Economist Writing Every Day

On May 6, 2022, the governor of Florida, Ron DeSantis, signed House Bill 7071. The bill was touted as a tax-relief package for Floridians in order to ease the pains caused by inflation. In total, the bill includes $1.2 billion in forgone tax revenues by temporarily suspending sales taxes that are levied on a variety of items that pull at one’s heartstrings. Below is the list of affected products.

A minor political point that I want to make first is that the children’s items are getting a lot of press, but they are only about 18.4% of the tax expenditures. The tax break on hurricane windows and doors received 37% of the funds and gasoline is receiving another 16.7%. There are ~$150 million in additional sales, corporate, and ad valorem tax exemptions. Looking at the table, it seems that producers of hurricane windows and doors might be the biggest beneficiary and that that the children’s items are there to make the bill politically palatable. Regardless, this is probably not the best use of $1.2 billion.

There are at least three economic points worth making.

Levels Vs Percent

First, the general sales tax is 6%. That means that the after-tax price that people pay for the above goods will fall by about 5.7%. But, this is a level change, not a change in the persistent growth rate of prices. The holiday provides a one-time decline in prices. But the inflation rate of the after-tax price is the same as that of the pre-tax price. Once the tax exemptions expire, the after-tax prices will again experience a one-time spike and then continue to grow at the rate of inflation. Below are two charts illustrating the effect on the price level and the effect on inflation for these goods.

The first graph tells us that the lower prices are temporary. Most likely, they will shift consumption from the future to now, increasing the quantity that Floridians purchase during the tax holiday, and lowering purchases after the holiday expires. Importantly, there is zero effect on the path of long run inflation. But, there will be a one-time plunge of deflation and a one-time spike of inflation.

The Law of Demand (And Supply)

With a sales tax holiday, retailers will receive more of the money that customers pay. Whereas under normal times the government comes between them and takes a slice of the payment, removing the tax means that both buyers and sellers benefit. Customers pay less, and retailers receive more. But, that means that prices don’t fall by the full amount of the removed sales tax. At a lower price, demanders would purchase more. In order to produce more, suppliers require a higher price. At the end of the day, more is bought and sold, and the buyers and sellers split the price difference – though not necessarily evenly. While the price will fall for buyers in Florida, it won’t fall by the full 6% of the sales tax. Indeed, the $1.2 billion dollar tax expenditure will be enjoyed by both customers and businesses.

Exporting Inflation

Both of the above points may seem like no big deal. Aren’t we happy for Floridians? They’re so lucky to have a legislature which cares about the people. Well, what if I told you that their lower prices would mean higher prices for you? Indeed, that’s exactly what will happen.

The cost of getting products to the retailer shelves is nearly the same no matter where you live. Consumer markets are relatively competitive. From the outsider perspective, it will appear that Florida’s demand for goods will increase during the tax holiday. Because we compete nationally for the same goods, national prices will rise. Floridians will be able to afford more products, but everyone else will experience the even higher prices – without the added benefit of the sales tax holiday. In other words, the Florida legislature is incurring tax expenditures so that Floridians can consume more at lower prices and non-Floridians face higher prices.

Florida is exporting inflation, temporarily anyway. Ultimately, brief tax gimmicks and special interest exemptions are only a stopgap for qualifying goods. When the holiday ends, Florida prices will subsequently spike back to what they would have been anyway. Except after the recent ‘relief’ bill, Florida’s government will be $1.2 billion poorer.