Amendment 5 didn't survive
a hard landing at the Florida Supreme Court.

!NOT ON THE BALLOT!

The Florida Supreme Court removed Amendment 5 from the ballot on Sept. 3, finding that its title and summary were misleading. The court announced that its unanimous decision was final. For more on the court’s ruling, including reaction to it, click here.

Amendment 5 would have eliminated the local effort (RLE) school property taxes, which the state requires school districts to levy to get state education funds. The Legislature sets the RLE amount every year. For the 2008-09 fiscal year, the statewide RLE is $8.3 billion. Other school taxes would have been unaffected by the initiative.
Eliminating the required local effort would have cut property taxes by an average of 25 percent but would have required the Legislature to come up with $9 billion to $11 billion annually for education funding from other sources.

That money would have been replaced by increasing the sales tax rate by as much as a penny per dollar (from 6 to 7 cents), eliminating sales tax exemptions, cutting spending, an increase in tax collections from economic growth spurred by property tax reductions or through “other revenue options” created by the Legislature.

The measure also would have:

   • Capped non-homestead property assessments at 5 percent, down from 10 percent;

   • Cut the maximum school levy in half, from 10 to five mills;

   • Limited future sales tax exemptions and required that they serve a public purpose.

Proponents said the measure would more evenly distribute the financial responsibilities of funding public schools among homeowners and non-homeowners. The amendment’s principal backer, the Florida Association of Realtors, hoped that cutting property taxes would resuscitate Florida’s sagging real estate market and boost the overall economy.

But the change would have come at a cost: eliminating a sizeable and dedicated funding source for education. Critics charged that the alternative funding sources suggested by Amendment 5 were inadequate and that if the Legislature were charged with making up the difference, education would suffer by having to compete each year for a share of the state’s dwindling tax revenues.

The state Division of Elections provided the following summary of Amendment 5:

Replacing state-required school property taxes with state revenues generating an equivalent hold harmless amount for schools through one or more of the following options: repealing sales tax exemptions not specifically excluded; increasing sales tax rate up to one percentage point; spending reductions; other revenue options created by the Legislature. Limiting the subject matter of laws granting future exemptions. Limiting annual increases in assessment of non-homestead real property. Lowering property tax rates for schools.

By the numbers
25 percent: Average property tax cut under Amendment 5

$8.3 billion: Collected through RLE school property taxes

$9-11 billion: Needed to compensate for lost education funding

$3.9 billion: What a 1-cent sales tax increase would generate

$4 billion: Most the state could collect from eliminating exemptions

2010: When the change would have kicked in

The history
Amendment 5 was put on the ballot in April by the Florida Tax and Budget Reform Commission, which convenes every 20 years to suggest changes to the state’s tax and revenue structure. Former state Senate president John McKay introduced the measure a few months after a March 2007 decision by the Florida Supreme Court rejecting two citizens’ initiatives that would have repealed most sales tax exemptions unless they served a public purpose. Those petition drives were spearheaded by a group known as Floridians Against Inequities in Rates, or FAIR, which McKay helped lead.

In July, the Coalition to Protect Florida's Economy – made up of the Florida School Boards Association, the Florida Association of District School Superintendents, the Florida Farm Bureau Federation, the Florida Institute of Certified Public Accountants, Associated Industries of Florida and other industry groups – filed a lawsuit in Leon County seeking to knock Amendment 5 off the November ballot.

Powerful interests lined up to support and oppose Amendment 5. Opposing the Coalition to Protect Florida’s Economy was Give Me 5 for Florida’s Future, bankrolled by the Florida Association of Realtors, which pledged to spend $1 million lobbying on behalf of Amendment 5.

The players
Florida Taxation and Budget Reform Commission, which convenes every 20 years to suggest changes to the state’s tax and revenue structure. Former state Senate president John McKay introduced the measure a few months after a March 2007 decision by the Florida Supreme Court rejecting two citizens’ initiatives that would have repealed most sales tax exemptions unless they served a public purpose. Those petition drives were spearheaded by a group known as Floridians Against Inequities in Rates, or FAIR, which McKay helped lead.

John McKay: The real estate developer from Bradenton served in the state Senate from 1990-2002 and was Senate president from 2001-2002. While in the Legislature, McKay tried unsuccessfully to lift sales tax exemptions on a variety of goods and services. He was appointed to the Tax and Budget Reform Commission by Gov. Charlie Crist.

Florida Association of Realtors: “Amendment 5 is a fairer way to fund our public school system. Currently, property owners pay a disproportionate share, compared to renters, for our schools. Also, property owners who pay for private school must also pay this tax for public schools.”

“In difficult economic times, like today, more people are cutting back on the things they buy – hence the lower sales tax collections the state is seeing.

Switching from a wealth tax to a consumption tax (sales tax) will put most Floridians ahead by making their property more valuable (because of less taxation) and allow property owners to control more of the tax money they pay (through a sales tax).”

Rep. Daryl Rouson, D-St. Petersburg: “This is also good for black folks in distressed communities where property taxes are killing them and hastening gentrification.” — Miami Herald, July 23.

Rep. Frank Attkisson, R-Kissimmee: “[It is] the biggest form of property tax relief that the citizens of Florida will ever see. “We are not raising taxes. We are asking for a different way of paying our taxes.” Miami Herald, July 23.

Against
Sen. Mike Haridopolos: The Republican state senator from Melbourne chairs the powerful Finance and Tax committee and is in line to become Senate president after the 2010 elections. He served in the House from 2000 to 2003 and has been in the Senate since 2003. Since 2006, he’s been the majority whip. He’s a part-time political science lecturer at the University of Florida and a longtime anti-tax crusader.

Coalition to Protect Florida’s Economy: “This is the fourth attempt to completely change Florida’s tax structure and allow for a back-door approach to place a services tax in our Constitution. The difference this time, however, is that the effort just happens to be wrapped in the mantle of property tax relief.”

Barney Bishop, president and CEO of Associated Industries of Florida: “Amendment 5 would bring a halt to economic development in this state as businesses considering relocation to or expansion in Florida will steer clear of a state mired down in the mess of figuring out whether or not there will be a services tax and which tax exemptions or exclusions will be kept and which have to go. Equally unappealing will be a state that does not invest in a highly-skilled and trained workforce of tomorrow through quality education today.”

Wayne Blanton, executive director of the Florida School Boards Association, in video on July 7: “It says it guarantees a tax reduction. That is not necessarily so for many people. It may guarantee property owners a tax reduction. But if you’re not a property owner and you have to pay the sales tax and you get certain exemptions that are closed then you may, in effect, be paying more taxes than you are now. … It is the biggest shell game ever played on the voters of Florida.”

AARP: “Budget experts who have examined the amendment say that the wording of this proposal makes it very hard to determine exactly what would happen if this amendment were enacted. Rather than lay out a clear tax-law change and a clear consequence, the amendment would force a drastic change in school funding and then leave it to the Florida Legislature to decide what to do next.”

Florida Institute of Certified Public Accountants

Somewhere in the middle
Gov. Charlie Crist: “I love the part that's a 25 percent reduction in property taxes.”
But would he campaign for it? “I haven't decided yet. I really don't know. Time will tell.”
How would he vote if the election were tomorrow? “Well, it's not tomorrow, so I don't have to make that decision.”

Don’t get me wrong: “I support it, I support it.” — Quoted by The Buzz in June.

ISSUES

Shifting the tax burden
Eliminating the required local effort and replacing it by increasing sales taxes would have shifted the responsibility from property owners to a broader base of taxpayers: consumers. That base would have broadened even more if the Legislature had lifted the sales tax exemptions on services.

Supporters argued that such a shift would make things more equitable:

“Amendment 5 will shift the burden of funding education from property owners to all who access the public school system. Currently, property owners pay a disproportionate share, compared to renters, for our schools. And property owners whose children attend private school pay tuition and public school taxes. By funding schools through sales taxes and other measures, Amendment 5 creates a more equitable tax system.” — Give Me Five For Florida’s Future

Sales taxes are considered regressive, though, because lower income people, including many seniors living on fixed incomes, pay a higher percentage of their incomes on taxable sales than higher income people do.

The  Georgia Budget and Policy Institute noted as much in a February analysis of a similar initiative there:

“A shift from the property tax to an expanded sales tax means a shift from upper income Georgians to low and moderate income Georgians. Since low and moderate income Georgians use a larger portion of their income to purchase taxable items, they spend a higher share of their income on sales taxes as compared to higher income taxpayers. Moving from the property tax to a higher sales tax will make this system even more regressive.”

However, supporters of the amendment said it would benefit homeowners living on fixed incomes by giving them more control over how much they are taxed. Theoretically, cutting property taxes and making up the revenue with an increased consumption tax does give taxpayers more say about taxes: if they can spend less, they can pay less.

This goes to retirees and low-income homeowners in gentrifying neighborhoods, where rising property taxes may severely strain household budgets or even force people to sell their homes.

Critics said the estimates for how much money would have to be replaced had been understated and that tax increases would have been needed to “hold harmless” education funding, as stipulated by Amendment 5. A July analysis by Florida TaxWatch estimates that the hold harmless provision and decreased tax collections attributed to Florida’s sagging economy could have combined to produce a net tax increase.

“Clearly, the inclusion of the education hold harmless provision in Amendment 5 changes the plan from a “tax swap” to a probable net tax increase, which could reach nearly $3 billion,” the organization said.

A tax on services
Amendment 5 authorized the Legislature to repeal certain sales tax exemptions and required that any future exemptions serve a public purpose. The state provides for 246 sales tax exemptions. But after you count out structural exemptions (e.g., items purchased for resale) and exemptions for food, prescription drugs, health services, etc., slightly more than $4 billion would have been left to be recouped, according to a Tax and Budget Reform Commission staff analysis.

It was this provision of Amendment 5 that really had business groups concerned. The Florida Institute of CPAs, Associated Industries of Florida, the Florida Farm Bureau Federation and other powerful trade groups are among those suing to knock the initiative off the November ballot. Noting that the amount generated from a sales tax and repealing standard exemptions would not be enough to replace the lost RLE funding, these groups argued that Amendment 5 would have forced the Legislature to implement a sales tax on services:

“Because Amendment 5 has language to hold education harmless, the amount of money the state will have to generate goes far beyond a couple of pennies’ increase to the sales tax and removal of tax exemptions. The passage of such an amendment to the state constitution could force the Legislature to place a sales tax on services to make up billions in needed revenue.” — Florida CPA Today, July/August 2008

On Giveme5Florida.com, supporters of Amendment 5 pointed out the obvious: that it did not specifically require the Legislature to tax services.

“Amendment 5 does not dictate to lawmakers how to make up the revenue to fund our schools — including any new tax on services. It points out obvious options, such as a reduction in spending, and encourages lawmakers to come up with other revenue sources, such as collecting sales tax on items currently taxed in retail stores but not when purchased on the Internet.”

But, TaxWatch concluded, the Legislature simply would not have been able to resist taxing services if it had been forced to replace billions of dollars in education funding. And that would have had serious implications for Florida’s economy:

“TaxWatch and Florida State University economists found that applying the sales tax to services was a questionable economic move and that taxing certain sectors would result in significant net losses in jobs, gross state product, and personal income of Floridians.” — Briefings, July 2008

Passing a sales tax on services would probably be politically difficult. The state’s lone experiment with a service tax lasted just six months. In 1986, the Legislature eliminated tax exemptions on services but it repealed the tax the following year in a special session.

Repealing tax exemptions would be tough
Amendment 5 would have authorized the Legislature to repeal certain tax exemptions, but that would have entailed a tough political fight. Since 2001 the Coalition to Protect Florida’s Economy – the collection of trade groups challenging Amendment 5 – has mounted three successful challenges to the taxing of services and has pledged to fight any effort to do so.

In fact, Amendment 5 originally included provisions to remove all tax exemptions and tax certain services, but that was changed because of pressure from the coalition. Though the coalition says it does not oppose a review of tax exemptions, its staunch opposition to a tax on services could have limited the field of exemptions the Legislature could eliminate.

The legislative career of Amendment 5’s architect, John McKay, offers more evidence of how tough it could be to eliminate tax exemptions. In his 12 years in the Senate and two years as Senate president, he was unable to repeal any tax exemptions on goods or services, despite having made doing so a major thrust of his term as Senate president.

TaxWatch’s July analysis underscored how the amendment could have added to the difficulty of eliminating sales tax exemptions: “The wording in Amendment 5 will make it difficult to repeal exemptions: The language of the amendment limits the repeals to those exemptions ‘which are determined not to advance or serve a public purpose.’ This limitation sets a high bar and could provide a basis for legal challenges to the repeal of exemptions.”

Furthermore, TaxWatch concluded, less than $1 billion could have been garnered from eliminating tax exemptions, once structural exemptions, those on life necessities and those that promote economic development were counted out.

“The remaining exemptions include some that Amendment 5 takes off the table and others that may have tax administration or social considerations that may contraindicate repeal.”

Stability of education funding
A key question when thinking about swapping property tax for sales tax is the stability of those funding sources. The conventional thinking is that property taxes are a more stable funding source than fluctuating income taxes and sales taxes. When the economy declines, income drops, consumer spending drops, and so do sales tax collections.

Florida’s flagging sales tax collections this year seem to underscore that point. According to The Tampa Tribune, the state Office of Economic and Demographic Research reported in June that sales tax collections in May were off $42.8 million from an estimate released in March and down $260 million compared with May 2007. Year-to-date sales tax collections through May were down $900.1 million compared with 2007 and down $134.2 million from the March estimate.

Amendment 5 would have eliminated a dedicated revenue stream for education but would not have mandated a particular replacement. Rather, it laid out options for the Legislature, and they could change from year to year. A concern is that this would have pitted education against other vital programs each year in a battle for funding, a situation that could be exacerbated by the likely fluctuations in sales tax collections.

According to the July TaxWatch analysis: “How much a one-penny sales tax increase would bring in is uncertain, but it would likely produce far less than half of the needed replacement revenue, and perhaps as little as one-third.” According to TaxWatch, the Tax and Budget Reform Commission originally estimated that a one percentage point sales tax increase would bring in $3.9 billion in fiscal year 2007-08, but the state has since revised that estimate to $3.3 billion. Moreover, not all of that money would go to replacing the Required Local Effort, according to TaxWatch.

The volatility of sales tax revenues has been well documented. A November study by the University of Georgia concluded that sales taxes were more prone to long- and short-term volatility than property taxes:

“Our work suggests that, holding revenues to be roughly equal, further movement towards consumption taxes can not be justified in terms of financial management and volatility related risk reduction. Any change in current law based on justification along other grounds which increases consumption taxes as a proportion of revenue portfolios should include measures to actively manage volatility and thus the expense of financing local governments.”

Been there: Michigan's experience
In 1994, Michigan voters approved a plan shifting education funding from property taxes to sales taxes and capping annual property tax increases at 5 percent. At the time, Michigan’s property taxes were the seventh-highest in the United States. As part of the plan, Michigan legislators increased the sales tax rate from 4 to 6 cents and its cigarette tax by 50 cents per pack.

Property taxes dropped dramatically – on average, about 50 percent.

The plan, known as Proposal A, also fundamentally changed the state’s education system, easing the burden on local governments and balancing funding inequities. According to a 2002 Washington Post story:

As a direct result of Proposal A, as the 1994 referendum was called, the state share of Michigan's elementary and secondary school spending has jumped from less than 29 percent to more than 77 percent, with a commensurate decline in local burdens. Where all but 42 of Michigan's 554 districts had less than $6,700 per pupil to spend in 1994, now all of them are above that figure. And the gap between the 10 richest districts and the 10 poorest has been reduced from almost a 3-1 ratio to barely more than 3-2.

The change, though, meant greater instability in education funding and has required substantial supplements from the legislature. According to a 2006 New York Times article.

Because the state's schools rely on sales taxes, which vary according to factors like the unemployment rate and consumer spending, the amount of money raised is now less stable than it was. Indeed, since Michigan adopted the change, the state has routinely filled shortfalls in school financing through sales tax revenue with one-shot payments from the state's general fund that have recurred, and have amounted to roughly a half-billion dollars annually.

There are other issues. Rich school districts complain about spending cap limits, and poorer districts complain that, while their funding levels have increased, they still receive less than wealthier communities, according to a 2001 story in the Philadelphia Inquirer.

The change in Michigan, though, is largely seen as a success that other states have tried to copy.

Death of an amendment
The state Supreme Court ruled that the ballot information for Amendment 5 was misleading. The summary indicated that the Legislature would be required to perpetually retain the current level of education spending, but the amendment itself offered that guarantee for just one year.

“This failure leaves voters with the impression that the amendment will accomplish something permanent and continuing, when in reality it does not,” the court said in the opinion released Sept. 15.
Opponents of the amendment praised the court’s decision; the amendment’s No. 1 supporter lambasted it.

An opponent, Republican Mike Haridopolos, chairman of the state Senate Committee on Finance and Tax, called the court's ruling “a reflection of what we heard throughout the state consistently − that this amendment was not as first described. This was a bait-and-switch.”

“This is a huge victory for public schools,” said Beverly Slough, president of the Florida School Boards Association, as quoted by the St. Petersburg Times.

Former Senate President John McKay, the Bradenton real estate broker who sponsored the amendment as a member of the Taxation and Budget Reform Commission, expressed disappointment that “the Supreme Court’s going to deny Floridians the opportunity to decide how they are going to be taxed to pay for the education system they expect and demand.”

But Barney Bishop, president of Associated Industries of Florida, said this in a statement on the group’s Web site on Sept. 3: “Florida averted a major threat to its future economic growth thanks to today’s Supreme Court ruling that will keep Amendment 5’s misguided tax swap off the ballot.”

Another business representative, Dan Krassner of the Florida Chamber of Commerce, said the court’s ruling “will avoid the uncertainty created by Amendment 5.”

What’s next?
The movement to reduce the state’s property tax appears to be heading for the state Legislature.
“The court has taken the decision for further property tax relief out of our hands for now, but not for good,” said Jose Cancela, co-chairman of Floridians for Property Tax Relief.

Bishop clearly was in agreement. He said Amendment 5 “would have worsened our economy because it would have delayed the proposed property tax cut for three long years, and it would have hurt Florida’s ability to keep and attract businesses until they knew in 2011 what the new tax structure would become.”

“Thankfully,” Bishop said, “we now have until 2010 to find the correct answer to this beguiling issue and, if recent history is any indicator, we will need all of that time to fashion an equitable and fair fix.”

For groups such as AARP that argued against Amendment 5 partly on the grounds that it would increase a regressive sales tax and switch more of the tax burden to lower-income Floridians, the battle presumably won’t be over.

“A lot of people have come around to the idea of buying out a portion of the property tax with a penny hike in the sales tax,” said John Sebree, vice president of the Realtors association. “Hopefully, the Legislature would look at something like that.”

“Well, we would hope that the governor and the legislature would convene as soon as possible to look at solutions,” said Dan Krassner of the Florida Chamber of Commerce.