On Wednesday, Governor Walker said he would include in next year’s state budget a sales tax holiday on school supplies. State residents may be unfamiliar with them, but in 2014 WISTAX wrote about a similar proposal. Important excerpts are reproduced below; the entire text is here ().
The case for a sales tax holiday
The lead assembly author of AB 108 calls it a “no-brainer.” In a recent letter, a lobbyist representing the state’s largest retailers offered a number of specific claims in support of a holiday:
- First, it would provide “an economic boost in these tough times.”
- Second, it would provide “welcome tax relief for working families.”
- Third, it is popular and common. As mentioned, a number of states had one or more sales tax holidays in 2013.
- Fourth, “revenue collections to the state are not negatively impacted due to increased economic activity surrounding tax holidays,” according to a study of a 2010 Florida holiday commissioned by the Retail Foundation there.
- Finally, the holiday “would encourage customers from surrounding states to come to Wisconsin,” while at the same time encouraging Wisconsinites to “shop locally.”
The case against a holiday
Opposition comes from a range of philosophically diverse groups whose comments, in no particular order, are much abbreviated below.
- Tax Foundation: “Rather than pro-viding a valuable tax cut or a boost to the economy, sales tax holidays impose serious costs on consumers and businesses without providing offsetting benefits.”
- Heritage Foundation: “[they] do not increase demand for anything . . . [and] discriminate between products covered by the exemption and those not covered.”
- Institute on Taxation and Economic Policy: “a boondoggle” and “too poorly targeted and temporary to meaningfully change the regressive nature of a state’s tax system.”
- Citizens for Tax Justice: “[they] end up benefiting wealthier taxpayers, who have more . . . flexibility to shift timing of their purchases.”
- Heartland Institute: “Tax holidays attempt to mask the wider problems in a sales tax system . . . rather than fixing the actual problem.”
Few dispute that sales of exempted items jump during tax holidays. But, if advocates’ claims are true, new economic activity and tax revenue would rise annually, and families of modest means would see tax relief. In addition to Florida research mentioned, studies from New York tax officials (NY), the University of Michigan (UM), Georgia State (GSU), and the Chicago Federal Reserve (ChiFed) shed light on these issues:
Economic stimulus? NY found that a 1997 clothing holiday did not boost annual sales but rather delayed them until the holiday. UM used 2007 in-store scanner data to find that timing shifts (not new sales) explained a major part of holiday computer sales in these states: SC (90%), GA and NC (both 82%), MA (42%), and NM (37%).
More telling for economic growth, the ChiFed team used 1997-2008 daily household consumption data to conclude that tax holidays did not generate “any statistically significant response to consumption of either food for home use or non-exempt items.” Indeed, they found evidence of reduced consumption of these items during holidays.
Added revenue? The above studies all suggest lost revenue from sales tax holidays. GSU confirms that using 1986-2010 tax collections and controlling for other factors. Researchers estimated state revenue loss from a four-day holiday at $36m to $50m, “substantially larger” than had been estimated for the 2010 legislature.
Tax relief? In comparing non-holiday and holiday shopping periods over 12 years, ChiFed researchers also found that it was “only the wealthiest households that take statistically significant advantage of STHs [sales tax holidays].” In fact, there was “no statistically significant change in consumption for the lowest-income households.”