Proposed Florida Business Tax Phase-out Draws Fire

Published October 18, 2010

Only three states—Nevada, South Dakota, and Wyoming—have no corporate income tax, but Florida GOP gubernatorial candidate Rick Scott wants to add the Sunshine State to that select list.

Scott proposes reducing the state’s corporate income tax to zero over the next seven years, but his suggestion has raised concerns among school choice advocates because credits against the tax help support the state’s privately funded scholarship program.

Since 2002 Florida has provided a dollar-for-dollar tax credit on corporate income taxes for donations to nonprofit organizations that award scholarships for private school tuition. This fall some 32,500 children enrolled in more than 1,000 private schools with the help of scholarships worth up to $4,106 each. However, because of recent changes the program no longer depends solely on the corporate income tax as a source of revenue.

A September 22 newspaper article by John Kennedy of the News Service of Florida warned the proposed tax cut could jeopardize the private school scholarships. Within a week, a coalition of school choice groups had taken out a full-page ad in the Tallahassee Democrat and held a news conference in Fort Lauderdale, urging both Scott and his opponent, Democrat Alex Sink, to support the Tax Credit Scholarship program.

The groups included the Hispanic Council for Reform and Educational Options, the Black Alliance for Educational Options, Agudath Israel of Florida, and the Black Ministers Parental Alliance.

One’s Committed to Expansion
“I support school choice and I strongly support these scholarships,” Scott wrote in a letter to Julio Fuentes, president of Hispanic CREO, in response to the coalition’s concerns. “I am committed to finding a solution that will continue to allow families more choice in where to send their child to school.”

Sink has said she would consider giving new businesses a three-year break on paying the corporate tax, and she told Florida’s Capitol News Service, “I don’t support any further expansion of that program until we are able to assure ourselves that public schools are adequately funded.”

The program targets students who qualify for free or reduced-price lunches.

Scott’s statements in his letter reiterated a position he had already made clear in his six-page education plan—support for school choice, support for the scholarships and their expansion, and a commitment to finding a solution to the funding problem created by the elimination of the business tax.

“As we phase out the corporate tax over seven years,” declares Scott in the plan, “I will work with the Legislature, business and parents to develop a more comprehensive program that will allow all of Florida’s children to have the best possible education experience that meets each child’s unique need.”

Scott argues eliminating the business income tax would have a minimal effect on state revenue while having a large positive effect on the state economy and state sales tax revenues by making Florida more competitive in the global marketplace.
Pushback Precedent
There is precedent elsewhere for pushback from nonprofits sidelining a proposed tax reform and its economic benefits. In 2005 Utah’s then-governor, Jon Huntsman Jr., proposed changing the state’s income tax, with its deductions and tax preferences, to a flat tax with no deductions. But when the Mormon Church made clear its “support of retaining a state tax deduction for charitable giving,” reform discussion quickly shifted to the idea of a flatter tax that included a charitable deduction.

“[A] flat tax with no deductions, exemptions or credits simply does not reflect the values and priorities of Utahns,” argued Sutherland Institute President Paul Mero in a 2005 Wall Street Journal article. The Mormon Church, he continued, “rightly understands that the tax code should be used to incentivize individual and societal behaviors that help us to be our better selves and, at the same time, serve to unburden our reliance on government programs.”

However, it’s unlikely the business tax reform proposal would be sidelined in Florida if Scott is elected governor. That’s because the tax credit program no longer depends exclusively on corporate taxes as a source of funding, thanks to bipartisan support for a major expansion of the program earlier this year, spearheaded by State Rep. Will Weatherford (R-Wesley Chapel).

New Credit Sources
Credits for the program can now be taken against the corporate income tax, the insurance premium tax, the alcoholic beverage excise tax, the oil and gas severance tax, and the direct pay self-accrual sales tax on manufacturers.

The four new credit sources produce tax revenues of about $1.6 billion a year, compared to $1.8 billion from the corporate income tax.
As part of the program changes approved by the legislature, the program cap for the following year is automatically increased by 25 percent when funding and enrollment reach 90 percent of the current cap. With the current year’s program already oversubscribed, the 2011-12 program cap likely will be lifted from $140 million to $175 million.

Even if the program expanded by 25 percent every year, it would have until the 2021-22 school year before the cap reached the $1.6 billion available from the new funding sources. To put this figure into perspective, that’s just 5.8 percent of the $27.4 billion allocated for K-12 public education in Florida for the 2007-08 school year.

George Clowes ([email protected]) is a Senior Fellow with The Heartland Institute.