Report on the Economic Health of Small Business in Florida

Article Written By
Dr. Rick Harper, Director
University of West Florida
HAAS Center for Business Research and Economic Development

Key Ingredients for
Florida’s Economic Recovery

Small businesses are responsible for the majority of job growth
in the private sector—addressing the insurance and tax problems will allow them to grow and ensure Florida’s recovery.

It’s again a pleasure to be asked to write about the economy for the Florida Small Business Development Center Network. I only wish I were writing about the economy of several years ago rather than now.  The Bad News is that local, state and national economies are unlikely to recover rapidly from the economic crisis.  The Good News is that if we respond correctly—to windstorm insurance and property tax challenges—Florida can again lead the nation in economic growth.

Florida has been hit as hard as almost any state by an economic slowdown that progressed from sub-prime mortgages into a full-fledged recession.  We are particularly vulnerable because we were at the forefront of a lending and building boom that now looks as if it will take substantial time to unwind.  The housing boom and hurricane rebuilding stimulated economic activity and sales tax revenue poured into state coffers through 2006.  It seemed reasonable to expect that the coming wave of baby boomer retirees would choose to make their home in Florida and that our growth rate, which had long been at least double the national rate, would increase still further.  Property prices nationally rose at greater than historic average due to low interest rates, aggressive lending and, as it turns out, lax regulation, but they rose especially rapidly in Florida.

The national bubble burst and left us with several problems.  The breakdown of incentives that traditionally brought population growth and economic opportunity to the State is one.  New residents were drawn to Florida for decades.  They could sell a home in a high cost northeastern city or suburb, take the proceeds and buy a lower cost replacement home in one of our beautiful communities and they could retire in our no income tax state.  Their spending created the jobs that pulled younger families into Florida.  Economic development marketing teams had advertised a low cost of living, great climate, growing market and available labor force to attract new firms.  However, the dynamic changed for younger potential migrants as they were now priced out of Florida real estate markets.  Then it changed for older migrants—they could no longer sell their northern home and Florida buy-in was very high.  Higher monthly carrying costs due to windstorm insurance premium increases and higher property taxes due to a Save Our Homes constitutional amendment that shifts the burden of funding the government onto newcomers and businesses have hit Florida hard. Growth has now ground to a halt.

The change in Florida’s growth dynamic has altered government finances.  It is normal for households to switch their purchases away from taxable goods and into services both as income grows and as people get older.  But population growth in past decades generated a growing sales tax base that let the state keep up with demands for government services.  Slowing population growth, and now the national recession, has us looking at an unprecedented fourth consecutive year of falling retail sales.  The declining ability to fund health and human service programs, education and criminal justice is creating new challenges.

Florida’s extensive coastline and warm weather mean the state will always face substantial threat from hurricanes. Therefore the answer to the insurance problem is to lead the world in measures to mitigate risk.  We must lead the way with building codes that reduce losses and insist that measures that harden structures against damage be reflected in rates.  We must spend less time arguing with insurance companies about overall rates (it is bad, not good, for Florida that State Farm is pulling out of our market), recognize that rates need to be high enough to ensure solvency and spend more resources on mitigation programs like My Safe Florida Home.

To handle the tax question correctly, we need to broaden the base through eliminating exemptions and enforcing the existing use tax on internet and catalog sales, and we can keep the tax rate low by carefully watching expenditures.

The current global financial and economic crisis will pass, as they always do.  If we get the insurance and tax questions right, we will be able to regain our rightful place—a top state for attracting new residents and new members of the business community.  Small businesses are responsible for the majority of job growth in the private sector— addressing the insurance and tax problems will allow them to grow and ensure Florida’s recovery.

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