Florida Taxes Make for an Interesting Blog Read…

Jana Baldwin, Marlin Design and Construction, www.marlindesignandconstruction.com picks this article about taxes as a good read for the blog. Call Jana at (850) 545-7622 or (850) 576-3978 for information about Marlin custom homes in the Tallahassee and Freeport, Florida areas.

Forecasts clash on impact of Florida tax swap TALLAHASSEE, Fla. – March 24, 2008 – When a state tax commission envisioned a huge cut in property taxes and an increase in the sales tax, it asked a veteran economic forecaster to examine the financial consequences of the swap.

He said it was a bad idea.

Employment projections would fall by about 50,000 jobs and $28 billion in personal income would be lost over a 10-year period, economist Tony Villamil predicted on the basis of computer models.

“We were shocked,” said John McKay, a former Senate president and now a leading member of the Taxation and Budget Reform Commission. “Seldom are the conclusions of an economist’s report all negative. Our common sense told us that wasn’t correct.”

So, on McKay’s recommendation, the commission hired another forecaster.

Hank Fishkind used a different computer model and came to a different conclusion: The tax swap would stimulate the economy, creating 72,000 jobs and boosting home construction by $6.9 billion.

“He did a very solid job,” McKay concluded.

Which projection is correct – if either – is a key to how the sweeping tax changes would alter the state’s economy if voters approve the property-tax cut in November and it takes effect as planned in 2010. It would be up to the Republican-controlled Legislature to decide how to replace the revenue: a sales-tax increase, the elimination of certain sales-tax exemptions, other revenue hikes or a combination of changes.

When The Miami Herald showed the Fishkind and Villamil studies to three other economists, all found flaws. That could mean state leaders are contemplating huge changes without being certain of the economic consequences.

“Both these studies have shortcomings,” said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.

Snaith questioned an underlying assumption of the tax commission – that Florida needs to have very low taxes to attract new businesses and residents. “If low taxes is all it took, North and South Dakota would be boom states,” Snaith said.

Villamil and Fishkind, both veterans in assisting governments with tough economic decisions, praise each other as professionals. But they vehemently attack each other’s work in this case.

Fishkind: “I like and respect Tony, but he’s just wrong here.”

Villamil: “The model he used is a much simpler model than the one we used, and it doesn’t take into account a lot of the complexities.”

Villamil, who heads the Washington Economics Group, based in Coral Gables, has served on advisory councils for both George W. and Jeb Bush. For two years, he worked for Jeb Bush, focusing on economic development.

For the tax study, Villamil and a colleague, Barry University Professor Robert D. Cruz, relied on the REMI model, developed by Regional Economic Models Inc. It’s often used by Florida and other state government forecasters to try to predict the effects of changes in revenue and spending.

In this case, the commission’s proposal to reduce property taxes by $9 billion a year and expand the sales tax to make up that money would cost Florida’s economy an average of $1.7 billion a year from 2010 to 2020, the REMI model found.

Effect on jobs

Florida is projected to have regular job growth of about 169,700 a year through 2015, according to the state Agency for Workforce Innovation. But Villamil’s projections say that the tax swap would reduce that growth by a cumulative 47,000 over the 10-year period. “So that’s not a huge decrease,” said Villamil, “but it’s a decrease.”

The reason for the decline, said Villamil, is that it’s not an equal swap to put $9 billion into the pockets of property owners and take $9 billion out of the pockets of people paying sales taxes on goods and services.

“There are two major leakages,” Villamil said. “One is that many property owners are out of state. We only use 10 percent in our assumptions” for the computer model, but my guess is it’s closer to 25 percent in some areas, like Miami.”

For those out-of-state owners, a drop in property tax is a “windfall,” which they might spend in Caracas or Manhattan, or put into an Atlanta bank, Villamil said.

The second leakage: Because property taxes are deductible on federal tax returns, a drop in Florida property tax means that people will pay more federal income tax, Villamil said. (State sales taxes are also deductible, but it’s usually a much smaller deduction.)

Those leakages could have complex effects, resulting in less money spent in Florida. Add the possibility that higher sales taxes mean fewer sales, and that would lead to fewer jobs, in both government and business.

“This isn’t Tony Villamil talking. This is what the model says,” the economist told The Miami Herald. And because of that, Villamil concluded, the proposed tax swap “is not good, sound policy for the state of Florida.”

Fishkind disagrees. He calls the property tax on education that the commission wants to drop “a bad tax for Florida” and praises the commission for trying to get rid of it.

A onetime economics professor and director of forecasting at the University of Florida, he heads Orlando-based Fishkind & Associates, which has offices statewide. He does extensive forecasting for local governments, redevelopment agencies and real-estate developers.

For his study, Fishkind used the RIMS II model, Regional Input-Output Modeling System, developed by the U.S. Department of Commerce. Fishkind found that a decline in property taxes would make housing cheaper, lure an extra 56,000 people to the state, and cause a new wave of construction.

Fishkind told The Miami Herald that there is nothing wrong with the REMI model that Villamil used. “It’s a good model. Maybe he put something in there that was wrong.”

Villamil counters that Fishkind’s model is overly simplistic. “It just doesn’t have the dynamic capabilities that REMI has.”

The views of others

Other economic experts interviewed by The Miami Herald questioned whether a drop in property tax automatically leads to more construction.

John Burford, an economist with the International Bank of Miami, said that because of oversupply and declining prices in real estate, “I don’t think it would make any difference now” if property taxes decreased.

By 2011, after the proposed changes took effect, construction might be trending back upward, Burford said, but that might be primarily because of the cyclical nature of real estate.

Donald Ratajczak, professor emeritus at Georgia State’s Economic Forecasting Center, said that both Villamil and Fishkind “overstate their cases.” He believes that the leakages would be less than Villamil predicts and the stimulus less than Fishkind foresees.

Overall, the tax swap could create problems, Ratajczak said. Higher sales taxes would mean a reduction in sales, he said. “That would create a near-term deficit requiring either higher taxes or reduced services.” That “in turn will alter competitiveness and slow migration.”

He said he didn’t agree with Fishkind’s theory that “rewarding current property owners leads to attracting new owners.”

Jorge Salazar-Carrillo, an economics professor at Florida International University, said Fishkind’s RIMS model “has a very distinguished usage. It doesn’t give the richness of the REMI model, but it could be that the REMI model gets lost in the complications in this analysis.”

“I would probably rely on the Fishkind analysis more,” Salazar-Carrillo said. But he disagrees with Fishkind’s conclusion that the state property tax for education is “bad” and needs to be replaced by an increased sales tax.

“You’re hurting poor people with the sales tax,” Salazar-Carrillo said, because studies show that 70 percent or 80 percent of the poor’s expenditures are subject to sales tax while only 20 percent or 30 percent of the rich’s spending is subject to sales tax. “It’s a very regressive tax.”

Snaith, at the University of Central Florida, said both studies cause “a sort of head-scratching.” When Villamil called REMI “the gold standard” in his presentation to the commission, “I think that’s overselling.”

But Fishkind’s conclusion on reducing property taxes and increasing sales taxes doesn’t make sense to Snaith. “Tiger Woods is going to pay less property tax on his mansion, but the renter is going to struggle to find more money when he goes to the store.”

Martha Barnett, a member of the commission, said the Fishkind study made more sense to her than Villamil’s – “but maybe that’s because its conclusions were more in line with my thinking.”

Copyright © 2008 The Miami Herald, John Dorschner. Distributed by McClatchy-Tribune Information Services.

Tags: custom homes, Florida Taxes, Freeport Florida, Jana Baldwin, Marlin Design and Construction, Tallahassee Florida