Q&A – About the Plan to Cut Florida’s Sales Tax
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Today’s Entry: Hi Brian, I always enjoy hearing your analysis in the daily Q&A. I have one for you. What do you think about the proposal to cut sales taxes? Of course we’d all like to pay less in sales tax but are there specific tradeoffs that would be attached to it that we’re not hearing about? I’ll be listening!
Bottom Line: So yes, on Wednesday, nearly halfway through the state’s legislative session, Florida House Speaker Daniel Perez, who to date is best known for publicly taking a stand against Governor DeSantis’s original special session to combat illegal immigration, presented a seemingly bold tax cut plan. A plan that he billed as the largest tax cut in Florida history. His proposal is to reduce the state sales tax rate from 6% to 5.25% permanently. In doing so he also seemed to aim fire once again in Governor DeSantis’s direction without naming him by name when he said: This will not be a temporary measure, a stunt, or a tax holiday. This would be a recurring tax reduction… this will be the largest tax cut in the history of Florida.
Notably, Governor DeSantis has significantly expanded sales tax holidays during his tenure as governor and often with themes and that have been called stunts by his critics like the ‘Tool Time’ sales tax holiday and this year’s proposed ‘Second Amendment Summer’. So notably, both Perez’s proposal, and his choice of words, run counter once again to Governor DeSantis’s budget proposals. Now with that said... when it comes to sales tax reductions it’s a much better plan. This is a dynamic I’ve talked about for years.
I’m on record as saying sales tax holidays are poor policy. If we want to provide a consumer benefit, even if just on select items targeted by sales tax holidays, nominally reducing the tax rate on those items year-round would be easier for retailers to manage and better for consumers in the long run. We should aim to provide benefits to people when they can afford items, rather than encouraging people to spend money they may not have to attempt to take advantage of the sales tax holiday, etc.
The most comprehensive research I’ve seen on this topic was done by the Tax Foundation. Among their findings...
- Sales tax holidays shift sales of the select items. Sales for exempt items drop an average of 37% to 90% in the weeks preceding tax holidays and after
- Customers are more likely to make “impulse” purchases during tax holidays
- The net effect economically isn’t beneficial
And then there’s this... Analysis shows that 80% of Florida households don’t intentionally make use of Florida’s sales tax holidays. And as for those who do, that’s often not a good thing either. It’s like this. Those most likely to intentionally time purchases with sales tax holidays are often those who are the most likely to do so using debt. Florida’s sales tax rate is 6%. Currently, the average credit card APR is over 20%. That’s not a tradeoff.
What I’ve proposed previously as being a better policy would be to add up the total value of the sales tax holidays and reduce the state sales tax rate on all purchases throughout the year by a nominal rate decrease. That way all people would benefit all the time from lower tax rates generally. When you do that btw, you get to a number that’s closer to 0.2% than three-quarters of a percent. What Perez has proposed is that principle on steroids.
In terms of tradeoffs, the difference between the tax benefit of existing sales tax holidays vs. Perez’s proposal is approximately 0.55%, or about 9% of state revenues on an absolute basis meaning, that if the policy were implemented, the state may have less to spend on certain programs in the future. The flip side to that argument is that lowering the nominal sales tax rate may lead to additional spending by consumers that could result in an improved economy that could theoretically produce additional sales tax revenues.
The bottom line is that there’s no doubt from a consumer perspective that Perez’s proposal is a better economic policy than any that prioritizes sales tax holidays. It’ll be interesting to see if it gains traction – which it would need to do quickly if it’s to have a chance of going anywhere with only five weeks left in this year’s state session.