At the December 2001 Board of Governors meeting in Tallahassee, members of the Board were honored to welcome Senate President John McKay to the FICPA and to hear from him directly about his tax reform proposal. While the proposal was couched in terms of "reform" and as a revenue neutral manner in which to level the peaks and valleys of Florida's budget, it was very clear to the Board that several critical issues in the proposal had not been publicly addressed and required further study.

As such, the Board voted unanimously to oppose the proposal. However, the Board accepted President McKay's invitation to participate in the process and to provide alternative "solutions" to an as yet undefined problem. As you know, you consequently constituted the Services Tax Task Force to which you appointed me chair.

Since December, the Task Force has pushed forward with its mission and has spent a great deal of time, energy and thoughtful review of the proposal. We are pleased to provide you with the final report and recommendations of the Task Force.

Summary of Meetings
Over the past three months, this Task Force has taken on the assignment of reviewing Sen. McKay's tax reform plan - SJR 938 and SB 1106. Our initial review took place during an in-person meeting in Tampa in early January. After a lengthy discussion, the Task Force members agreed to focus on two areas of Sen. McKay's plan - deficiencies and alternatives.

First, in a brainstorming session, we identified deficiencies in the McKay plan. Many deficiencies identified by the Task Force have been used in legislative testimony by the FICPA in opposition to SJR 938/SB 1106. Further, the deficiencies were incorporated into FICPA's "talking points" on the services tax and also into a recent statewide Call To Action urging FICPA members to voice their opposition to the services tax.

Second, we discussed alternatives to the McKay plan. Based on the fact that many of the alternatives would harm relationships in FICPA's services tax coalition, we believe these alternatives may be appropriate for study after the services tax plan has been defeated (see February 7, 2002 report).

Recommendation for Further Task Force Action
On behalf of the task force, I would like to recommend the following statement of the Task Force be accepted by the Executive Committee and used in FICPA's legislative testimony if needed.

The FICPA Services Tax Task Force was formed in December 2001 with the charge of reviewing proposed legislation to create a services tax in Florida. In January the 15-member Task Force substantially reviewed SJR 938. Following discussion, the Task Force identified significant deficiencies in SJR 938 and alternatives to the proposal.

The deficiencies cited by the Task Force range from the inappropriateness of legislating via Constitutional amendment to pyramiding of taxes. Significantly, SJR 938 does not adequately identify the goals of the legislation and does not fairly match taxes to users.

Although SJR 938 has been described as revenue neutral in the first year, the Task Force based their discussions on the assumption that any alternative proposals must generate revenue for the State of Florida.

With less than two months to review and comment on an incredibly complex issue such as tax reform and without the ability to perform a separate independent economic study, the Task Force recommends the following based on a host of research provided by staff:

1) The Task Force recommends the FICPA participate in an interim study on this issue if asked.

2) The Task Force recommends the FICPA endorse Governor Jeb Bush's February 7, 2002 letter in opposition to the Senate's tax reform plan.* Specifically, the Task Force agrees with the Governor's assessment in that:

a. Current revenues are meeting Florida's budget needs. Our taxes are growing at the same rate as the economy and we do not need to increase them. The Legislature and the Governor should continue their work to find better, smarter and more efficient ways to accomplish priorities.

b. The Senate proposal is based on the faulty premise and inconsistent data that Florida will "lose" approximately $4 billion in revenues by 2006. The Governor and the Task Force are in agreement that there is no loss in revenue by not taxing that which was never taxed. The state cannot lose that which it never had.

c. If enacted, the Senate plan would not generate the cited $4 billion. To do so would require annual growth rates in the newly taxed portion of the base to be in the range of 50 to 100 percent.

d. Contrary to earlier reports from the Senate, the reform plan is not revenue neutral. Consequently, if the goal is to raise revenues we firmly agree with the Governor that reform proponents should be straightforward with Floridians and tell them a tax increase is, in the reformers' opinions, needed.

e. Reform proponents incorrectly surmise the tax structure is unstable and have exaggerated economic fluctuations. Even with that faulty premise, those same reform proponents have not demonstrated that the proposal would provide any significant degree of protection from the normal ebbs and flows of the business cycle. As noted by the Governor, based on experience in past recessions, the proposal would not protect vital state programs from revenue shortfalls that inevitably occur in periods of economic downturn.

f. Finally, in contrast to reform proponents, we agree with the Governor that the current tax system is fair and logical. Reformists argue that current exemptions protect special interests while Floridians are forced to pay higher taxes. They argue that a "fair" tax system would spread the burden equitably across all segments of society. Perhaps this is true, if the goods and services taxed in "all segments of society" are subject to the same tax rate. However, as the Governor said, the effective tax rate levied on business inputs, as suggested in the plan, will result in tax pyramiding up through the cost structure.

3) The Task Force recommends the FICPA commend the State Tax Reform Task Force on their Feb. 2002 final report.**

a. The FICPA Services Tax Task Force is in agreement with the findings of the State Tax Reform Task Force upon its "examining the state's tax structure and considering extensive testimony from all sectors, we conclude that the current state's tax structure is adequate to carry the state forward into the 21st Century." We also support the Task Force's recommendation that future proposals to revise or amend the tax code should conform to the following Principles of Taxation:

Equity-- The state should impose similar tax burdens on people in similar circumstances and minimize regressivity.
Compliance-- The Florida tax system should facilitate taxpayer compliance.
Pro-Competitiveness-- The Florida tax system should be responsive to interstate and international competition.
Neutrality-- The Florida tax system should affect competitors uniformly and not become a tool for "social engineering." It should minimize government involvement in investment decisions and minimize pyramiding.
Stability-- The Florida tax system should produce revenues in a stable and reliable manner, sufficient to fund appropriate governmental functions and expenditures.
Integration-- The Florida tax system should balance the need for integration of federal, state and local taxation.

The Task Force is proud to have played a role in such an important process. My thanks to each member of the Task Force and staff for their dedication to this assignment.

If you need additional information, please contact Jennifer Jankowski Green, Director of Governmental Affairs and task force liaison at (850) 224-2727, ext. 201.

BD/JJG/VLY

cc: Lloyd "Buddy" Turman, CAE, CEO-Executive Director
FICPA Executive Committee

* Gov. Bush commends the Senate's effort, but opposes their approach to tax reform based on flawed assumptions and unintended consequences.

** The report is a summary of two years of work by a legislatively created committee of 17 individuals specifically charged with looking at Florida's Tax Structure.