A look at the Rick Scott economy...
Would GOP candidate's tax-cutting vision mean more jobs, or more pain?
SARASOTA, FL (NS/AP/HT) -
Many of the questions surrounding Rick Scott's campaign to be Florida's next governor have centered on the massive fraud that occurred when he was CEO of what was then the nation's largest health care chain, Columbia/HCA.
But some economists, and more than a few members of the Florida Legislature, are also alarmed by what Scott aims to do if elected. Specifically, they're concerned about his plan to revive Florida's economy.
The plan is so audacious that some doubt whether Scott could get it passed, even in a Legislature where Republicans are projected to hold a 2-to-1 advantage.
What makes the plan so controversial? Start with the premise of cutting billions of dollars in tax revenue from the state budget. Even in a boom year, that would be a challenge. But Scott is advocating it at a time when Florida is already facing a $2.5 billion shortfall next year. So far in the recession, Florida has avoided deep cuts in law enforcement, schools and other services by raiding trust funds and taking in massive aid from the federal government, but both sources have run dry, making next year a pivotal one in state budgeting.
On top of the budget shortfall, Scott wants to reduce state revenue by:
Imposing an immediate $1.4 billion reduction in property taxes supporting Florida's schools. Scott says it will reduce taxes for the owner of a $200,000 home by $200 a year.
Permanently ending the state's corporate income tax over the next seven years. The tax represents nearly 3 percent of the state's budget.
Scott says this will make Florida unique -- the largest state in the nation without corporate and personal income taxes. Businesses will flock to Florida because, in addition to its beaches and balmy weather, it will have the favorable tax climate of states such as South Dakota and Wyoming.
The dividend from the spending cuts, Scott claims, will be 700,000 private-sector jobs created in Florida over the next seven years -- a pledge that fits neatly into Scott's campaign mantra of "Let's Get to Work."
What Scott does not say, however, is that his plan is built on one of the most contentious theories in modern government financing: supply-side economics.
The woman who served as chief architect for Scott's economic plan is Donna Arduin. She is a partner in a consulting firm with Arthur Laffer. Laffer is the father of supply-side economics and creator of the Laffer Curve, which postulates that cutting taxes, in some cases, can lead to more government revenue because business is growing.
Supply-side economics first entered the political lexicon under former President Ronald Reagan. President George W. Bush's administration also embraced cutting taxes without finding additional streams of revenue.
But this is what makes Scott's plan different: Unlike the federal government, Florida cannot make up lost revenue from lower taxes by borrowing and deficit spending. The state is constitutionally bound to pass a balanced budget.
That means the only way to balance the budget in the face of what would be historic cuts in revenue would be to make massive cuts in government services.
And Scott has made clear that he is prepared to do just that.
One part of his plan calls for reducing the state prison budget by nearly one-half, cutting pay for state correctional officers and having inmates grow some of their own food. Although cutting money for prisons is usually supported by the public, Florida correctional officials say such extreme cuts would create chaos in the state's penal system and force the state to put thousands of criminals back on the streets.
Scott also wants to cut the state work force by 5 percent and make state workers pay 6 percent of their pension benefits.
Many economists question whether the strategy will yield a fraction of the new jobs Scott is promising a desperate state, one in which more than a million residents are out of work. Ohio, which tried a similar cut to the corporate income tax recently, still has an unemployment rate above 10 percent. One recent analysis found that instead of hiring workers, businesses use cuts in their state corporate income tax to raise dividends to shareholders, many of whom are outside the state in which the business is located.
In addition, a study from the nonpartisan Pew Center released last week showed many Floridians are wary of cutting taxes if it hurts schools and other services that significantly benefit the state's quality of life and future work force.
Florida is already known as a low-tax state, ranking as the fifth most friendly for taxes in the nation, according to one prominent business group.
Scott's ex-rival for the GOP nomination, Bill McCollum, called his plan unrealistic. More than two decades ago, George H.W. Bush gave it another name: "Voodoo Economics."
Big voice in economics
To understand Scott's plan to revive Florida's economy, it helps to know the woman behind it.
Donna Arduin, 47, lives in Michigan and Florida and does not hold an advanced degree in economics. After getting her start as an intern in the the Reagan administration's budget office three decades ago, Arduin has been a rising star, becoming the go-to economist for Republican governors around the country, and carrying the supply-side torch.
Arduin's imprint can be found in New York, where she advised former Gov. George Pataki; in California, where she was Gov. Arnold Schwarzenegger's finance director; and in Florida, as former Gov. Jeb Bush's budget director.
But in Scott, who is making his first run at elected office, Arduin has found a candidate eager to wield a longer knife to cut into what he contends is a bloated state government and a tax system that stymies business development.
"It's the most extreme, and one might say ludicrous, side of supply-side economics," Bruce Nissen, director of research at the Center for Labor Research and Studies at Florida International University, said of the plan Arduin drafted for Scott.
Florida's corporate income tax, a flat 5.5 percent, is already lower than most states', and significantly less than California's (8.84 percent), New York's (7.1 percent) and Alabama's (6.5). Also, unlike those states, Florida does not have a personal income tax.
But conservative economists, who support Scott's plan, say the comparison should go beyond the United States.
"Ending the state corporate income tax is the single best tax policy any state can do," said Chris Edwards, director of tax policy for the Cato Institute, a conservative policy group in Washington, D.C.
"You've got to look at global trends," Edwards said. "If you want international investments from Europe, China or wherever, the state corporate tax is important."
Back to Bush basics
Arduin sounds surprised when told her plan is controversial. She says Scott is advocating tax policies that were tried and proven under former Gov. Jeb Bush, for whom Arduin was a chief adviser.
"The two men have very, very similar ideas about the economy, budgeting and accountability budgeting," Arduin said.
Under Bush, the elimination of the intangibles tax on stocks, bonds and other personal investments -- Bush called it an "insidious tax on seniors and savers" -- kept the size of state government in line with what growth in the private economy could afford, Arduin contends.
"Look at what happened with Florida's economy," Arduin said of Florida's economy during Bush's two terms.
Florida led the nation in job creation during the Bush years, she said. The state earned a triple-A bond rating and built up a multibillion-dollar surplus.
Bush said Scott's plan is realistic, citing more than 1.5 million jobs created during his two terms in office. "Floridians created significantly more jobs in eight years than 700,000," he said Friday. "It's possible to create that kind of growth. We need it. There are a lot of people suffering."
But many economists say attributing Florida's boom to Bush's tax policy is like attributing someone's cold in Miami to a guy who sneezed in China. The real factor for Florida's boom was the real estate bubble, which injected hundreds of billions of dollars into Florida's economy -- and billions more in revenue to the government.
Just as Bush's tax policies did not lead to the boom, those same policies, which remain in effect, have done little to help Florida recover. Florida's surplus vanished and the state has taken to raiding hundreds of millions of dollars from places like the tobacco trust fund, which was supposed to educate children about the dangers of smoking.
"Florida was in the epicenter of the bubble," Nissen said. "That's why we're in worse shape on the downside. I don't think it had anything to do with cutting the intangibles tax."
Echoes from Jeb Bush
With the state's jobless rate at 11.7 percent, Scott's promise of 700,000 jobs is a powerful enticement.
And economists agree that eliminating the corporate income tax will create jobs. When businesses no longer have to send as much 5.5 percent of their income to Tallahassee, it follows that they will have more for investment and to hire workers.
What is strongly debated is whether such cuts will yield anywhere near the jobs Scott is promising.
"In general, across-the-board business tax cuts are not a very cost-effective means of stimulating state economic growth," said Michael Mazerov, author of a new study from the Center on Budget and Policy Priorities in Washington.
Because states must have balanced budgets, Mazerov said, the business tax cuts have to be offset by spending cuts -- which Scott has suggested -- or other tax increases, which minimize the overall impact of the tax reduction.
Mazerov said a consensus of studies have shown that business tax cuts can stimulate economic activity in states over the long term. But the studies have also shown that the elimination of taxes representing 10 percent of the business community's financial burden would yield an increase of just 2 percent or 3 percent in state economic activity. In Florida, where the corporate tax accounts for a little more than 5 percent of overall business taxes, Mazerov said the impact would be even less.
Additionally, Mazerov pointed to the recent example of Ohio, which eliminated its corporate income tax.
"Ohio is hardly a good example of a booming state economy," Mazerov said. "It's just a further indication that this argument that somehow eliminating a tax is going to be some kind of game-changer in the perception of the business community around the country about investing in a particular state has just not held true."
Concern over cuts
While economists cast doubt on whether Scott's plan can create the promised number of jobs, state government officials are equally concerned about what the cuts would do to vital services.
So far, Florida has been spared the problems of states such as California, which have been forced to deal with massive budget shortfalls by cutting fire department services and closing schools.
But Florida could face such scenarios if Scott is successful in his plan to cut $2 billion more next year on top of the $2.5 billion the state is already anticipating. That would account for about a 7 percent reduction in state spending.
Correctional officers say Scott's proposal to cut more than $1 billion from the $2.3 billion corrections budget would cripple the state prison system.
School officials question how Scott can cut $1.4 billion in school property taxes and replace it by cutting other areas of state government.
Wayne Blanton of the Florida School Boards Association said massive spending cuts could lead to the loss of thousands of government jobs. "It's the exact opposite of 'Let's Get to Work,' " Blanton said.
Blanton also questioned how Scott could find more than $2 billion in cuts to offset the loss from school and corporate taxes.
"I think state government is pretty lean right now," Blanton said. "If he's going to cut state government, he's not going to be cutting the meat. He's going to be breaking the bones."
Editor's Note:
Having been in the unique position as a small Town Tax Assessor in Upstate New York many years ago, I happen to think the Property Tax Cut idea for both Businesses and Homeowners CAN work because that's exactly what we did in our Local Town and it helped the Town to grow and prosper over the next decade. Our Tax base went TRIPLED from where it had been and our Town population DOUBLED during the next 4 year period! Folks this concept does work and it's been PROVEN to work during the Ronald Reagan Presidency when the economy and misery index were actually 'worse' than it is today. Hard to believe but TRUE...
Matt Bruce
News Sarasota.com, Managing Editor...
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