Regional News

Piling On Budget Reform

BRADENTON, Fla. - The powerful Florida Taxation and Budget Reform Commission on Monday approved a sweeping new tax reform measure that swaps school property taxes for an increased sales tax and caps increases in some property assessments.

If passed by voters on Nov. 4, the commission's proposed constitutional amendment would be the state's third major tax reform initiative in less than a year, and rating agency analysts say it has the potential to further stress local and state budgets already hit by lower property assessments, foreclosures, and the downturn in the national economy.

The newest proposal, passed on a vote of 21 to 4, would replace most of the property tax revenue that support public school districts with other revenues, including an increase in the state sales tax, beginning in 2011. That would save property owners about $8 billion, while a one-cent hike in the sales tax would generate approximately $3.9 billion.

The commission's plan would also require the Legislature to replace school property taxes with revenue created by repealing some sales tax exemptions and reducing state spending as well as revenue resulting from economic growth attributable to lower property taxes, according to an analysis of the constitutional proposal. The repeal on existing sales tax exemptions would bring in an additional $4 billion, the analysis said. Items such as food and prescription medication would still be exempt from the sales tax.

The constitutional amendment would also cut to 5% from 10% the amount that annual property assessments could increase on non-homestead properties, such as commercial properties and second homeowners. While it would not apply to school district tax levies, it would further erode revenue that cities, counties, and other special districts now raise through property taxes.

"This measure likely will reduce state government spending on services and items other than education due to possible budget reductions," the analysis said. "The cap on the annual growth of assessments of non-homestead properties may reduce local government revenues and/or lead to an increase in millage rates on all properties."

Since there are unknowns - such as whether the constitutional amendment will pass in November and how additional revenues would be raised to replace property taxes - rating analysts said it is difficult to quantify credit concerns.

"As an agency our concern is that the issuers we rate have the ability to repay their obligations and maintain financial health," said Moody's Investors Service analyst John Incorvaia, who reviews local government credits. "The property tax measures that have been adopted and are proposed continue to attempt to limit a major revenue source utilized by all issuers at a time when other local and state revenues are also faltering, and the housing and construction markets, on which the state's economy has been dependent, are under serious stress."

"When coupled with the ongoing concerns of a serious decline in in-migration, enrollment losses, and high property insurance, it's difficult not to be concerned about the long-term economic and financial landscape," Incorvaia added. "Many issuers are already making difficult budgetary decisions to respond to these new challenges and have cut personnel, programs, capital spending and utilized some accumulated reserves."

Moody's yesterday revised its outlook on Florida's general obligation credit and certificates of participation to negative from stable, citing the state's significant revenue weakness stemming from the ongoing economic slowdown.

Monday's action by the Taxation and Budget Reform Commission represents the third major tax reform initiative in Florida since last year.

In June 2007 special session, the Legislature passed a bill mandating that local governments, special districts, and school districts roll back tax rates. It is estimated that the action will save taxpayers $15 billion over five years. In October 2007, lawmakers held another special session and passed another property tax relief package that required a constitutional amendment in a statewide referendum.

On Jan. 29, voters approved the Legislature's proposed constitutional amendment changing the state's tax laws in four ways, including increasing the homestead exemption for primary homeowners, granting a new $25,000 exemption for businesses, and placing a 10% cap on the annual increase of property assessments on all properties other than those owned by primary homeowners. It is estimated the changes will save $12.4 billion over five years.

The fervor to slash property taxes was fueled by dramatic increases in property values as real estate sales soared during the past five years.

Between 1997 and 2001, the fair market value of property in Florida increased each year by an average of 7.3%. But between 2001 and 2006, the fair market value increased each year by an average of 17.3% - far outpacing the growth in per capita personal income, according to the Florida School Boards Association.

Standard & Poor's analyst Robin Prunty noted that if voters approve the measure in November the provision affecting school districts doesn't take effect until 2011. At that time, the rating agency will evaluate its effect on school districts and how the state makes up for lost tax revenues. But other affects of the amendment, such as a smaller assessment base for local governments to tax, will be evaluated on a case-by-case basis.

"It's clearly going to be a challenge," Prunty said.

But she also noted that other states such as California, Maryland, and South Carolina have implemented tax reform measures similar to those passed or under consideration in Florida.

"Most find a way to manage with the constraints," Prunty said.

Analysts say despite the gloomy economy, they are encouraged by aggressive action taken by state officials to implement budget cuts twice in the current fiscal year because of lower than anticipated revenues.

But a prolonged downturn could pressure credit ratings, especially if new laws require the state to come up with additional revenues for schools.

"We're going to have to see how it plays out," said Fitch Ratingsanalyst Amy Laskey.

As a requirement of Florida's constitution, the 25-member Taxation and Budget Reform Commission is convened every 20 years. It has the power to place proposed constitutional amendments directly on the ballot. The panel is considering more than 50 constitutional amendments and statutory recommendations, which are nonbinding recommendations for the Legislature to consider.

In addition to Monday's action, the commission still must vote on other measures, including another proposed constitutional amendment that would limit spending increases by the state and other units of government to the rate of inflation adjusted by population or student enrollment changes. Another proposed measure would require zero-based budgeting.

The commission will be voting on additional proposals Wednesday and April 4, said Kathy Torian, a staffer for the commission. On April 24 and 25 the commission will review all proposals in their final form and re-vote on some, if necessary.

The commission has until May 2 to present proposed constitutional amendments to the secretary of state for placement on November's ballot. For more information about the commission's proposal, go to www.floridatbrc.org.


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