Tax Analysts Blog

Bush Nomination Would Be Bad News for Tax Reformers

Posted on Apr 27, 2015

This is the story of how Jeb Bush killed tax reform when he was governor of Florida.

In 2001 Florida Senate President John McKay, a Republican, had already announced he was not seeking reelection. McKay decided that before he left office, he would try to reform Florida's loophole-ridden sales tax. Because the state had no income tax, the $17 billion of sales tax it collected accounted for 73 percent of general revenue. But in 2002 the state had 323 sales tax exemptions that cost it $23 billion. Some made good economic sense -- like exemptions for business inputs that would have caused double taxation of final purchases -- but many were just targeted giveaways to special interests, including exemptions for such eye-catching items as racing dogs, charter fishing tickets, and dance lessons

Florida's main revenue source needed reforming, and McKay was determined to do it. His idea was to get rid of dozens of special interest tax exemptions -- including those for legal and accounting services -- and use the revenue to reduce the rate from 6 percent to 4 percent. But he would not directly push the tax reform through the Legislature. Instead he would ask it to put an initiative on the November 2002 ballot asking voters to embed his reform into the Florida Constitution.

There was never any indication that Bush liked the idea. And in fact, Republican insiders with close ties to Bush were meeting with the business groups opposed to the plan. But for months he was cautious about publicly expressing any firm opinion. During his State of the State address on January 22, 2002, he politely commended McKay for his efforts -- just as Republicans in Washington commended then-House Ways and Means Chair Dave Camp for his tax reform plan in 2014. Bush did raise some questions about the merits of McKay's reform, but said he hoped that during the 2002 legislative session there would be "full, honest, and transparent dialogue" and "thoughtful discussion" on tax reform.

Under McKay's leadership, the Senate moved full speed ahead. On January 25 the Committee on Finance and Taxation unanimously approved SJR 938. On January 31 the full Senate approved the measure on a 32-8 vote.

SJR 938 would ask voters in the upcoming November election to approve or reject an amendment to the Florida Constitution that would set the rate of sales and use tax at 4.5 percent beginning on July 1, 2004. Under the amendment, the rate could only be increased with a three-fifths vote of both houses of the Legislature. All sales of goods and services would be subject to the tax with the following exceptions: (1) groceries, health services, prescription drugs, and residential rent; (2) exemptions enacted between January 1, 2002, and July 1, 2004; and (3) exemptions enacted after July 1, 2004, by a three-fifths vote in both houses of the Legislature. No tax would be imposed on goods purchased for resale, sales of real estate, sales of intangible property, or sales of communications services. To ensure revenue neutrality, the Legislature would be required to pass legislation that did not allow the estimated growth rate of sales tax revenue to exceed the average growth rate of those revenues over the previous five years.

The business community was outraged by the expansion of the state sales tax and funded an aggressive radio and television campaign denouncing McKay's plan. The main argument was that the Senate tax reform would be a tax increase. As leader of the Senate, McKay had many levers he could pull to wield political power, but he was not going to win the propaganda war.

On February 5 Lt. Gov. Frank Brogan (R) called McKay and told him the governor would not support the bill. Three days later, in a 20-minute speech before the Florida Chamber of Commerce, Bush denounced the plan, repeatedly calling it flawed.

From a political perspective, Bush made the safe move. He was up for reelection in nine months, and he had to choose between having all the money and power of business for him or against him. And he did not want to have a referendum on a tax reform that he supported and that would be painted as a tax increase sharing the ballot with him in November.

Republican Florida House Speaker Tom Feeney led the opposition in the House. His main argument, like Bush's, was the same as the one that was filling the airwaves: The Senate tax reform was an enormous tax increase that would deliver a terrible blow to Florida's businesses during difficult economic times.

The flaw with the tax-reform-is-really-a-tax-hike argument is that even if the McKay bill was not revenue neutral (because the mechanism designed to ensure revenue neutrality had some flaws), the legislation could have been amended to ensure revenue neutrality. After all, writing a revenue-neutral tax reform bill is not an uncommon legislative exercise. For example, Congress and President Reagan did it in 1986. But neither Bush nor any other opponent of the bill offered such a change. Te only positive thing Bush could say about tax reform was that he was in favor of reviewing exemptions.

The McKay plan was defeated 99 to 0 in the House on February 20.

In November 2002 Bush was elected to a second term by a vote of 56 percent to 43 percent.

Read Comments (1)

robert goulderApr 26, 2015

Doctor Sullivan:

Seriously, 323 exemptions from the FL retail sales tax!!! If I read this
correctly, the value of the exemptions ($23B) far exceeds the revenue raised by
the tax itself ($17B).

One of my biggest objections to the RST is that it fails to reach the things it
should (e.g., services) but quite often hits the things it shouldn't (e.g.,
business inputs). I see no policy justification as to why my consumption of a
tangible good, like a hamburger, should be subject to RST while my consumption
of a personal service, like a haircut, is exempt from RST. Talk about the
government arbitrarily selecting winners and losers. Makes zero sense. (BTW,
the U.S. is almost the only country in the world still clinging to archaic
RSTs. When it comes to taxing consumption we have yet to evolve beyond the
stone age.)

So Gov. Jeb did the 'safe' thing by not doing tax reform. That tells us he's an
astute politician. By definition, all tax reform involves targeting somebody's
sacred cow. Tax reform is very embodiment of risky behavior, and all politicos
are risk averse. It's no surprise that tax reform is such a rare occurrence.
Barring a monumental crisis that necessitates change, it won't happen. What
happened in 1986 is unlikely to be repeated until 2086 (... but keep reading
Tax Notes just in case).

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