Sales Tax Holiday Bad for Budget

Governor Scott Walker introduces his Freedom and Prosperity budget proposal to the citizens of Wisconsin. Photo from the State of Wisconsin.

Governor Walker has 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 in August. This move would cost the state an estimated $11 million a year in lost tax revenue, and local governments an additional $750,000 a year 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 a sales tax holiday, 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;
• 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; and
• This sales tax holiday wouldn’t even be an effective way of giving a tax break to students, because the tax holiday would apply to items whether or not they were purchased for a student.

Governor Walker included the sales tax holiday in his budget proposal, which is now under consideration by the legislature. Some Republican legislators have voiced skepticism about the value of a sales tax holiday. State Senator Howard Marklein (R-Spring Green) is quoted in this Wisconsin Public Radio article as saying, “I guess I’m concerned with a lot of things about it. I think it’s a gimmick, totally, and it’s just not worth it.” In the same article, State Senator Luther Olsen (R-Ripon) also expressed disapproval of the sales tax holiday proposal, saying “You’re taking a certain group of people and giving them a tax break on two days, and the rest of the population be damned.”

State legislators who value prudent management of the state’s finances should reject Governor Walker’s proposal to implement a sales tax holiday. Doing so would inflict a high cost with little benefit.