Silent Spending: Florida’s Shadow Budget Needs Greater Scrutiny
By: Dhanraj Singh
Silent spending, in the form of numerous kinds of tax breaks, costs Florida billions of dollars in lost revenue a year. Unlike money spent through the state budget process, this “shadow budget” is not routinely examined to see if it is meeting worthwhile goals or promoting a stronger economy.
This is money that is spent through legislation that changes the tax code. While spending through the state budget is subject to yearly review and reauthorization, spending through the tax code – called tax expenditures – takes the form of revenue the state foregoes, rather than money the state collects and then spends. In either case the result is the same – the state doesn’t have money it otherwise would. Once enacted, these expenditures tend to remain in statute without any expiration date.
State tax expenditures are not inherently good or bad. The problem with them arises because, unlike actual spending, they are not routinely evaluated to ensure they deliver on objectives. Stronger evaluations and routine monitoring of such silent spending would give policymakers and the public a much stronger handle on whether the money the state is giving up is being put to good public use.
What is “Silent Spending”?
What many people might call “tax breaks,” tax expenditures are potential state revenues that are never collected because of provisions in the tax code that allow exceptions to the rules of state revenue collection. Tax expenditures are not funded by collecting revenues and appropriating them through the state’s budget, but instead by not collecting tax revenues from some taxpayers. Their ultimate impact on a government’s budget is the same as an actual appropriation and expenditure of public funds.
By not collecting revenues that would otherwise be due to the state, tax expenditures reduce funds available to support public priorities such as education, health, safe communities and transportation.
Silent spending takes many forms, the most common of which include:
- Tax credits –amounts that a taxpayer can reduce taxes that would otherwise be owed to the government. An example of this would be a reduction in income taxes that a business would owe in the amount of its investment in solar energy.
- Tax exemptions – amounts that, by law, an individual or business is not required to pay in the first instance. The best examples of tax exemptions come in the case of sales taxes, where taxes are due on the sale of goods and services. The law makes exception to the law requiring payment of these taxes in the case of certain good such as food and medicines that are thought to be necessities.
- Tax refunds –funds given back to a taxpayer from total taxes paid. For example, a commercial airline with a ticketing counter in Tallahassee that refuels its aircrafts in Tallahassee is given a refund on the motor fuel and diesel fuel taxes it pays. Tax deductions – funds that a tax payer can deduct from taxable income before taxes are calculated. Often the deduction is the amount of money spent on a good or service incurred to produce additional income.
Further, tax expenditures can be put into two broad categories:
- Those that reduce a taxpayer’s taxable income, e.g. exemptions and deductions
- Those that reduce a taxpayer’s tax liability, e.g. credits, and refunds.
The Legislature approves tax expenditures for a number of reasons. Some tax expenditures are intended to help families by increasing household income. Examples include tax breaks on purchases of groceries, health care, and education supplies.
Others are aimed at helping businesses, with the expectations that lower taxes will encourage new business startups, attract businesses to the state, encourage investment in new plant and equipment, support research and innovation, and create jobs. For example, one program offers businesses tax credits if they locate in certain urban areas.
Why Should We Care About Silent Spending?
Tax expenditures are important because they cost billions of dollars each year with very little accountability. They are not subject to regular evaluation because, once enacted, they are not considered part of the annual budget review process.
Stronger evaluation of tax expenditures could identify sensible ways to save and increase available resources to fund core services at levels that meet the needs of Floridians.
State lawmakers annually scrutinize public investments in education, health and human services, public safety and other areas. Tax expenditures, however, are not systematically reviewed to ensure they deliver on their intended purposes. Tax expenditures drain billions of dollars in potential state revenue each year, reducing the revenues available for much-needed public investment. Further, the growing cost of tax expenditures creates a bigger hole in potential state revenue, making it increasingly difficult for the state to adequately fund critical public services.
Florida is one of 26 states that fail to evaluate tax expenditures, according to The Pew Center on the States. The Florida Tax Handbook embeds revenue loss estimates into the overall revenue analysis for each type of tax expenditure, but does not include an analysis of the benefits that might accrue from them. Florida could increase revenues, close service gaps and enhance funding for critical services by analyzing and revising the current system of silent spending. Such analysis would help policymakers rethink tax expenditures, competing state priorities and critical state needs to maximize the cost-effectiveness of Florida’s tax and budget system.
Fortunately, there are simple steps lawmakers can take bring current tax expenditure laws under scrutiny, assess their impact on the state revenues and economy, and adopt meaningful tax reforms to ensure limited resources are spent in the most effective way to promote real economic growth, benefiting all Floridians.
Recommendations for state action: Enact tax expenditure laws for transparency and accountability
We suggest that the Florida legislature should incorporate tax expenditure evaluation into its regular budget review agenda in the following ways:
- Include a specific explanation of what each tax expenditure law intends to achieve.
- Require regular nonpartisan evaluation of tax expenditures to determine how successful they have been in achieving their objectives; such evaluation must include recommendations for reform.
- Specify an expiration date for each tax expenditure to allow for its evaluation and vote on the expenditure again in light of new evidence of its success, or lack thereof.
- Include specific recommendations related to any tax expenditure that has been recently evaluated in each budget presentation (from the Governor, House and Senate).
- Require the finance and tax committees of the legislature to hold hearings on any tax expenditure that has been recently evaluated.
The extent to which these recommendations would improve the state’s tax policies depends on analysts having the resources needed to conduct rigorous evaluations and on lawmakers having a genuine interest in using the findings to inform their debate and policy decisions. If these conditions are met, these recommendations have the potential to enhance the quality of information needed for meaningful tax reforms, increase revenues, and increase investment in core public services.
The legislature compiles annual estimates of the cost of tax expenditures, but does not consistently estimate their benefits. In many cases there is no public disclosure about whether stated goals have been met. In some cases, there are not even explicit goals stated in legislation enacting the expenditures.
This is not to say that evaluation and resultant changes in policy are non-existent in Florida. A good recent example of Florida’s legislature changing course on a tax expenditure involved tax credits aimed at attracting film and television production to the state. Florida decided not to renew the credit after studies by the Florida Legislature’s Office of Economic and Demographic Research showed that the credits do not break even. The study resulted from a legislative mandate to review the benefits of certain economic development programs. This type of action should be the rule, not the exception.
Policymakers and the public need to know the impact of each tax expenditure –both the cost and the benefit – in order to craft informed tax and budget policies.
It is important to note that tax expenditures, in and of themselves, are not inherently good or bad. There is no reason to expect that every tax expenditure is a poor use of public dollars. Some of them serve important purposes that benefit the state’s families, businesses and overall economy. The problem comes when:
- we don’t know which tax expenditures are serving those purposes and which are not
- we’re not clear on exactly what purposes they are meant to serve
- we’re not able to prioritize them against other spending decisions in an annual budgeting process
Florida Tax Expenditure Facts
Tax expenditures cost billions in state revenues each year.
Florida’s assortment of tax expenditures is projected to cost the state $17.7 billion in fiscal year 2016 -17, according to the Florida Tax Handbook 2016. Total tax expenditures represent an amount equal to almost 22 percent of the state’s budget for the same fiscal year, though the amount of the expenditure is not considered in the budget.
By way of comparison, the cost of tax expenditures is equal to the total appropriations from the state budget for early learning, state universities, public safety, children and families, public health and environmental protection combined.
More than 85 percent of the $17.7 billion in lost revenues come from exemptions to sales and use taxes. Roughly 8 percent comes from the corporate income tax breaks; and the balance comes from smaller sources such as insurance premium and lottery taxes.
More than half of all silent spending targets Florida businesses.
More than half of total tax expenditures go to Florida businesses. For fiscal year 2016-17, tax expenditures targeting businesses cost the state an estimated $9.8 billion, compared to $7.9 billion that would benefit Florida’s families.
Tax breaks targeting families are primarily exemptions from sales tax. Those targeting business include exemptions, as well as tax credits and refunds. Together the expenditures reduce business taxable income and tax liability.
Florida has spent the equivalent of an annual state budget on tax expenditures over the last 5 years.
From fiscal year 2010 to 2015, tax expenditures cost Florida $76.3 billion, almost the same amount as the total budget for fiscal year 2015-16 of $78.4 billion.
These expenditures represent a significant loss of revenues that could have been otherwise invested in services such as education, health care and public safety to keep up with state needs. For example the education funding gap is increasing (when compared with the national average).
Most family tax breaks are for food, housing expenses and other necessities of life.
Forty-four percent or $3.5 billion of total tax expenditures targeting families are from sales and use tax exemptions for groceries for consumption. Sales tax exemptions for rents paid by permanent residents account for 23 percent or $1.8 billion. Together these two expenditures account for two thirds of the total $7.9 billion in tax expenditures benefiting families.
Other notable tax expenditures targeting families include sales and use tax exemptions on prescription drugs, hospital meals and rooms and purchases of power and heating fuel by households
Business tax expenditures are large while returns are uncertain.
The cost of special tax treatment for Florida businesses, projected to be $9.8 billion for fiscal year 2016-17, constitutes 55 percent of the total tax expenditures for the year. Business tax expenditures include sales and use tax exemptions for manufacturing businesses and hotels, and tax credits for corporations and insurance companies.
The most expensive business tax expenditure, by far, is sales and use tax exemptions for businesses. These exemptions cost an estimated $7.185 billion. The cost of corporate income tax expenditures benefiting businesses is estimated at $1.4 billion.
Many business tax exemptions make sense. For example, some sales tax exemptions on manufacturing keep Floridians from paying taxes more than once on a product, keeping prices lower. It is not immediately clear, however, how much other business tax expenditures, such as those against the corporate income tax, are helping the state economy. A majority of studies find that income tax expenditures have little if any effect on the rate of economic growth and job creation. Studies find that cutting corporate income taxes doesn’t necessarily create jobs or boost the economy.
Silent spending on tax breaks is higher than on any single area of the budget.
Florida will spend 40 cents on tax breaks for every $1 in revenue that will be collected in fiscal year 2016-17, though tax expenditures are not collected and appropriated through the state’s budget. Revenues collected and appropriated are shared among priorities such as education, human services, transportation, public safety among others. For fiscal year 2016-17, for every $1 of revenue collected, the state allocated 35 cents for education, 21 cents for human services, 8 cents for public safety and less than 1 cent for transportation. Total revenues collected are projected to be $44.6 billion compared to total tax expenditure of $17.7 billion.
Annual growth in tax expenditures outpaced growth in spending on key priorities.
The annual cost of tax expenditures has increased on average by 4.3 percent or $650 million since fiscal year 2010-11. It has grown even faster in recent years. From 2013-2016, the annual cost of tax expenditures grew by 5 percent ($800 million), compared to 3.5 percent ($500 million) during fiscal years 2010-2012 (see chart on right).
What is driving up the cost of tax expenditures? First, legislators have added new tax expenditures averaging more than $700 million each year, since fiscal year 2010. Second, new tax expenditures are often implemented over a few years, generally 2-3 years after they have been enacted. Their full cost is felt after this period.
Compared to other key priorities, annual growth in the cost of tax expenditures is highest (see chart on right). From fiscal year 2010-11 to 2016-17, annual growth in tax expenditures is 34 percent higher than human services, 258 percent higher than education and 816 percent higher than public safety expenditures.
Most sales and use tax expenditures are dated and many may be ineffective due to economic changes.
Almost 13 percent were implemented during the 1940s, and more than 53 percent were implemented during the 1980s and 1990s. Tax expenditures enacted before fiscal year 2000-01 account for 68 percent ($8.7 billion) of all sales tax exemptions. One might wonder if silent spending enacted in the last century is still relevant in today’s economy.
Florida’s economic, social and environmental realities have changed significantly over the past twenty years. This fact raises the question of whether individual tax expenditures are still relevant. Even if they are relevant, are they the most effective way of achieving their stated objectives, whether it is creating jobs, promoting economic growth or attracting businesses to the state?
 The Pew Center on The States (2012): Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth.
 Leachman, Michael; Dylan Grundman and Nicholas Johnson (2011): Promoting State Budget Accountability Through Tax Expenditure Reporting, Center on Budget and Policy Priorities.
 Institute on Taxation and Economic Policy (2012): Five Steps Toward a Better Tax Expenditure Debate.
 For the purposes of this report, business is defined as businesses and organizations.
 Lynch, Robert G (2004): Rethinking Growth Strategies: How State and Local Taxes Affect Economic Development, Economic Policy Institute.
 This is the sum of average annual cash expenditure of $460 million and recurring expenditure of $258 million from annual tax cuts from 2010-2016.
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