FLORIDA'S FISCAL FUTURE: TAX AND EXPENDITURE POLICY IN UNCERTAIN TIMES

March 5, 2009

Despite considerable problems the economic downturn presents for Florida, the state government alone can do little to improve economic conditions because the problem is national and global in scale.  The Florida Legislature should think in terms of fiscal conservatism, not fiscal stimulus, in the face of current economic problems, says Randall G. Holcombe, an economics professor at Florida State University and a Senior Fellow with the James Madison Institute.

State policy should focus on creating a long-run economic environment conducive to growth, and the Legislature should resist the temptation to increase taxes.  Tax dollars take money out of the private sector and hamper recovery, says Holcombe:

  • Over the past year state and local government employment in Florida has increased, while private sector employment has decreased; using employment as an indicator, the public sector is faring better than the private sector in this downturn.
  • In the short run, the state can accelerate construction projects that are already funded to help support that sector of the economy, which has suffered since the collapse of the housing market; also, infrastructure improvements will also help Florida's economy in the long run.

Around the nation, states facing the biggest fiscal problems during the downturn are the high-taxing, high-spending states such as New York and California.  Meanwhile, the governors of the more fiscally-conservative states of Texas and South Carolina have asked the federal government to not give bailout money to the states. The evidence shows that higher taxes are not a solution for fiscal problems; they are part of the cause, says Holcombe:

  • In 1992 Colorado passed a Taxpayer Protection Amendment (TABOR) that limited the growth of government expenditures to the sum of population growth plus inflation.
  • If Florida had enacted a Colorado-style TABOR in 2001 to limit total appropriations, it would have prevented substantial state spending growth from 2004-07, but the TABOR budget would have been $66.7 billion in 2008-09, slightly higher than the actual $66.2 billion appropriated by the Legislature.
  • Had that TABOR been in place with excess revenues placed in a rainy day fund, there would have been more than enough in reserves to allow the 2009-10 budget to increase to $68.9 billion.

A TABOR smoothes expenditures over the business cycle, limiting increases during prosperous years, but also limiting budget cuts during downturns, says Holcombe.

Source: Randall G. Holcombe, "Florida's Fiscal Future: Tax and Expenditure Policy in Uncertain Times," James Madison Institute, Backgrounder No. 58, February 2009.

 

Browse more articles on Tax and Spending Issues