Inflation for Thee, But Temporarily Not for FL

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.

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Florida’s Minimum Wage Experiment

One of the more interesting results from last night’s election comes out of Florida: voters appear to have narrowly approved an increase of the minimum wage in stages to $15/hour in 2026 (Florida has a 60% requirement for ballot measures to pass, and the current vote total is just above that threshold).

Florida is not the first state to approve such an increase to $15/hour: 7 states have already done so, though no state is yet at that level. California will hit $15 first in 2022. Several US cities, such as New York and Seattle, as well as the “city-state” of Washington, DC are already at $15, but these are generally very high wage cities.

What makes Florida the most interesting of the states to try very high minimum wages is that Florida is not a high wage state. Once the minimum wage is fully phased in (in 2026), the minimum wage will be about 75% of Florida’s median wage (it was $17.23 in 2019). That’s much higher than other states: California will be the next highest at about 66%, with Oregon next around 64%. Oregon will be close to $15, but perhaps a little below, as they index their minimum wage for inflation.

(To make these estimates I am using 2019 median wage data from the BLS OES wage data and assuming 2% annual wage growth. This may not be exactly right, but it’s probably close enough.)

Also important to note in Florida: the median wage is not $17.23/hour all over the state. Several MSAs in Florida currently have a median wage at or even below $15 (Sebring, Florida is the lowest at around $14/hour). There will be some wage growth over the next 6 years in those areas, but still this means that the minimum wage will be applicable to roughly half the labor force.

That brings up another interesting legal question: will the minimum wage apply to salaried workers making less than $30,000 per year? The way the law is written, probably not, but logic would seem to dictate that it should. Otherwise, what’s to stop an employer from hiring an employee on a $2,000/month contract, equivalent to $12/hour for a full time worker?

The minimum wage debate among economists consumes a vast literature, and I am no expert on it, and will make no attempt to summarize it here. But Florida seems to be breaking new territory. My little state of Arkansas currently holds the “record” for a US state starting in 2021, with a minimum wage of $11/hour which will be about 67% of the median wage (and about 78% of the median wage in Hot Springs, Arkansas). Florida’s experiment will certainly give economists a new experiment to study.

Arin Dube, one of the leading researchers of the minimum wage and a strong advocate of raising the wage, suggested in a recent policy paper that a good minimum wage for Florida would be around $9/hour, given their wage distribution. That was in 2014 dollars, so we can roughly adjust that up to $11-$12 in 2026 dollars. Florida voters have chosen to go well beyond that recommendation.

How HOAs are Born

I live in Florida and there is a lot of residential construction down here. It’s not typically people just deciding to build a house on some isolated plot of land. A large portion of construction is private or semi-private neighborhoods built by developers. They often include manicured common spaces and strict Home Owners Association (HOA) rules.

The typical procedure is that a developer purchases a large parcel of land, and then starts building. Before the first house is even sold, the HOA is established and the governing board is packed with developer representatives.  Written into the HOA bylaws is that the developer maintains a preponderance of the HOA representation during construction. This makes sense. ‘Nice’ neighborhoods command higher property prices and the developer has often invested *very* large sums of money. Certainly more money than it’s willing to risk at the hands of a sloppy, owner-controlled HOA.

Best practice differs by developer.

Typically, the residents will have seats on the HOA board in some proportion of development project completeness. For example, if 75% of the total planned lots have been built and sold, then the developer may retain 2/3 or 3/5 control of an HOA board. The developer finally relinquishes all HOA control after 100% of the planned units are completed and sold.

Ignoring policies for beautification and such, a HOA boards under developer control act differently from those that are resident controlled. As I said, the developer has full discretion on HOA policy, practically speaking, because it maintains a majority of the voting members. But, HOA fees are *not paid* by the developer.[1] Only homeowners pay HOA fees.

For example: Not everyone wants cable TV. But the developer knows that home-buyers want the option for cable TV. Typically, one of the first HOA orders of business is to pay for monthly cable TV. Every single unit pays for cable TV through their HOA fees – whether they use it or not – in exchange for the cable company laying cable lines and providing access. Typically, these contracts are often a decade in duration, after which time the contract can be cancelled and owners can individually decide whether to pay for cable. It’s not obvious that an owner-controlled HOA would pay for cable and have lines laid in the first place (Satellite TV anyone?).

To be clear: The developer sets the HOA policy priorities and determines the HOA budget. Then, the owners pay the quarterly HOA fee. Can you say Principal-Agent problem? Early HOA activities include less resident engagement because residents don’t much affect outcomes. The developer also doesn’t mind higher HOA fees because it doesn’t bear the cost. Do you expect your HOA to put contracts up for bid, say, to do landscaping, pressure washing, etc.? If your HOA is developer-controlled, then you should expect no such thing. Putting contracts ‘up for bid’ is time consuming and reflects a concern for costs. Not to mention that the quality of the bid work may be variable. Developers want high property values and they want them dependably. HOA fiscal prudence, besides solvency, is not a priority.

Having said all this – it’s true that your neighborhood may be ‘nicer’ due to developer control of the HOA. Depending on you preferences, this might align nicely with your priorities. If that’s true, however, you can expect to be less happy in the long-run when your neighbors ultimately gain control of the HOA.

I’m on my HOA board and it’s now 100% privately owned. There are still principal-agent problems. But they are much easier to address now that everyone on the board pays HOA fees. Our problems and our opportunities are truly ours.

[1] Sometimes, the developer will provide a loan to the HOA to provide for initial management costs.