Originally created 12/28/96

Investors seek to avoid tax

MIAMI - Millions of dollars start flying around Florida as each year winds down with a single purpose - avoiding a state tax.

The state looks at investments Dec. 31 to calculate its intangible tax, so savvy residents shift their money - legally - from taxable investments into tax-exempt Florida municipal bond funds on the so-called "snapshot date."

The tax "is enough of a poke in the eye to where people don't want to do it," Bob Pariseau, a portfolio manager at the USAA investment firm, said Friday. "Everybody goes thundering into these Florida municipal funds during the last week of the year."

A total of 82 municipal bond and money market funds with $7.6 billion in assets are immune from the Florida tax, which runs between $1 and $2 for each $1,000 in taxable investments. The rate seems small, but since it's a tax on the account balance, the dollars add up.

"With the intangibles tax, whether you're not making any money at all, whether you don't have any pension at all, you owe it," Mr. Pariseau said.

The math is pretty easy. If you have $1 million to invest, the tax hit is $1,760 due in a lump-sum payment on a joint filing. In addition to avoiding taxes, a one-week switch into one of two tax-exempt USAA funds would produce earnings of $767.

As of Dec. 1, the two USAA funds stood at $80 million each. At least one is expected to temporarily double in value. With two work days left in the year, the Florida Money Market Fund stood at $104 million and the Florida Tax-Free Income Fund was at $91 million.

"We always suspected that that phenomenon did occur," said Tom Herndon, a former director of the state's tax collection agency.

The tax on both individuals and corporations is expected to generate $981 million this year from stocks, bonds, mutual funds, money market funds, notes, accounts receivable and IOUs.

Although other states have an intangible tax, Florida investors especially are courted by investment houses with tax-exempt funds because the state has so many retirees on fixed incomes and they tend to be richer than elsewhere.

In addition, Florida has no income tax, making its residents more likely to shift investments for a short term to avoid other taxes.

People in states with income taxes often keep tax-exempt investments year-round.

The investment houses benefit when clients shift the money to avoid the tax and leave it in its new home. Pariseau expects to keep 25 percent to 40 percent of the tax-fleeing deposits in the firm's money market fund.

"There's a tremendous amount of inertia in investments," said Florida State University business professor Donald Nast. "People don't move money easily."

Of course, the state Revenue Department isn't happy to see taxes evaporate and which will be pushing legislative proposal to close the loophole. The federal tax code already prohibits short-term shifts of investments to avoid taxes.

"Essentially we're asking them to tax intangible property that is transferred solely for the purpose of avoiding the tax," said department spokeswoman Donna O'Neal. "Whether they do it for two days or two weeks or whatever."


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