Corporate Tax

Florida Company Tax Charge: Lawmakers Ought to Be Assured

Florida is now the ninth state to introduce or adopt a corporate tax cut in 2021, with the state’s new rate being the second lowest in the country – for now. Five states passed legal corporate tax cuts this year, two states (Arkansas and Indiana) passed tax cuts as part of previously agreed incremental cuts, and now Florida, along with Colorado, made tax cuts triggered after revenues exceeded set targets. However, Florida’s rate relief is designed in such a way that it could bounce back almost two percentage points just a few months after cutting the interest rate by almost one percentage point. This uncertainty limits the usefulness of this otherwise positive development and points to the opportunity for legislative reforms to secure Florida’s highly competitive new interest rate.

On September 14, Florida announced a nearly one percentage point cut in its corporate tax rate, the second rate cut since fiscal 2019. The rate cuts were triggered by provisions of House Bills 7093 and 7127, which automatically lower corporate tax rates when they are net of income tax revenue exceeded forecasts in a given fiscal year. The latest cut brings Florida corporate tax rate to 3.535 percent, from 5.5 percent before the cuts began.

However, it is possible that the reduced rate will only last for a short time. While the new rate will apply retrospectively to January 2021, it should decrease to 5.5 percent on New Year’s Day. Also, corporate tax cuts generally have positive effects on both capital investment and the return on labor (which benefits workers), but the most recent cut is likely to stay below average unless policy makers keep rates in the next Legislative period deliberately constant as most investment and hiring decisions that year were made before the lower tariff was announced.

Florida’s recent rate cut is notable for its relationship to the revenue projections that made it possible. It was February 2018 when Florida’s Office of Economic and Demographic Research (OEDF) completed its sales estimates for the next four years. The US economy recorded its 105th consecutive month of growth and Florida’s unemployment rate was 3.9 percent. Corona was best known as a beer or city in Southern California. The OEDF’s growth estimates and Tallahassee’s adoption of automatic income tax cuts are in line with expectations of sustained growth, even though they included provisions to restore higher rates as revenues fell.

The first automatic cut came in 2019 and brought the corporate tax rate to 4.458 percent. Revenue exceeded 2018 estimates, but the economy was booming, so this was not surprising. Then came COVID-19, and anyone expecting another price cut would likely have got the laughs out of the room. Still, corporate tax revenue for FY2021 blasted the best estimates of a pre-COVID-19 economy out of the water. Florida’s income tax revenue exceeded projected net income for the past fiscal year by 38.5 percent. To trigger a cut, corporate tax revenues had to exceed estimates by at least seven percent. Sales in fiscal year 2021 were 22.4 percentage points higher than necessary to trigger an automatic rate reduction. And all at a tax rate that was more than a percentage point lower than the tax rate used in the pre-COVID estimate. It is truly remarkable that this growth is taking place in a state economy dominated by tourism and hospitality, even if the aftershocks of the COVID recession are still reverberating across the country.

How can government decision-makers build on these gains and ensure lasting benefits for the Floridians? First, the legislature must recognize companies’ need for stability. It is well established that there is a strong negative correlation between corporate tax increases and employee wages. On average, workers see wage increases in states where tariffs are going down and wages are going down in states where tariffs are going up. It is important, however, that wage changes are not made at short notice. In other words, don’t expect wages to rise immediately in the same year that a collective bargaining cut is decided. Companies need time to realize cost savings and pass them on to employees. Because of this, it’s difficult to measure how the 2019 pay cut affected Florida workers. The intervening pandemic and the associated lockdowns and mass layoffs have made these waters considerably cloudy.

Realistically, it is unlikely that Florida will realize a wage increase after the tariff cut in September 2021. Long-term planning, on which wage increases depend, will be interrupted by the collective wage increase planned for January 2022. Corporations will not raise workers’ wages if they have to hedge against a two percentage point tax hike next year.

Stability is at the heart of a solid tax policy. Politicians must therefore give companies time to adjust to changes in interest rates if they want to realize the associated effects. The original Florida legislation, HB 7093, was flawed in this regard. The law granted companies a tax year worth of benefits, but it wasn’t until September of that year that companies were sure the tax cut would come. Then they immediately came across a snapback determination that would have returned the course to its original level four months later. Legislators wisely extended the law for an additional two years, and businesses were given some degree of stability during that time. Now, however, the latest rate cut is marked by the same uncertainty as the 2019 cut.

It is testament to the strength of Florida’s economic recovery that a revenue trigger lowered the corporate tax rate by nearly one percentage point. However, if Florida businesses and individuals are to benefit from the September income tax cut and make the investments policymakers are hoping for, lawmakers should at least consider adjusting the shape of the tax cuts going forward so that it affects next year’s rates, not those for a year that is almost over. In addition, lawmakers may want to secure certain profits. Perhaps further growth can sustain another rate cut, or perhaps it is just enough to keep the rate constant. However, Florida is very unlikely to have to bring the rate back to 5.5 percent – so legislators could remove that uncertainty by lowering the base rate and potentially extending the new rate of 3.535 for at least one more tax year.

Nine states, including Florida, cut corporate tax rates in 2021 – five through legislative action this year, two (Arkansas and Indiana) as the culmination of a previously agreed gradual cut, and Colorado and now Florida through triggered relief. (In addition, twelve states have passed or implemented individual income tax cuts. Florida, of course, has already waived one.) If lawmakers fail to act in 2022, Florida could be the first state to raise corporate tax in the new year. This type of instability unsettles business and does not support the Floridians’ livelihoods. It’s also the opposite of what the state intends to do, and even if it doesn’t, the uncertainty undermines the benefits of these aggressive rate cuts. Florida is on the upswing. Now is the time to consolidate those gains.

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