Thursday, September 8, 2016

Sales-tax holiday? A vapid and stupid idea

As another “gold standard” jobs report came out this week showing Wisconsin again lagged the rest of the nation when it came to jobs and wages, Governor Scott Walker and the Wisconsin GOP knew they had to find a way to take heat off of themselves for their failed policies. So Scotty and the WisGOPs reached into the recycle bin of ideas to try to lower the bills of families with children across the state- by suspending the sales tax on back-to-school purchases.
Under Walker's plan, the sales tax holiday would cover the first full weekend of August 2017 and August 2018. It would then sunset, allowing the state to determine if it was effective.

It would apply to: school supplies, computers costing less than $750 and clothing items costing less than $75 each.
So explain to me how this two-day sales-tax holiday gimmick is supposed to help Wisconsinites? Because it gives parents a 5%-5.5% discount off of school supplies and clothes in those two days? I guess that could help pay the bills for a month- but I’m betting higher wages or better property values from high-quality schools in their community would help them more, and for a much longer period of time.

Meanwhile, let’s look at what the potential drawbacks of such a move are.

1.Fiscally- the Department of Revenue has estimated that it’ll reduce revenues by around $13.2 million. The obvious question is “Where would we make up the difference?” Will we cut public schools or the UW again? We already have deficit issues looming for the 2017-19 budget, so how does cutting revenue help fill in those holes? Naturally Walker and the Wisconsin GOP aren’t saying how this will be taken care of, likely because they don't want people to think about the bad budget situation.

2.The timing of the sales tax holiday is ridiculous. First of all, it’s too short. You’re basically encouraging Wisconsinites to make purchases on these two weekend days in early August, which is nearly a month before classes begin, due to state law not allowing school to start before September 1. Early August may not be the most convenient or useful time for those families to do their back-to-school shopping, and if a family is planning to take a vacation at that time and are out of state, is it “Too bad, so sad?”

Why not make the sales tax holiday last for a longer period, like 3 weeks in August, which allows more Wisconsinites to take advantage of the sales tax holiday without having to deal with artificially crowded store? Also, most UW campuses don’t have their students get back into town before mid-to-late August, so college students wouldn’t see reductions in the cost of their books under Walker’s proposal.

In addition, a sales tax holiday will make stores take on extra costs by having to re-set their registers to reflect the lack of sales tax, and then set it back once the holiday ends. Seems like a lot of work for just 2 days. And those stores will likely have to staff up to handle the extra crowds, adding costs and potential overtime there.

3.And there’s not much evidence that a sales tax holiday would help the state’s economy. A 2015 analysis of Georgia’s sales tax holiday found that “there is not much of an incremental increase over what shoppers would spend anyway, if not for the break.” Joseph Henchman of the right-wing Tax Foundation has looked at sales-tax holidays in-depth, and said in a 2013 report that they didn’t change much at all.
Rather than stimulating new sales, sales tax holidays simply shift the timing of sales. In 1997, the New York Department of Taxation and Finance studied its clothing sales tax holiday and found that while sales of exempt goods rose during the holiday, overall retail sales for the year did not increase. On the contrary, shoppers waited until the holiday to purchase exempted goods, thereby slowing down sales in the weeks prior to and following the holiday. A University of Michigan study looking at computer purchases during sales tax holidays found that timing shifts “account[ ] for between 37 and 90 percent of the increase in purchases in the tax holiday states over [a] 30-week horizon,” depending on price caps and particular products .Anecdotal evidence from other states supports these conclusions.

Other evidence suggests that sales tax holidays attracted cross-border sales only when other states did not have their own holidays, which is no longer the case. Peter Morici, an economist with the University of Maryland, told the Washington Examiner in 2006 that a sales tax holiday “has to be a novelty to be a measurable success and it’s no longer.” As the costs of squeezing a disproportionate number of sales into a short period of time have become clear, evidence suggests that fewer shoppers participate. For the vast majority of those who shop during sales tax holidays, the holiday simply provides a modest windfall, or unexpected benefit, for doing something they would have done anyway.

“Impulse” purchases occur whenever consumers shop, and if consumers merely shift their tax-free purchases, as the evidence suggests, their “impulse” purchases during a sales tax holiday are likewise shifted from other time periods. The increase in tax revenue would be far outweighed by the lost revenue from the much larger amount of tax-free purchases. It is therefore unlikely there is a net revenue gain from additional “impulse” purchases. And even if the “impulse” argument were true and consumers are essentially tricked into making extra unnecessary taxable purchases, that would contradict the argument that sales tax holidays are designed to provide a tax cut for consumers.

Job creation is a frequent argument in support of sales tax holidays. But this argument suffers from the same problems as the argument based on general economic growth. Any increase in employment will be modest and temporary, limiting the benefits. Temporary increases in labor associated with sales tax holidays are costly for businesses, more so than an equivalent increase spread over the whole year, because of the fixed cost associated with hiring and training multiple temporary employees. By focusing on encouraging a few days of temporary employment during sales tax holidays, lawmakers lose sight of and undermine policies that promote long-term economic growth and job creation.
You know, policies like adequately funding schools to generate talent that can keep a state economic competitive and productive? That kind of thing.

So not only is the Wisconsin GOP’s “sales tax holiday” idea a silly gimmick that’ll drain even more revenues from an already deficit-ridden 2017-19 state budget, it’s not likely to help the state’s economy when it’s in place. This is especially true in Wisconsin, whose sales tax of 5% is under what its neighbors pay on most products (clothes in Minnesota being the obvious exception). There is little additional “tourist shopping” that would be acquired or retained by this (a reason sales tax holidays were promoted in some other states), so it really is a one-time shot that might make a few Wisconsinites feel good for a short time, but helps nothing in the long run.

Then again, maybe this desperate attempt to grab headlines illustrates how Walker and WisGOP are completely out of ideas when it comes to improving Wisconsin’s economy, and they know that the voters aren’t buying their refrain of “cut taxes and services” after 5 ½ years of subpar job and wage growth. Sorry Scotty, but if you’re trying to change the downward direction of the state, this half-assed sales tax holiday idea isn’t going to cut it. That’s true not only when it comes to economic performance, but also in turning around the views of the voters. In fact, it makes you look like a flailing fool.

1 comment:

  1. The Wisconsin Budget Project has a good read on the subject as well. A good additional point they raise is that with a proposed tax holiday on two particular days in early August, it's the wealthier who are best placed to do the time-shifting of purchases that it encourages.