Do we need expanded tax holiday?

Friday, February 8, 2008

A proposal currently under consideration by state legislators is expanding the number of items that qualify for the annual state sales tax holiday, the first weekend in August.

The proposal would expand the sales tax exemption to include more than clothing and eliminate the $100 maximum for each item to qualify.

If the state's revenue exceeded what would pay for needed services, then a tax cut would make sense.

However, there is no such excess revenue. Mental health services are underfunded, possibly forcing reductions in services to the people who are least able to speak up for themselves. The governor has proposed a reduction in library funding, reducing a service widely used by both children and adults from all economic classes. School districts must meet increasingly stringent and costly state and federal mandates.

So why are state legislators thinking about reducing tax revenue for this one weekend? The reasoning is to boost whatever economic stimulus is expected from proposed federal tax rebates. The federal rebates would likely be sent to taxpayers shortly before the Iowa sales tax holiday in August.

The sales tax exemption includes the five cents that goes to the state's general fund, the one cent that goes to municipal and county governments and the one cent that goes to school districts.

The timing of the tax holiday on clothing creates a particular benefit for families doing back-to-school shopping. The limited nature of the tax savings under the tax holiday as it has operated provides a modest benefit to those who need it most. Under the proposed expansion of the exemption, those who would benefit most are those with a large amount of cash to spend at one time, including for big-ticket items.

The theory behind the economic stimulus benefits is dubious. Do the proponents believe that the tax savings retained by citizens means money magically appears that would not otherwise exist?

If the government spends less money, for example by laying off librarians or paying less to mental health care professionals, doesn't that mean that those people would have less money to spend to stimulate the economy?

And what particular benefit would Iowa get from a one-weekend boost in retail sales? The idea at the federal level of an economic stimulus proposal is to jump start the manufacturing segment of the economy. The country would lose much of this benefit from the fact that many of our consumer goods are imported.

The benefit from a stimulus to manufacturing would be even more diluted In Iowa, since most of the manufactured goods found in Iowa stores are produced outside of Iowa, even among those goods manufactured in the U.S.

The amount of tax exemption resulting from the proposal will likely be small, but state legislators need to avoid acting on poorly thought out gimmicks.