Florida’s failed experiment with sales tax expansion

Governor Kasich is seeking to expand the state sales tax base to help pay for a $4 billion income tax cut. This is not the first time a state has attempted to broaden its sales tax base. Yesterday we looked at Gov. Taft’s 2003 effort. Today we review the 1987 expansion of Florida’s sales tax to services which faced many of the same roadblocks.

At the end of the 1986 legislative session, the Florida legislature passed a bill extending the state’s five percent state sales tax to an array of new services and repealed exemptions for many previously exempt services. Florida did not have an income tax and needed additional revenue to provide services for a rapidly growing population.

After the bill’s passage, the legislature was forced to postpone the tax’s enactment until July 1, 1987, citing “significant policy, revenue, legal and administrative implications” that required further consideration. Six months later, the new sales tax was repealed.

Here’s what happened:

  • Businesses hated it. National advertisers such as Coca-Cola, General Foods and Procter & Gamble terminated or reduced advertising efforts in the state, and some businesses helped fund taxpayer efforts to have the tax repealed. Businesses had difficulty determining what services the new sales tax covered and were confused about how to account for the tax. Further, businesses argued that the cost of the sales tax would be passed down to consumers.
  • Taxpayers did not support it. Seniors worried that the sales tax would extend to medical care services, and local groups organized to oppose the tax.
  • The new sales tax on services was repealed just six months after its enactment. Due to a combination of confusion about the tax and public outcry against it, Gov. Bob Martinez (R) withdrew his support for the tax. On December 11, 1987, the legislature enacted new legislation that repealed the sales tax on services and instead increased the rate of the existing sales tax from five to six percent.

(For an overview of the Florida experience, see here, here and here).

Yesterday, representatives from industries including realtors, travel agents, insurers, criminal defense attorneys, laundromats, bowling alleys, grocers and veterinarians spoke in opposition to the plan that, they argued, would drive companies out of state, cut into their profit margins or result in higher costs for consumers. Testimony on the plan continues today, with amendments to the plan expected after the upcoming two-week spring recess.