Florida’s Governor Tries Again on Tax Changes

Governor Rick Scott (R) of Florida announced a slate of new tax changes. The changes, many recycled from previous budget proposals, would result in a $1 billion tax cut. Like previous iterations of Governor Scott’s proposals, this year is a mix of pro-growth tax reforms and tax gimmicks.

The proposal includes five key changes:

• Permanent elimination of the income tax on manufacturing and retail businesses ($770 million)
• Permanent elimination of the sales tax on machinery and equipment ($76.9 million)
• Reducing the tax on commercial leases ($339 million over two years)
• Extending the college textbook sales tax exemption ($46 million)
• Sales tax holidays for back-to-school purchases and disaster preparedness ($72.8 million)

Ending sales taxes on business inputs is a positive step. Under Governor Scott’s plan, the sales tax on commercial leases would be cut by 1 percent, down from 6 percent, in 2017. Additional cuts of 0.36 percent would occur annually. Machinery and equipment are currently exempt from the sales tax, but the exemption ends in 2017. This plan would make the exemption permanent. Business inputs should not be subject to the sales tax. The taxes add considerable costs to business investment. The costs get passed through the production cycle, increasing the economic distortions.

Governor Scott’s package includes exempting manufacturing and retail businesses from the corporate income tax. He estimates the cuts would save almost $800 million a year. The corporate income tax is a small source of Florida’s revenue, collecting only $2.2 billion in fiscal year 2014–2015. Proposing cuts to the corporate income tax rate is a great step, but targeting industries is not. A better solution would be to use the revenue to push an across-the-board rate cut.

The sales tax holiday provisions are gimmicks. Sales tax holidays do not generate economic growth; demand simply shifts to take advantage of the tax holiday. Tax holidays impose large burdens on retailers, who must reprogram their computers to exempt the items based on relatively narrow provisions. Governor Scott has proposed sales tax holidays before. It was a bad decision then, and it is a bad decision now.

Finally, Governor Scott adds another tax change in his budget, separate from the stated five proposals. The budget proposal includes an additional $38 million in investment tax credits. The credits are part of a larger package of economic development subsidies to encourage firms to relocate to Florida, which are likely to have limited effectiveness.

Governor Scott continues to push for tax relief in Florida. In a number of respects, his package moves the ball forward on pro-growth tax reform. Eliminating the sales tax on machinery, equipment, and commercial leases would be a win for sound tax policy. Governor Scott could improve his plan by removing the sales tax holidays and wasteful tax credits, and redirecting those savings toward an across-the-board cut to the corporate income tax.