PRESS RELEASE February 15, 2002

TALLAHASSEE -- A special report from Florida TaxWatch's Center for a Competitive Florida raises serious questions about the feasibility of revenue neutral tax reform.

"The use of the term 'revenue neutral' to describe the tax reform proposal currently before the legislature is largely disingenuous," said Florida TaxWatch President Dominic M. Calabro. "The estimates used in crafting the plan are likely 'wide guesses' and should not be considered any more than that."

According to the report, revenue neutrality should mean that the new tax structure would raise the same amount of revenue as the old one during the same time period and under the same economic conditions. The Senate's tax reform proposal sets a different standard, limiting the revenue in the first year of the tax to the previous year adjusted for growth regardless of what the current tax would have been expected to raise. This determination will be made before the new tax system goes into effect and if the estimates are wrong, and much more (or less) money is collected during the first year, there is no remedy in the law. Moreover, if it is determined that the tax will not be revenue neutral, and the legislature cannot agree on what exemptions to add to make it so, the tax in the constitution will still take effect.

This is important because the a significant error in the estimate is likely. Estimating the value of all the exemptions from the sales tax is a difficult undertaking. Predicting how much revenue would actually be collected under a new taxing scheme is even tougher. The state's Revenue Estimating Conference has generally done a good job in estimating annual general revenue. Still, since 1990, the average error (up or down) in estimated revenue compared to actual revenue has been 3%, the largest error was an overestimate of 9.2%. An error rate of 9.2 % could create a first-year tax revenue increase or tax revenue shortfall of $1.75 billion.

Unlike products, many services do not leave a record of production and inventory, and tracking the quantity and value of services rendered is a daunting task. According to the report, significant compliance problems and under-collection should be expected under the new law. Therefore, using the first year collections of such a major tax change to measure revenue neutrality will not fully reflect its revenue raising capacity. In addition, the claim of revenue neutrality fails to take into account the fact that the proposed expanded tax base will very likely grow faster than the current one.

"Add to the normal, expected error in the state's forecasts the difficulty of estimating the impact of removing exemptions and taxing services," Calabro said, "and a significant difference between estimated and actual revenue for the first year of the new tax is likely. It is virtually impossible to make this plan revenue neutral"

In addition, the report raises questions about the purported impact of the plan on families and businesses. For example, it is claimed that the average small business will save $375 million. However, this does not include the impact of local option sales taxes. Even using the Senate's assumptions, if the business in the analysis is in a county with a local option sales tax of 1% or more, that savings would be eliminated and a tax increase of $125 would result. Approximately 59% of the population live in counties with a local option sales tax.

Last week, Florida TaxWatch announced its opposition to the proposed tax reform plan, and urged lawmakers to consider comprehensive and nonpartisan tax reform study information prior to making revolutionary tax changes. "Many Questions Remain About Impact of Tax Reform Proposal" is the fifth in a series of Special Reports by The Center for a Competitive Florida.