Florida Idea for Modernizing its Sales Tax

All tax systems have exemptions, exclusions or special rules of some type. Often they are enacted because they seem important at the time. However, if enacted without an expiration date, they can easily remain forever even if no longer needed. For example, many systems have some type of tax break for seniors. Decades ago, many seniors were poor. However, that is not the case today so any system that provides an automatic exemption of some type based on age, should probably be changed to be based on income level instead. California's personal income tax system has this issue (for details - click here).

A Florida senator has proposed a system to review all of the state's sales tax exemptions. SB 216 introduced in Florida in October 2009 calls for the Joint Legislative Sunset Committee to review the states sales tax exemptions over a 9-year period (with 1/3 reviewed over three year periods). They are to recommend whether current and future exemptions be retained, repealed or modified. They are also to review the exclusion of sales of services from the sales tax base. The reports are due November 1, 2010, March 1, 2011, and July 1, 2011. Future review reports are due on December 1.

Exemptions for groceries, medical, guide dogs for the blind, and household fuel are protected. To put some strong effect into the proposal, it also provides that "any exemption from the state general sales and use tax or exemption from imposition of such tax on sales of services which is not prohibited from review by the committee ... and is not modified or reenacted by the end of the regular session after any 9-year review period is repealed on July 1 after the end of the regular session immediately after the 9-year review period."

The rationale for SB 216 includes:

1. Budget problems that "require the state to consider innovative solutions in addressing the long term viability of the state's tax structure."
2. The need for individuals to be treated "fairly and equitably" under the tax structure.
3. The need for sales tax exemptions to "serve an important state interest and ... be uniform in the effect on residents."
4. The belief that "periodic sunset and review of all sales tax exemptions will serve to restore fairness to the state's tax structure."

"In developing the evaluation criteria, the committee shall consider the following principles of taxation:

(a) Equity.—The Florida tax system should treat individuals equitably. It should impose similar tax burdens on people in similar circumstances and should minimize regressivity.

(b) Simplicity, transparency, and compliance.—The Florida tax system should facilitate taxpayer compliance. It should be simple and easy to understand and should provide visibility and awareness of the taxes being paid.

(c) Neutrality.—The Florida tax system should affect taxpayers uniformly and consistently. The primary purpose of any tax should be to raise revenue for appropriate governmental functions, rather than to influence business and personal decisions.

(d) Stability.—The Florida tax system should produce revenues in a stable and reliable manner that is sufficient to fund appropriate governmental functions and expenditures.

(e) Integration.—The Florida tax system should balance the need for integration of federal, state, and local taxation.

(f) Public purpose.—Any sales and use tax exemption or exclusion under the Florida tax system should be based upon a determination that the exemption or exclusion promotes an important state interest and should benefit citizens as equally as possible."

Oregon recently did something with similar effect - it added sunset dates to most of its exemptions and exclusions (here).

I think the Florida proposal is a good one. Special tax rules that provide some type of tax break or subsidy can easily get buried in the system and remain even if not best addressing the original problem or no longer needed. With states hurting for money, it is past time for them to take a careful look at updating their tax systems (also see my last post of 11/19/09).