R.J. Lehmann: Tax competition is good for Florida, and America

Back in October, President Donald Trump made a change that hundreds of thousands of his fellow lifelong New Yorkers have over the years; he became a Floridian.

The President didn’t reveal what motivated his move, other than offering some by-now familiar complaints that New York officials had treated him unfairly. But many speculated it could be due to Florida’s lack of a state income tax, which would mark a considerable improvement for Trump over the 9% rate he would have to pay to New York state, in addition to another 4% to New York City.

Indeed, Florida’s favorable tax climate has long been a competitive advantage in attracting both new residents and new businesses. In its 2020 State Business Tax Climate Index report, the Tax Foundation ranked Florida’s tax system the fourth-best overall.

Breaking it down into component parts, the Sunshine State tied for the top ranking in lowest individual income taxes, was No. 2 in unemployment insurance taxes, No. 9 in corporate taxes, No. 13 in property taxes and No. 23 in sales taxes.

Just as with competition in the marketplace, Americans historically have appreciated the results when governments compete to provide the best services at the lowest cost. Alas, Adam Smith’s warning that about conversations among people of the same trade ending in “a conspiracy against the public, or in some contrivance to raise prices” proves doubly true when it comes to ostensibly competitive governments colluding to raise taxes.

One such unfortunate trend can be seen in the area of state sales taxes. In a June 2018 decision, the U.S. Supreme Court overturned its own 26-year-old precedent that previously did not permit states to impose sales tax collection requirements on businesses with no physical presence in that state.

In the wake of that decision, South Dakota v. Wayfair, 43 of the 45 states with statewide sales taxes have imposed extraterritorial tax-collection requirements on out-of-state businesses, including those located in the five states with no sales tax at all.

But collusion among governments to stamp out tax competition is not limited to the states. It also has reared its head in the international arena. In particular, members of the Organization for Economic Cooperation and Development (OECD) have already begun hammering out the details of a new international tax regime they seek to finalize this year, which the group itself projects will amount to a $100 billion global tax increase.

The OECD project has been formalized in two framework documents called “pillars.”

Pillar One would subject nearly all multinational corporations to a new regime in which nations’ taxing rights would be allocated based on a new set of profit and nexus-of-commerce rules.

Pillar Two, rolled out in October, would essentially set an international “minimum” corporate tax rate. While it doesn’t yet specify what the rate would be, if implemented, the framework would encourage OECD members to tax the foreign income of any company that wasn’t subject to an effective rate in its home jurisdiction that met that minimum threshold.

The stated goal of the OECD project is to crack down on so-called “income shifting.” But what it would do, in effect, is bind the United States and all other OECD members in an international cartel dedicated to stamping out competition from countries with low or no corporate taxes.

Florida should be particularly concerned about such a move, because we’ve seen this movie before.

Early iterations of the tax reform bill signed by Trump in 2017 proposed a “border adjustment tax” that would have seriously curtailed the availability and affordability of reinsurance protection for Florida’s $2.9 trillion of insured coastal property. According to an analysis by the Brattle Group, the tax would have raised homeowners’ insurance premiums by 1.9%, or $282 million a year, and business insurance premiums by 6.7%, or $367 million a year.

Though the border adjustment tax was never adopted as originally proposed, a related base erosion tax did make it into the final 2017 tax bill and could be contributing to higher reinsurance costs the state is seeing during the current renewal period.

Economists broadly agree that corporate income taxes are inefficient and prone to gaming by politically connected lobbies. While taxing big corporations is politically popular, they ultimately fall disproportionately on those groups that can least easily avoid them — workers and consumers.

Rather than colluding with other rich nations to ensure corporate taxes remain as high as possible, the United States should follow the example of states like Florida.

Don’t stamp out the competition; win it.

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R.J. Lehmann is director of finance, insurance and trade policy for the R Street Institute. He lives in St. Petersburg.