Amendment 3 passed; now how will Florida municipalities be funded?

Florida voters passed Amendment 3 on November 3, with approximately 62% support. This lowers property taxes for homeowners. But it was these taxes that financed municipal services. How will these services now be funded?

Police officers, firefighters, garbage collectors, road maintenance crews, emergency medical personnel and other municipal employees still have to be paid. Fire engines, police vehicles and garbage trucks still have to be purchased and maintained.

The amendment reduces a major source of revenue, but it does not reduce the cost of providing those services. It increases the homestead exemption on property taxes that fund local governments. In 2027, the exemption rises to $150,000, and in 2028, to $250,000. Beginning in 2029, the exemption will be adjusted for inflation.

Importantly, this new exemption applies to county, municipal and special district property taxes, not school property taxes. It also reduces the annual assessment increase cap on non-homestead properties, including rental and commercial properties, from 10% to 5%.

The estimated loss to local governments is substantial, reaching nearly $5 billion in the first fiscal year and rising to approximately $12 billion annually thereafter.

To replace the loss of property tax revenue, Florida municipalities will now need to consider several options.

One likely option could be imposing higher taxes on commercial and rental properties. Local governments may look increasingly to businesses, apartment buildings, rental homes and second-home owners to generate property tax revenue.

But this could mean higher property tax rates for businesses, greater tax burdens on landlords, with the additional costs eventually passed on to renters through higher rents, and higher operating costs for businesses, potentially passed on to consumers.

Amendment 3 also reduces the annual assessment cap on non-homestead properties from 10% to 5%. That limits the growth in their taxable assessed values, even if local governments want more revenue.

Another option municipalities could consider is raising sales taxes. Florida already has a 6% state sales tax. Counties can impose additional local sales surtaxes, generally subject to statutory limits and, for many of these taxes, voter approval. But cities and counties cannot simply announce that they are raising the statewide sales tax to compensate for their losses. Furthermore, sales taxes are not unrestricted replacement revenue. Some are earmarked for particular purposes.

Increasing charges for services provided by cities and counties is another option. This could result in higher garbage collection charges, water and sewer bills, stormwater drainage fees, building and business permit fees, parking charges and other municipal service fees. Increasing fees would shift some of the financial burden from property taxes to those using particular services.

By far the most concerning option would be municipalities reducing services critical to residents. Until reliable alternative sources of revenue are identified, they could freeze the hiring of police officers and firefighters, reduce staffing, delay the replacement of aging fire engines and police vehicles, reduce library and recreational services, and postpone road repairs and infrastructure improvements. These are very real possibilities.

Florida's incoming governor, Byron Donalds, campaigned on a promise to improve the cost of living for Floridians. To keep his promises, he should consider establishing a dedicated state fund to compensate municipalities and counties for their losses upon taking office. Incumbent Gov. Ron DeSantis has indicated that he intends to convene a special legislative session to address the implementation of such a fund.

Unless the state actually appropriates money to local governments, they must find their own solutions.

A Florida TaxWatch analysis estimates a five-year reduction of approximately $45.8 billion in local property tax revenue. This is a whopping blow to cities and counties.

Reducing property taxes gives homeowners more disposable income. That is a genuine benefit, particularly for retirees living on fixed incomes. On the other hand, renters face potentially burdensome rent increases, businesses could face higher property taxes and operating costs, and everyone who depends on local government services could lose out.

A homeowner might save $2,000 annually in property taxes, for example, but subsequently face higher garbage collection charges, utility fees or other taxes. The actual financial benefit will depend on what the local government does.

PolitiFact examined these concerns after the amendment passed and found that substantial increases in statewide sales taxes are not the most likely immediate response. Higher local fees, changes in property tax rates and service reductions are more plausible possibilities.

Local government services are not free. Somebody must pay for them. If the government reduces one major source of revenue without establishing a reliable replacement, the financial burden does not disappear. It gets redistributed. Ironically, even homeowners who benefit from lower property taxes may discover that some of their tax savings will be offset by higher fees.

It will be interesting to see how South Florida's three counties respond to the loss of property tax revenue. The financial implications for large, densely populated counties will differ considerably from those for smaller rural counties.