The issue of property taxes, or rather the reduction of these taxes which have been a burden for Florida homeowners, has again become controversial. Last week, the Taxation and Budget Reform Commission, comprised of members of the Florida Legislature, proposed what is referred to as a tax swap, whereby property taxes would be reduced by as much as twenty-five percent, and to offset the resulting fall in the state’s revenue there would be a one cent increase in sales tax. The commission’s proposal was approved by the Legislature to be placed on the November 4 general election ballot as an amendment. A 60 percent majority vote will be required for the passage of the amendment.

The commission must be commended for its efforts in trying to provide Florida homeowners with significant property tax reductions, since the property tax amendment passed on January 29 provides hardly any relief in the amount of these taxes homeowners pay. But, already there are signs of problems being created for the budgets of public services like schools, police and several social programs by even the slight reduction in the taxes.

The problem with property taxes is that they are a vital source of revenue for the state government, and when they are cut, the state loses revenue to finance key services, particularly school funding. The commission recognizes this, and has proposed the one-cent sales tax increase as a means of stemming the loss to the state coffers that will result from cutting property taxes. However, the projections indicate that the loss to the state from cutting property taxes will be $9.6 billion, while the increase in sales tax is projected to realize only $2.9 billion – a whopping difference of $6.7 billion. The proposal leaves it to the Florida Legislature to make up the difference.

This presents a major flaw in the proposal. The Legislature consists of politicians, and it is simple too risky to leave it to the whims of politicians to fund a deficit of almost $7 billion annually. This is no way to manage the state’s finance. In the week since the proposals were announced, there have been much criticism, not about the proposed reduction in the taxes, but the gap that exists after the proceeds from the sales tax increase are collected.

There is criticism that an increase in sales tax is unfair to lower income citizens, as they will be paying more for goods and services from an already shrinking dollar. However, to compensate for this the proposal recommends tax exemptions for some food items, medicine, rent, and electricity. Other critics are claiming that while the reduction in property taxes benefits homeowners, it does not benefit renters, who will be paying higher sales taxes. However, the theory is that the owners of rental property would be beneficiaries of the property tax cut, and would be passing this reduction to renters in reduced rent. Plus, it is also theorized that reduction in property tax should provide more money to homeowners for general spending, which should be a motivator to the state’s economy, providing new jobs and increasing salaries and wages.

Despite the positive response to some of the criticisms to the proposal the one that loom large is the dependency on the revenue of sales tax to, partially, make up the budget deficit. Revenue from sales tax can be fickle. This tax relies on the economy and the business cycle to produce revenue. Currently, the state has been complaining of a fall in revenue from sales tax as consumers cut back on spending, as the economy struggles. Of course, when the economy is buoyant and people are spending freely, the sales tax revenue will be strong, but lately it has weakened. On the other hand, the revenue from property taxes remains more or less constant regardless of the nature of the economy. It is imperative that budget planners have a reliable source of revenue on which to plan for future expenditures. An ad-hoc and uncertain source of revenue is plain bad fiscal management.

There seem to be no alternative but for the commission and the state Legislature to take anther close examination of the proposals before placing it on the ballot. If not, the state could end up with another dilemma similar to the sub-prime mortgage mess. While voters will be tempted to vote for a significantly reduced property tax, similar to borrowers of sub prime mortgages being tempted to borrow low interest sub prime loans, they may not be aware of the consequences on schools, crime fighting, public transportation, libraries, parks and other public services as a result of the property tax reductions. It makes no sense giving with one hand only to take away with the other.

It could be, and this would be a pity, that the problem in the formula proposed by the commission is that the reduction in property tax is too severe. Would, say, a 20 percent reduction instead of 25 percent reduce the revenue loss? Also, perhaps a tiered sales tax system be considered, where instead of the state depending on the proceeds of a general one-cent tax increase, the increase would be sharper on products like cigarettes, alcohol drinks, and some luxury items

Whatever the remedy may be, we are confident that the collective minds of the 25 individual that comprise the Taxation and Budget Reform Commission who initiated the new property tax proposal can fine tune the proposal. They must find a way to bridge the gap that will result from the tax cuts without Floridians having to rely on the state’s politicians to do so.