Inflation Tax Windfall for State Governments Is a Myth

Rising prices don't automatically mean a tax windfall for state governments — economist Orphe Divounguy breaks down how inflation actually hits government budgets and taxpayers differently. The "stealth tax" question: When prices rise, sales tax collections rise too — even if households buy the same quantity of goods. But Divounguy explains this isn't a windfall for governments: if both prices and tax revenue rise 10%, government purchasing power stays flat since governments face the same higher costs. Some households respond by trading down to cheaper goods, which can offset the revenue gain. Who inflation hits hardest: Fixed-income retirees relying on cash savings lose purchasing power fastest, while Social Security recipients get some inflation adjustment. Those with stock or asset holdings have fared better, though last week's Fed rate hike triggered a stock market dip that hurts anyone near or in retirement. Homeowners and property taxes: Rising home values during the pandemic led to higher reassessments and bigger tax bills, especially for fixed-income retirees. Divounguy notes older Americans are increasingly choosing to stay put rather than sell, given elevated mortgage rates (7.2%) and high replacement-home costs. Local governments don't gain real purchasing power from higher assessments either, and he recommends using any revenue windfall to pay down debt rather than rolling it into today's higher interest rates. Labor market and housing data: Jobless claims show a stable — not improving or worsening — labor market, giving the Fed more room to focus on inflation (hence last week's rate hike). New home sales rose 6.4% in August, which Divounguy calls encouraging but not a recovery — sales remain below last year, driven by resilient buyers, fewer new homes coming to market, and builders shifting toward cheaper price points. What's your experience — is inflation squeezing your budget more through everyday goods, property taxes, or both? Leave a comment below. #Inflation #Economy #TaxPolicy #CenterSquare #TheStates