Taxes are overly burdensome and the best government is one that is out of our wallets and out of our lives. But is this really true? Is having a very low tax burden really that beneficial or is it just fool's gold?
Follow me past the fold as we look at some of the consequences of having unrealistically low taxes, ask if the tax savings today are worth the potential future problems caused by lack of adequate funding, and discuss ways to provide tax relief in some areas while still maintaining an equitable and functional revenue stream for government funding.
Do you want to live in a state with an extremely low tax burden? If you are a Floridian, you already do and are now beginning to see the consequences of having very low taxes.
The purpose of this diary to discuss the impacts of inadequate taxes can have on the quality of life of the citizens. Here in Florida, we are starting to see the impacts of an insufficient revenue stream upon local governments and school districts. By using Florida as an example, this diary is intended to promote a broader discussion of equitable and adequate taxation policies.
Disclaimer: I am not an expert on taxes or the law, but I am a resident of Florida and have already seen in the last year and a half how inadequate revenues are beginning to negatively affect local governments and school districts.
A Comparison of Tax Burdens by State
Generally, state and local governments derive most of their revenue from three main sources of taxes: income taxes, property taxes, and sales and excise taxes. Of those sources, income taxes are considered to be the most progressive while sales and excise taxes (user taxes) are considered to be the most regressive because they impact poorer citizens disproportionately.
Florida is considered a very low tax state. While taxes alone do not determine the overall costs of living in any state, they greatly determine the extent that local and state governments can provide services to the citizens. According to the Retirement Living Information Center, the amount and types of taxes vary greatly from state to state.
Many people planning to retire use the presence or absence of a state income tax as a litmus test for a retirement destination. This is a serious miscalculation since higher sales and property taxes can more than offset the lack of a state income tax. The lack of a state income tax doesn’t necessarily ensure a low total tax burden.
States raise revenue in many ways including sales taxes, excise taxes, license taxes, income taxes, intangible taxes, property taxes, estate taxes and inheritance taxes. Depending on where you live, you may end up paying all of them or just a few.
The Retirement Living Information Center site also includes an analysis published in August 2008 by the Tax Foundation of total taxes paid in each state as a percentage of income. New Jersey, New York, and Connecticut residents pay the highest percentages of their income in taxes. The lowest percentage rates are in Alaska followed by Nevada, Wyoming, and Florida. That means that residents of only three states had a lower tax burden than Floridians in 2007.
It is estimated by the Tax Foundation that the nation as a whole will pay on average 9.7% of its income in state and local taxes in 2008, down from 9.9% in 2007 primarily because income grew faster than tax collections between 2007 and 2008.
New Jersey residents paid 11.8%, topping the charts. New Yorkers were close behind, paying 11.7%, and Connecticut was third at 11.1%. The top 10 were rounded out by Maryland (10.8%), Hawaii (10.6%), California (10.5%), Ohio (10.4%). Vermont (10.3%), Wisconsin (10.2%) and Rhode Island (10.2%).
Alaskans pay the least, 6.4 percent in 2008, but Nevada is close at 6.6 percent. In four states the residents pay between 7 and 8 percent of their income in state and local taxes: Wyoming (7.0%), Florida (7.4%), New Hampshire (7.6%) and South Dakota (7.9%). Four other states round out the bottom 10: Tennessee (8.3%), Texas (8.4%), Louisiana (8.4%) and Arizona (8.5%).
As noted above, the Tax Foundation's report was published in August 2008, therefore, the figures used in the report were from the previous year, 2007. Not only does Florida have one of the lowest average tax rates based upon 2007 figures, but also Florida is one of only seven states that has no individual income tax.
In addition to having an already low average tax burden on its citizens, Florida's tax system is also very regressive. According to a 2003 study of state taxes by Institute on Taxation and Economic Policy, Florida has the second most regressive tax system of the states, with only Washington state's begin more regressive.
Ten states —Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada and Alabama— are particularly regressive. These ten states ask
their poorest residents —those in the bottom 20 percent of the income scale— to pay
up to five-and-a-half times as great a share of their earnings in taxes as they ask the
wealthy to pay. Middle-income families in these states pay up to three-and-a-half times as high a share of their income as the wealthiest families.
Impacts of Property Tax Relief (Florida Amendment 1) on Local Governments and Schools
In January 2008, voters in Florida passed Constitutional Amendment 1 which gave property owners additional tax relief. Although Florida Tax Watch and many newspaper editorials urged voters to defeat Amendment 1 for various reasons including the potential impact on local governments, Florida Governor Charlie Crist campaigned heavily in support of it. As a result, the voters passed Amendment 1, which resulted in an average savings of $240 a year per homeowner.
Because property taxes are the primary funding source for local governments and schools, Amendment 1 has been particularly hard on those entities. Many local governments and school districts had already been instituting cost cutting measures such as cutting unfilled positiions and streamlining programs and services prior to the passage of Amendment 1. However, these same entities are experiencing significant to severe budgetary shortfalls because Amendment 1 has limited their main source of financing. The result of these additional local budgetary shortfalls is now being seen in some school systems, such as Leon County, Florida, with the elimination of existing filled positions and the cutting of entire programs.
The Center on Budget and Policy Priorities published a study in December 2008, which includes an analysis of the effect of property tax caps on local governments and services.
Proponents argue that tight property tax caps will force localities to provide services more cost-effectively, or to eliminate services that are not needed. Opponents content that caps are more likely to force localities to cut necessary services. As an example they point to California, where education, health care, transportation, and other public services all have declined dramatically since the state adopted a tight property tax cap (Proposition 13) in 1978. California’s school system, formerly one of the best in the country, became one of the worst.
Further, when we consider the legacy of the 1978 property tax cap in California, we can see just how bad the long term effects of property tax caps. In his May 24, 2009 column, New York Times op-ed columnist, and Nobel Prize winning economist, Paul Krugman examined the lessons from California's 1978 property tax cap.
The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.
Even though the property tax cap in California is not the same as the one passed by Florida voters, the problems caused by artificially restricting the ability of government to provide a reasonable revenue stream are the similar. Without the ability to pay for them, government is forced to cut or reduce the quality of services, some of which are critical to the well being of the citizens. In the case of Florida, local governments and the school districts have been the hardest hit with budget shortfalls as a result of decreased tax revenues in less than a year and a half since the passage of Amendment 1.
Statewide Budgetary Shortfalls
The budget shortfalls are even being felt at the statewide level and federal stimulus money is being proposed to temporarily bridge the gaps in the State's budget.
Called, "blue smoke and mirrors," by some critics, the budget uses $5.3 billion in federal stimulus dollars, more than $800 million in fees and cuts to social service programs to deal with a $6 billion budget deficit.
Even though proponents of Amendment 1 promised that the school systems would not be adversely affected, that does not appear to be the case. Some opponents predicted that the smaller and poorer rural counties would be hit the hardest. Unfortunately, in April, that was already proven to be true when mostly rural Jefferson County was unable to fund its public school system and the state of Florida was forced to temporarily take over the administration of Jefferson County Schools.
Further, the state's budget does not make up for shortfalls in many of the social services to help the poor or in county school systems, especially those smaller, rural school districts.
The budget would increase the statewide per-student average slightly to $6,873, but some districts, particularly rural ones, will see dramatic declines. Lawmakers relied on $907 million in federal stimulus dollars in the K-12 budget alone, even though the state has not technically received permission from the federal government to spend the money. Rivera said lawmakers can come back in special session and make deeper cuts before the July 1 start of the fiscal year if necessary, but he doesn't think it will be needed.
Social service programs will feel some of the sting of budget cuts, including one that uses hundreds of volunteers to guide foster children through the legal system. Bright Futures students will no longer see their popular scholarships cover the full cost of tuition, which will rise at least 8 percent next year.
Where do We Go from Here?
Using stimulus money to cover the state budget shortfall is does not seem to be in the spirit of providing economic stimulus and is at best, only a stop gap measure.
In addition, the Florida legislature is considering another ballot initiative to further reduce property taxes in Florida. Continuing to reduce the property tax burden without creating additional sources of funding for local governments and school districts is a recipe for future disaster.
So now here are the questions: Is having very low taxes today a really prudent investment in our future considering the budgetary problems that public entities are now facing and will continue to face? How should states structure their tax systems in such a way as to be both equitable and still adequately provide necessary public services? What is the right balance between tax relief and efficient government?