Though difficult for us to imagine now, the State of Florida’s budget reached a peak of 74 billion dollars just a few years ago. Last year, the state legislature approved a budget of 66.5 billion dollars which included approximately five billion in federal stimulus funds. The consequence of relying on “stimulus dollars” or other federal grants is that these funds are non-recurring. That is, this financial patch-up of Florida’s budgetary shortfall may not come again next year. In addition, as Florida’s sales tax revenues continue to slide, it is likely the state will once again face a revenue shortage of as much as five billion dollars.

Unfortunately, we often hear of “budget cuts” without receiving the information necessary to fully appreciate the challenges our state confronts in meeting its responsibilities. But, before the State of Florida appropriates any funds, it must first collect the revenue necessary to run its government and various agencies.

In this discussion, we will look at where the revenue comes from and how the subsequent funds are spent. After that, we will look at possible solutions to the state’s financial challenges.

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Back to our discussion…so, where does the state’s revenue come from?

As seen in the graph above, about 32% of the state’s revenue is generated from sales taxes. Next, approximately 28% is the product of trust fund income from gasoline taxes and licensing fees. Lastly, roughly 40% of Florida’s appropriated funds flows from the federal government. That is to say, 40% of the state budget comes from your federal income tax dollars that are returned to the state.

Where do the dollars go:

In the graph above, we can see that health care (Medicaid) accounts for 39% of Florida’s budgeted spending. About one-third of every dollar (32%) is spent on education. Next, the state’s transportation expenditures total about 14% and approximately 8% is appropriated for Florida’s criminal justice system. As you can see, 93% of the budget is encapsulated within these four line items alone. That leaves 7% or 4.3 billion, for everything else.

So what is everything else? Well you can see that a little more than 2 billion goes to natural resources. The natural resources appropriation includes funding for agencies such as the Saint Johns River Water Management District.

The remaining 2.2 billion is used for General Government Administration and Operations. Within the Admin budget are expenses such as the Executive Office of the Governor The operations side covers state agencies such as the Department of Business and Financial Regulation, the Department of Military Affairs, and Florida Lottery.

We would all agree that waste in government has to be eliminated. However, you can see that the items available for lawmakers to “cut” in the next budget will be limited. Even the dismissal of the Florida Legislature, the entire executive branch, including its agencies, would not make up a third of the anticipated 5 billion dollar budget shortfall confronting us next year.

So, why not raise the sales tax? Well, for every one penny the sales tax is raised an estimated 3 billion dollars is generated in tax revenue. So, a 2% increase would be needed to cover a five billion dollar short fall. Some people would agree to a one-third increase in sales tax to maintain the state’s spending. For most, a 2% increase is only a few dollars a day. However, what about the companies, both large and small that make Florida their home? Let’s look at just one example: a large aerospace company has offices and manufacturing plants throughout Florida.

This Company spends $760 million dollars per year on local procurements. If the state were to increase the sales tax just one penny on the dollar, this company would be made to pay 7.6 million in additional taxes. Accordingly, this company would be faced with some tough decisions. Would they stay in Florida and continue to purchase goods locally or would they relocate to avoid the new tax? Maybe the company would remain in Florida, but instead shift their purchasing from local to national and simply ship in their needed supplies to avoid the increased taxes. Lastly, the company in our example might choose to layoff enough employees to offset the new costs, adding to Florida’s rising unemployment rate.

Without raising taxes, the choices for new state revenues are limited. I don’t think many would argue that Florida needs to diversify its employment base by bringing in non-tourism jobs like manufacturing and aerospace. But, that is a long-term fix and we need an answer next year. The Legislature can increase opportunities for industries not presently operating in Florida, such as gambling and oil drilling. Gambling could generate as much as a billion dollars a year in revenue and some estimates show that oil drilling could produce as many as 11,000 new jobs with proceeds to the state reaching up to 5 billion annually.

So, now it is your turn. What does the state do to fill the revenue gap? Here are some discussion suggestions, however, feel free to go in any direction you wish.

Cut Government, not just waste but critical services as well.
Raise the sales tax to cover the gap.
Expand Gambling
Allow for the exploration of oil within 10 miles of Florida’s West Coast
Spend state dollars to attract new companies to Florida

This old cartoon has been making its way around the internet. Take a look and let us know if you have any thoughts.