida’s retailers who want an agreement that will increase the costs of their out-of-state rivals.
The Documentary Stamp Tax
When real estate transactions occur in Florida, buyers are required to pay a documentary stamp tax to register their ownership. The documentary stamp tax has provided a steady source of revenues to Florida, but as noted earlier, the collapse of the real estate market in 2007 led to a large decline in those state revenues. There has been little in the way of any proposals to change the nature of the tax.
Motor Fuel Taxes
Table 7 shows that motor fuel taxes have been declining as a share of state GSP since the early 1990s. The reduction from around 0.4 percent of GSP to 0.3 percent is a substantial decline. The taxes are earmarked to fund transportation projects—mostly roads—so the decline has an impact on road funding. As automobiles become more fuel efficient, and perhaps shift to alternate fuels, the amount of fuel burned per mile traveled is declining. Another factor that leads to the decline is that the tax rates are stated in cents per gallon, and legislators are reluctant to vote for rate increases even as inflation erodes the value of the dollar.
The primary response to a reduction in funds available for roads has been to build toll roads, financed by user-paid tolls. People resist establishing tolls on roads that do not have them, so political pressures prevent shifting a nontoll road to a toll road. But when voters are offered the option of a new road, financed by tolls, and the alternative is no new road, they do favor the building of the new toll road.
How far this funding model can be taken is an open question. It does appear that the use of motor fuel taxes to fund roads will become less viable over time, but politicians tend to be shortsighted, and at present there is no serious discussion of overhauling the transportation funding model of using motor fuel taxes as the primary source of revenues to finance roads.
Intangible Property Tax
Florida’s intangible property tax dates back to 1931, and its primary tax base was financial assets, including stocks, bonds, interests in partnerships, and other intangible property. Bank accounts and assets in tax-sheltered retirement accounts were exempt. The tax was levied on the value of intangible property at the end of each calendar year, and the rate varied from half a mill to as much as two mills, which was the constitutional upper bound. In addition to this recurring tax, there was a nonrecurring two-mill tax when mortgages were recorded.
When Jeb Bush was elected governor in 1998, one item in his platform was to repeal this tax, which he called the “seniors and savers tax.” He bargained with the legislature to reduce the rate and to eventually repeal the tax in 2008. The nonrecurring two mill tax on the recording of mortgages remains.
Table 7 documents the reduction in the intangible property tax as a share of GSP through the first few years of the 21st century. In 1997/98 the tax was collecting 0.29 percent of GSP, but collections declined after 2000 as the rate was reduced, and it has fallen to 0.04 percent of GSP in 2013/14, as only the mortgage component of the tax remains. The repeal of the intangible property tax is an interesting political phenomenon. Such a tax would have fallen most heavily on upper-income Floridians, who owned more in the form of intangible assets, so a populist approach to politics would have supported taxing the rich to raise revenue for everyone else. This may be a case of principles rising above politics in that Florida’s governor is limited to two terms, and Governor Bush did not face strong opposition when he ran for reelection in 2002, so he was able to use some political capital to get the tax repealed. In addition, he had the support of key legislators who were also term-limited.
The politics was interesting, though, in that Governor Bush had to push continually for repeal, while the legislature compromised a little at a time, cutting the rate but not repealing the tax until Bush’s last year in office. By holding off on complete repeal, politicians could use the lure of future repeal as a bargaining chip in the political process.
Real Estate Taxes
Florida’s state government does not collect real estate taxes, but such taxes are governed by state law and have been subject to some policy changes over the decades. Florida’s constitution limits the number of mills that local governments can levy for property tax, and in perhaps the biggest change to Florida’s constitution, the Save Our Homes amendment was added in 1995. The amendment limited the increase in the assessed value of any property with a homestead exemption to no more than the rate of inflation or 3 percent, whichever is lower.
In Florida, as in other states, rising property values had caused people’s property tax bills to rise, even when they remained in the same homes. Rising property taxes based on an increase in assessed values could, in the extreme, force people out of their homes as their property taxes made living there increasingly unaffordable.
The Save Our Homes amendment was a citizen initiative amendment, put on the ballot by collecting a sufficient number of voter signatures. It applys only to homestead property: homeowners living in their own homes are protected by the cap on assessed value, which does not apply to other property, including apartments, commercial property, second homes, or out-of-state owners of Florida real estate. When the housing bubble occurred during the first few years after 2000, Florida homeowners were protected from rising property taxes by the Save Our Homes amendment; owners of second homes and commercial property were not. Owners of commercial property have less voting power than homeowners, so getting political support for limits on their assessed property values is problematic.
The Save Our Homes amendment caused another problem, though, which was that homeowners with capped assessments could be “locked in” to their homes and reluctant to sell and give up their tax advantages. Moving to another home in Florida, even one of equal or lesser value, could trigger a big property tax increase. As long as a homeowner continues living in the home, the cap on the assessed value of the homestead is in effect, and over time this can add up to substantial tax savings. But if the house is sold, the sales price will set a new assessed value for the new owner, and the tax savings will be lost. Real estate agents, who are a powerful interest group, disliked the lock-in because it discouraged people from selling their homes and moving to new ones, which cut down on home sales and their associated commissions.
The result was that the legislature put a constitutional amendment on the ballot in 2008 that provided for portability of the tax savings from Save Our Homes and also capped increases in the assessed value of all property to no more than 10 percent per year. Portability means that if a homeowner has a capped assessed value that is less than the fair market value of a home, the homeowner can sell the home and take that difference to lower the assessed value of a new homestead that the homeowner buys. The tax saving goes with the homeowner to the new property. The constitutional amendment passed, getting the support of 64 percent of the voters.
Because Florida allows constitutional amendments to be placed before voters if the amendments get a sufficient number of voter signatures, legislators sometimes feel constrained to place an amendment on the ballot to avoid such an action. The 1995 Save Our Homes amendment that capped assessed values on homesteads to an increase of no more than 3 percent a year was a citizen initiative amendment. The legislature produced the 2008 amendment with a cap of 10 percent on all property, rather than the 3 percent that only applies to homestead property. The legislature felt some pressure to put this amendment on the ballot, largely because of the portability provision that would lower the property taxes of Floridians who moved from one Florida homestead to another. By putting the amendment on the ballot the legislature was able to preempt what might have been a stronger amendment, had it originated from the interest groups that wanted it.
 Raymond J. Ring Jr., “Consumers’ Share and Producers’ Share of the General Sales Tax,” National Tax Journal 52, no. 1 (March 1999): 79–90.
 Hellerstein, “Florida’s Sales Tax on Services,” 1–18.
 William F. Fox and Matthew Murray, “Economic Aspects of Taxing Services,” National Tax Journal 41, no. 1 (March 1988): 19–38; William Duncombe, “Economic Change and the Evolving State Tax Structure: The Case of the Sales Tax,” National Tax Journal 45, no. 3 (September 1992): 299–313.
 This idea has been explained by Fred S. McChesney, “Rent Extraction and Rent Creation in the Economic Theory of Regulation,” Journal of Legal Studies 16, no. 1 (January 1987): 101–18, and Money for Nothing: Politicians, Rent Extraction, and Political Extortion (Cambridge: Harvard University Press, 1997). More recently, see Peter Schweizer, Extortion: How Politicians Extract Your Money, Buy Votes, and Line Their Own Pockets (Boston: Houghton Mifflin Harcourt, 2013).
 Fla. Stat. § 212.05 (2011).
 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
 For the group’s history and the current agreement, see the Streamlined Sales Tax Governing Board Inc. home page at www.streamlinedsalestax.org.
 For a discussion of voter support for the amendment, see Ron Cheung and Chris Cunningham, “Who Supports Portable Assessment Caps: The Role of Lock-In, Mobility, and Tax Share,” Regional Science and Urban Economics 41 (2011): 173–86. The authors find that voters who were more likely to move and had greater savings locked in because of Save Our Homes were more likely to support the amendment.
 The others are Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire do not tax wage income but do tax interest and dividend income.