High Cost, Little Benefit to Tax Gimmick under Consideration

Thursday, January 28, 2016 at 10:20 AM by

State lawmakers have proposed a back-to-school sales tax holiday, a gimmick that would reduce the resources available to support Wisconsin’s schools, university system, and communities, without providing any real economic benefit.

Under the proposal, purchases of school supplies, computers, and clothing would be exempt from the sales tax for one weekend each August. This move would cost the state an estimated $13.2 million a year in lost tax revenue, and local governments an additional $952,000 in lost revenue. This reduction in revenue would make it harder for Wisconsin to make the kinds of investments in education, health, and workforce systems that can spur economic growth.

A sales tax holiday would do little to boost consumer spending or give a tax break to Wisconsin families with low incomes. There are a whole host of downsides to sales tax holidays, including:

  • Instead of encouraging consumers to spend more money, sales tax holidays simply shift the timing of the spending;
  • A sales tax holiday on back-to-school items involves lawmakers picking winners and losers among types of goods that should be exempt from the sales tax; and
  • Sales tax holidays are not an effective tool for giving a tax cut to individuals with low incomes, since a large amount of savings is also given to people in higher income groups as well. In fact, wealthier families are often better positioned to take advantage of the tax break because they can more easily shift the timing of their purchases – an option that is more difficult for families living paycheck to paycheck.

For more information on why sales tax holidays harm the ability to make public investments without providing a significant benefit , read “Sales Tax Holidays: Politically Expedient but Poor Tax Policy” by the Tax Foundation, or “Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform,” by the Institute on Taxation and Economic Progress.

Back in 2014, state lawmakers proposed a similar sales tax holiday. (See our January 13, 2014 post “Assembly’s Sales Tax Proposal Draws Flak from Right and Left.”) That legislation did not pass, and lawmakers who value prudent management of the state’s finances should again take no action to pass legislation implementing a sales tax holiday. Doing so would inflict a high cost with little benefit.

Tamarine Cornelius

UPDATE:  Despite the fact that groups on opposite sides of the political spectrum oppose sales tax holidays, the proposal is getting expedited treatment this year.  The Assembly version, AB781, was introduced last Friday, January 22, and then on the 25th it was referred to the Joint Survey Committee on Tax Exemptions.  Just two days later, before many people were even aware the proposal had been introduced, that joint committee voted to approve it. After rapidly clearing that hurdle, it was referred back to the Ways and Means Committee, which wasted no time in posting a notice that it will hold a public hearing next Tuesday, Feb. 2nd.  Perhaps this year it won’t see its shadow and will move on to votes in both houses of the legislature – even though last week’s substantially reduced revenue estimates provide one more reason why Wisconsin should not approve this ineffective tax break.    

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