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States Watch Florida's Fight Over Services Tax

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Washington--The ferocious political battle now raging in Florida over a new services tax is likely to be repeated in a large number of states over the next few years, according to speakers at a recent conference here.

The results of those struggles, experts warned, may determine funding levels for education and other state programs for years to come.

Despite staunch opposition from powerful business interests, broad-scale economic change will continue to push state officials to re-examine the sales-tax exemptions they have long granted for commercial and professional services, said Steven Gold, an economist with the National Conference of State Legislatures.

While all but a few states levy taxes on the sale of goods, they have been reluctant to extend those taxes into the less tangible world of services, such as those provided by law4yers and accountants, or hairdressers and dry cleaners.

"Sooner or later states will be forced to tax services more heavily if they are to avoid ever-higher sales-tax rates ... or a permanently diminished rate of revenue growth," Mr. Gold said.

Mr. Gold was one of several fiscal experts to address the topic as part of the ncsl's annual seminar on state and local tax policy.

The rapid growth of service industries, he said, has locked many states into a declining revenue base, with general sales taxes that cover only a shrinking proportion of all transactions.

With taxpayers largely hostile to other alternatives, such as income taxes, state policymakers will eventually find that taxing services is the least painful course to follow, he predicted.

Eyes on Florida

But while the trend may be inevitable, the tide of change has yet to flow strongly, Mr. Gold and other speakers noted, as state officials around the nation closely watch political developments in Florida.

Representative Winston Gardner, chairman of the Florida House's Finance and Taxation Committee, predicted the legislature would ignore Gov. Robert Martinez's request to repeal the far-reaching services tax it approved earlier this year.

Mr. Martinez, a Republican, originally supported the tax. He later changed his position after business interests, particularly the advertising industry, launched an expensive publicity campaign to defeat the proposal.

Lawmakers failed to either repeal or revise the new tax during a special session last month. Gov. Martinez has called the legislature into a second special session, set for December, to further consider the issue.

But so far, Mr. Gardner said, legislators have been unable to agree on even the broad outlines of a plan to replace the revenues brought in by the services tax. "We are more or less in a state of political gridlock," he said.

The tax is expected to generate more than $750 million in the current fiscal biennium, Mr. Gardner said, erasing a $500-million budget shortfall and helping schools cope with an enrollment boom that has added more than 60,000 students this year alone.

"The law is in place and bringing in the revenue," said Mr. Gardner. This fact will make legislators reluctant to do away with the tax, despite its unpopularity, he predicted.

But opponents, he said, are busy gathering signatures for a petition that would put the issue to a vote of the people in next year's elections.

The lesson of the Florida experience, Mr. Gardner and other speakers said, is that it is possible to enact a services tax, but only if lawmakers are well informed and prepared for a major political battle.

The national business community's intense opposition to the Florida tax, Mr. Gardner said, is an accurate measure of its effectiveness. The levy, he explained, allows the state to reach far outside its own boundaries, taxing services that are produced and even consumed in other parts of the nation, but which ultimately benefit Florida consumers.

This also has the politically pleasing effect of "hitting those people who don't come to the polls in Florida every so often," noted Lloyd Looram, director of state and local tax practice for the accounting firm of Arthur Anderson & Company.

But broad-based services taxes, Mr. Looram warned, can trigger a devastating counterattack if they injure business interests, such as the advertising industry, that have the resources to shape public opinion.

"Florida went astray when it8reached out and touched someone who could touch back, namely the ad agencies," Mr. Looram said.

Other Reforms Sought

The debate over services taxes is only a part of continuing efforts by state policymakers to reform and diversify their revenue systems, several speakers noted. The 1986 revisions in the federal tax code sparked reform efforts in 26 states this year, according to Mr. Gold of the ncsl

Although states have traditionally sought a diverse mix of revenue sources to insulate education and other programs from budget cuts, policymakers are beginning to pay closer attention to other considerations, such as fairness, simplicity, and political practicality, said one economist.

Officials should not seek a "rigid balance" among the three primary revenue sources--income, sales, and property taxes--available to state and local governments, said Helen Ladd, a professor of public finance at Duke University.

While such a balance may appear stable, she warned, it may also prevent states from achieving other policy goals, such as maximizing revenues, increasing tax progressiveness, or fostering economic development. In designing tax systems, she said, "there is no reason why a state should not take advantage of its economic strengths and benefit from those revenues."

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