Florida Considers Limited Tax Reform

November 16, 2007

According to the Associated Press, a bipartisan reform commission has recommended junking a series of special-interest sales tax exemptions:

McKay’s plan is aimed at repealing exclusions for services ranging from landscaping to lawyering as well as commodity exemptions for such things as ostrich feed and skybox leases at professional sports stadiums.

The committee plans to consider service exclusions at its next meeting Nov. 30. The Legislature repealed them for most services in 1987 but quickly restored them after protests, mainly from businesses.[…]

McKay’s plan would automatically repeal exemptions and exclusions, forcing lawmakers to re-enact those they want to keep. It’s a process known as “sunsetting.”

The plan is a good start. Sales taxes usually only tax 40 percent or so of the “base” of goods and services, and often less. As more and more things are exempted from sales tax, that hikes the rate on everything that’s left. Florida should consider lowering the rate on everything as it brings more goods and services under the sales tax.

The commission estimated that $100 billion of items are excluded from the sales tax base, while about $200 billion of items are currently taxed at 6 percent. Eliminating all exemptions might allow Florida to reduce its rate to about 4 percent while staying revenue-neutral.

The debate over sunsetting should be a lively one:

Commissioner Randy Miller, executive vice president of the Florida Retail Federation, said businesses are against a sunset provision.

“It sends the wrong message to investors, business people doing business in this state that have relied on certain exemptions to come and build their plants here, operate here,” Miller said.

At least one commissioner suggested that these steps are necessary for Florida to begin taxing businesses who have customers but no property or employees in Florida, a practice the U.S. Supreme Court found unconstitutional in the Bellas Hess and Quill cases. Florida should be careful about starting a race-to-the-bottom, which could easily result in Florida companies being hit with punitive taxes by other states. More on this topic—physical presence nexus—here.

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