Silent Spending: Florida's Shadow Budget Needs Greater Scrutiny

Silent spending, in the form of numerous kinds of tax breaks, costs Florida billions of dollars in lost revenue a year. Unlike money spent through the state budget process, this “shadow budget” is not routinely examined to see if it is meeting worthwhile goals or promoting a stronger economy.

This is money that is spent through legislation that changes the tax code. While spending through the state budget is subject to yearly review and reauthorization, spending through the tax code – called tax expenditures – takes the form of revenue the state foregoes, rather than money the state collects and then spends. In either case the result is the same – the state doesn’t have money it otherwise would. Once enacted, these expenditures tend to remain in statute without any expiration date.

State tax expenditures are not inherently good or bad. The problem with them arises because, unlike actual spending, they are not routinely evaluated to ensure they deliver on objectives. Stronger evaluations and routine monitoring of such silent spending would give policymakers and the public a much stronger handle on whether the money the state is giving up is being put to good public use.

What is “Silent Spending”?

What many people might call “tax breaks,” tax expenditures are potential state revenues that are never collected because of provisions in the tax code that allow exceptions to the rules of state revenue collection. Tax expenditures are not funded by collecting revenues and appropriating them through the state’s budget, but instead by not collecting tax revenues from some taxpayers. Their ultimate impact on a government’s budget is the same as an actual appropriation and expenditure of public funds.

By not collecting revenues that would otherwise be due to the state, tax expenditures reduce funds available to support public priorities such as education, health, safe communities and transportation.

Silent spending takes many forms, the most common of which include:

Tax credits –amounts that a taxpayer can reduce taxes that would otherwise be owed to the government. An example of this would be a reduction in income taxes that a business would owe in the amount of its investment in solar energy.
Tax exemptions – amounts that, by law, an individual or business is not required to pay in the first instance. The best examples of tax exemptions come in the case of sales taxes, where taxes are due on the sale of goods and services. The law makes exception to the law requiring payment of these taxes in the case of certain good such as food and medicines that are thought to be necessities.
Tax refunds –funds given back to a taxpayer from total taxes paid. For example, a commercial airline with a ticketing counter in Tallahassee that refuels its aircrafts in Tallahassee is given a refund on the motor fuel and diesel fuel taxes it pays. Tax deductions – funds that a tax payer can deduct from taxable income before taxes are calculated. Often the deduction is the amount of money spent on a good or service incurred to produce additional income.

Further, tax expenditures can be put into two broad categories:

Those that reduce a taxpayer’s taxable income, e.g. exemptions and deductions
Those that reduce a taxpayer’s tax liability, e.g. credits, and refunds.

The Legislature approves tax expenditures for a number of reasons. Some tax expenditures are intended to help families by increasing household income. Examples include tax breaks on purchases of groceries, health care, and education supplies.

Others are aimed at helping businesses, with the expectations that lower taxes will encourage new business startups, attract businesses to the state, encourage investment in new plant and equipment, support research and innovation, and create jobs. For example, one program offers businesses tax credits if they locate in certain urban areas.

Why Should We Care About Silent Spending?

Tax expenditures are important because they cost billions of dollars each year with very little accountability. They are not subject to regular evaluation because, once enacted, they are not considered part of the annual budget review process.

Stronger evaluation of tax expenditures could identify sensible ways to save and increase available resources to fund core services at levels that meet the needs of Floridians.

State lawmakers annually scrutinize public investments in education, health and human services, public safety and other areas. Tax expenditures, however, are not systematically reviewed to ensure they deliver on their intended purposes. Tax expenditures drain billions of dollars in potential state revenue each year, reducing the revenues available for much-needed public investment. Further, the growing cost of tax expenditures creates a bigger hole in potential state revenue, making it increasingly difficult for the state to adequately fund critical public services.

Florida is one of 26 states that fail to evaluate tax expenditures, according to The Pew Center on the States. The Florida Tax Handbook embeds revenue loss estimates into the overall revenue analysis for each type of tax expenditure, but does not include an analysis of the benefits that might accrue from them.Florida could increase revenues, close service gaps and enhance funding for critical services by analyzing and revising the current system of silent spending. Such analysis would help policymakers rethink tax expenditures, competing state priorities and critical state needs to maximize the cost-effectiveness of Florida’s tax and budget system.

Fortunately, there are simple steps lawmakers can take bring current tax expenditure laws under scrutiny, assess their impact on the state revenues and economy, and adopt meaningful tax reforms to ensure limited resources are spent in the most effective way to promote real economic growth, benefiting all Floridians.