Assembly’s Sales Tax Holiday Proposal Draws Flak from Right and Left

Monday, January 13, 2014 at 7:24 PM by

Conservative and progressive thinks tanks often disagree about the merits of tax legislation.  Thus, it’s almost a “man bites dog” story when they find a tax cut proposal that both camps agree is bad public policy.  One such bill is an Assembly proposal for a sales tax holiday, AB 108, which got a public hearing last week in the Assembly Committee on Small Business Development.

If AB 108 were to pass, it would make Wisconsin the 19th state that provides a brief period when certain types of purchases would be exempt from the state sales tax.  In fact, the proposed bill would create two sales tax holidays – the first weekend in August each year for certain clothes and school-related items, and the first weekend in November when Energy Star qualified products would be exempt. 

According to the Dept. of Revenue fiscal estimate, AB 108 would reduce state tax revenue by an estimated $14.5 million per year.  The bill was introduced in March of last year and didn’t seem to be going anywhere, but it has recently shown some signs of life after the proposal was referred to a different committee and drew some positive comments from Assembly Speaker Robin Vos late last month.     

Among national groups who opine on tax policy, the conservative National Tax Foundation and progressive Institute for Taxation and Economic Policy (ITEP) oppose such legislation.  The following are just a few of the arguments made against sales tax holidays in a Tax Foundation report:

“Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.

Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale leads many larger businesses to lobby for the holidays.

Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating between products and across time, and distorting consumer decisions.”

A report by ITEP makes rather similar arguments and stresses that although sales taxes are regressive, meaning they take a larger share of income from low- and middle-income families, compared to wealthy families, a sales tax holiday does not remedy that problem.  The ITEP analysis explains why sales tax holidays don’t change the regressive nature of state sales taxes:   

“wealthier taxpayers are often best positioned to benefit from the holidays, since they have more flexibility to shift the timing of their purchases to take advantage of the tax break –an option that isn’t available to families living paycheck to paycheck.

…One recent study found that while households with earners above $30,000 were likely to increase their clothing purchases over a sales tax holiday weekend, households earning less than $30,000 were not.”  

AB 108 has been endorsed by several retailers and organizations of retailers, including Wal-Mart, Apple, GE and the Alliance of Wisconsin Retailers.  Groups who have registered against the bill include Americans for Prosperity, the Wisconsin Counties Association, and WCCF.  You can find the full list of groups who have taken a position on AB 108 here

Because many groups and many legislators view sales tax holidays as just a gimmick, not tax reform, my guess is that AB 108 won’t pass.  However, if or when higher revenue estimates are announced later this month, AB 108 could be one of the budget ideas that draws increased attention.    

Read more about the bill in this Milwaukee Business Journal article.

Jon Peacock

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