Evaluating Potential Modernization of the Florida Tax System:

Simulating Shifts In Productivity in the Florida Economy with Changes in the Exemptions and

the Incidence of State Taxes

Prepared by:

Tim Lynch, Ph.D., DirectorWith assistance from:

Carter Doyle, ABD, Economist

Center for Economic Forecasting and Analysis

Florida State Universitywww.cefa.fsu.edu

For: The Florida Tax Watch Center for a

Competitive Florida and the Task ForceOrlando Airport Hyatt Regency Hotel

December 12, 2002

Using Regional Economic Models (REMI) to Measure

The Potential Economic Impacts on Productivity,

Employment and Wages from Shifts in the Structure of the State of Florida Tax System

REMI Uses Three Sources of Employment, Wage and Salary Data

• The Bureau of Economic Analysis (BEA): Annual data and reported to county level.

• ES-202 Establishment employment and wage and salary data: Monthly data and to county level.

• County Business Patterns (CBP) data published by the Bureau of Census: Annual (March of each year) data.

REMI Model(Five Basic Blocks)

• Output (Final Demands drive this block)• Labor and Capital Demands (Labor Demand)• Population and Labor Supply (Labor Supply)• Wages, Prices,and Profits• Market Shares (Share of Local and External

Markets)

Recalling a Basic Economic Relationships

GDP = Investment + Personal Consumption

+ Government Spending + Net Exports

Hence, an INCREASE in industry (TAX EXEMPTIONS) or consumer taxes rates will:

1. INCREASE PRODUCTION COSTS AND SLOW the economy:

2. DECREASE CONSUMER SPENDING AND SLOW the economy;

3. BUT INCREASE GOVERNMENT SPENDING AND INCREASE the economy (but by how much on net??? This is to be answered on a case by case basis).

HOWEVER:

A general sales tax increase spread across all consumers and industries with an approximate 20% COLLECTION RATE FROM TOURISTS EXPORTS A LARGE CHUNK OF THE TAX and results in continuing to STIMULATE AND INCREASE the economy despite the dampening effects on Florida residents and industries identified above.

ESTIMATING SHIFTS IN TAX REVENUES AND PRODUCTIVITY FROM REMOVING SELECT

SALES TAX EXEMPTIONS PER RANDY MILLER SUGGESTIONS

FY 2002-03Short Description Annualized

MillionsCondominium recreational leases. $6.3Toll road charges. $44.1Movie theater concession rent. $1.6Highschool and college teams'stadium skyboxes $0.7Admissions to certain school and state events. $6.3Dues, fees, and admissions charged by non profit entities. $27.2Admissions paid by students for required sports or recreation. $4.7Super Bowl football tickets (impact only when held in Florida) -$0.6Governmental participation or sponsorsnip tees $16.0Tickets for certain non-profit theater, opera or ballet events. $1.6Law enforcement officers' protection services. $3.3Non-Prescription drugs. $167.8Bottled (except carbonated) Water $7.4Sales of U.S. and State flags. $1.7Laundry & Dry Cleaning Services $77.8Beauty & Barber Shops $64.9Cleaning and Pest Control - Residential $56.4Auto Towing and Other Non-repair Services $17.2Franchises, Royalties & Lisc./Holding & Oth r Invest. Offices $814.3Certain candy sold in vending machines by non-profit orgs. inst.PRIDE $1.3Up to $2.Om annual subsidy for certain professional sports teams. $16.5$2 million annual subsidy for Professional Golf Hall of Fame. $2.0$1 m annual subsidy for Intern'l Game Fish Association World Center $1.0

$1,339.5

ESTIMATED POTENTIAL REVENUE FROM REMOVING THE SALES TAX ON SELECT SERVICES

REMOVAL OF SPECIFICALLY IDENTIFIED PROFESSIONAL AND PERSONAL SERVICES EXEMPTIONS AND AN INCREASE IN

GOVERNMENT SPENDING BY $1,339.5 MILLION

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

Increase in Production Cost AND in Government Spending of $1,339.5 M

Increase in Professional and Personal Services Production Cost ONLY of $1,339.5 M

Increase in Government Spending ONLY of $1,339.5 M

BILLIONS 1996$

ESTIMATED REVENUE FROM SALES TAX ON SERVICES

REMOVAL OF PERSONAL SERVICES EXEMPTIONS AND INCREASE IN GOVERNMENT SPENDING BY $1,028 MILLION

$(3.00)

$(2.50)

$(2.00)

$(1.50)

$(1.00)

$(0.50)

$-

$0.50

$1.00

$1.50

$2.00

Increase in Production Cost and Increase in Govt. Spending of $1,028 M

Increase in Production Cost of $1,028 M

Increase in Govt. Spending of $1,028 M

BILLIONS 1992$

REMOVAL OF PROFESSIONAL SERVICES EXEMPTIONS AND INCREASE IN GOVERNMENT SPENDING BY $2,128 MILLION

$(7.00)

$(6.00)

$(5.00)

$(4.00)

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

$4.00

Increase in Production Cost and Increase in Govt. Spending of $2,128 MIncrease in Production Cost of $2,128 MIncrease in Govt. Spending of $2,128 M

BILLIONS 1992$

REMOVAL OF BUSINESS SERVICES EXEMPTIONS AND DECREASE IN GOVERNMENT SPENDING BY $2,428 MILLION

$(8.0)

$(6.0)

$(4.0)

$(2.0)

$-

$2.0

$4.0

Increase in Production Cost and Increase in Govt. Spending of $2,428 MIncrease in Production Cost of $2,428 M

Increase in Govt. Spending of $2,428 M

BILLIONS 1992$

REMOVAL OF FINANCIAL SERVICES EXEMPTIONS AND AN INCREASE IN GOVERNMENT SPENDING BY $3,344 MILLION

$(16)

$(14)

$(12)

$(10)

$(8)

$(6)

$(4)

$(2)

$-

$2

$4

$6

Increase in Production Cost and Increase in Govt. Spending of $3,344 MIncrease in Production Cost of $3,344 M

Increase in Govt. Spending of $3,344 M

BILLIONS 1992$

REMOVAL OF MEDIA SERVICES EXEMPTIONS AND DECREASE IN GOVERNMENT SPENDING BY $701 MILLION

$(2.50)

$(2.00)

$(1.50)

$(1.00)

$(0.50)

$-

$0.50

$1.00

Increase in Production Cost and in Govt. Spending of $701 M

Increase in Production Cost of $701 M

Increase in Govt. Spending of $701 M

BILLIONS 1992$

REMOVAL OF ENTERTAINMENT SERVICES EXEMPTIONS AND DECREASE IN GOVERNMENT SPENDING BY $258 MILLION

$(0.80)

$(0.60)

$(0.40)

$(0.20)

$-

$0.20

$0.40

Increase in Production Cost and in Govt. Spending of $258 M

Increase in Production Cost of $258 M

Increase in Govt. Spending of $258 M

BILLIONS 1992$

REMOVAL OF CONSTRUCTION INDUSTRY EXEMPTIONS AND DECREASE IN GOVERNMENT SPENDING BY $1.28 BILLION ANNUALLY

$(6.00)

$(5.00)

$(4.00)

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

Increase in Production Cost and in Govt. Spending of $1,280 M

Increase in Production Cost of $1,280 M

Increase in Govt. Spending of $1,280 M

BILLIONS1992$

REMOVAL OF INSTITUTIONAL SERVICES EXEMPTIONS AND DECREASE IN GOVERNMENT SPENDING BY $420 MILLION

$(1.50)

$(1.00)

$(0.50)

$-

$0.50

$1.00Increase in Production Cost and in Govt. Spending of $420 M

Increase in Production Cost of $420 M

Increase in Govt. Spending of $420 M

BILLIONS 1992$

REMOVAL OF TRANSPORTATION SERVICES EXEMPTIONS AND DECREASE IN GOVERNMENT SPENDING BY $661 MILLION

$(2.00)

$(1.50)

$(1.00)

$(0.50)

$-

$0.50

$1.00

Increase in Production Cost and in Govt. Spending of $661 M

Increase in Production Cost of $661 M

Increase in Govt. Spending of $661 M

BILLIONS 1992$

REMOVAL OF HEALTH SERVICES EXEMPTIONS AND INCREASE IN GOVERNMENT SPENDING BY $1.791 BILLION

$(7.00)

$(6.00)

$(5.00)

$(4.00)

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

Increase in Production Cost and in Govt. Spending of $1,791 M

Increase in Production Cost of $1,791 M

Increase in Govt. Spending of $1,791 M

BILLIONS 1992$

INCREASE IN FLORIDA SALES TAX AND CONSUMER TAX BURDEN BY $1% OR $2,781 MILLION (DIFFERENCES)

$(5.00)

$(4.00)

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

$4.00

$5.00

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

Increase in Personal Tax Burden and Increase in Govt. Spending of $2,781 M

Increase in Personal Tax Burden of $2,781 M

Increase in Govt. Spending of $2,781 M

BILLIONS 1992$

INCREASE IN FLORIDA SALES TAX AND CONSUMER TAX BURDEN BY 1% OR $2,781 MILLION (LEVELS)

$400

$450

$500

$550

$600

$650

$700

$750

$800

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

Increase in Personal Tax Burden and Increase inGovt. Spending of $2,781 MIncrease in Personal Tax Burden of $2,781 M

Increase in Govt. Spending of $2,781 M

BILLIONS 1992$

INCREASE IN FLORIDA SALES TAX AND CONSUMER TAX BURDEN BY 1% OR $2,781 MILLION

(TEN YEAR FORECAST IN LEVELS)

$400

$420

$440

$460

$480

$500

$520

$540

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Increase in Personal Tax Burden and Increase in Govt. Spending of $2,781 M

Increase in Personal Tax Burden of $2,781 M

Increase in Govt. Spending of $2,781 M

BILLIONS OF 1992$

SALES TAX 1% INCREASE WITH A $2,225 MILLION DECLINE IN FLA CONSUMER TAX BURDEN (TOURIST INCREASE 20%)

$(5.00)

$(4.00)

$(3.00)

$(2.00)

$(1.00)

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Reduction in Consumer Tax Burden of $2,225 M and Increase in Govt. Spending of $2,781 M

Increase in Consumer burden of $2,225 M

Increase in Govt. Spending of $2,781 M

BILLIONS OF 1996$

Summary and Conclusion:

Recalling a Basic Economic RelationshipsGDP = Investment + Personal Consumption

+ Government Spending + Net Exports

While an INCREASE in industry (TAX EXEMPTIONS) or consumer taxes rates will:

1. INCREASE PRODUCTION COSTS AND SLOW the economy:

2. DECREASE CONSUMER SPENDING AND SLOW the economy;

3. BUT INCREASE GOVERNMENT SPENDING AND INCREASE the economy.

CONCLUSION:A general sales tax increase spread across all consumers and

industries with an approximate 20% COLLECTION RATE FROM TOURISTS EXPORTS A LARGE CHUNK OF THE TAX and results in continuing to STIMULATE AND INCREASE the economy despite the dampening effects on Florida residents and industries identified above.