Politics and More Debt from Illinois Sales Tax Holiday

July 22, 2010

Mike Lawrence writes in the Chicago Tribune that sales tax holidays aren’t all they’re cracked up to be:

Each day Illinois sinks deeper into quicksand. A report issued this month by Comptroller Daniel Hynes concluded Illinois has never been as fiscally frail. The state has built a backlog of nearly $5 billion in unpaid bills. Gov. Pat Quinn proposes still more borrowing as our credit rating tanks. Yet, the Democratic chief executive and bipartisan majorities in the General Assembly have declared a sales tax holiday from Aug. 6 to 15 on back-to-school purchases.

It could slice state income by $60 million, but what the heck? So what if it reinforces the reality-defying view that we can escape this fiscal mess without the pain of raising taxes and slashing services? Quinn can tout it on the campaign trail along with the Republican gubernatorial nominee, Sen. Bill Brady, and other lawmakers who voted for it. Shoppers and shops will embrace it without questioning its impact on a state careening toward insolvency. After all, Rod Blagojevich reaped kudos and votes for expanding health care and early childhood education even though he funded them through billions in borrowing and hocus-pocus.[…]

Never mind that retailers are unlikely to hire permanent employees in response to a temporary crush of customers. Never mind that Illinoisans would have to spend as much as $1 billion more on non-exempt items to offset the revenue loss. Never mind that the Tax Foundation in Florida [sic] – a state Quinn cited as a model – found similar holidays there and elsewhere produced points for politicians but not jobs and revenue spikes.

Revenue officials believe that it is “unlikely” that increased economic activity will make up the revenue loss. Only the state portion of the sales tax is affected; city and local sales taxes will still apply unless they sign onto the holiday:

Actual savings for consumers will depend on where they shop and what they buy, according to a tax bulletin published last month by the Illinois Department of Revenue. There is a $100 limit per item on clothing and footwear, but no limit on qualified school supplies.

“If you went in and bought school supplies, you’ll essentially pay 3 percent instead of 8 percent,” said Springfield city Treasurer Jim Langfelder, who added that elimination of the state share will not affect city sales tax revenues.

As we note in our sales tax holiday report:

Despite their political popularity, sales tax holidays are based on poor tax policy and dis­tract policymakers and taxpayers from real, permanent, and economically beneficial tax reform. Sales tax holidays introduce unjustifi­able government distortions into the economy without providing any significant boost to the economy. They represent a real cost for busi­nesses without providing substantial benefits. They are also an inefficient means of help­ing low-income consumers and an ineffective means of providing savings to consumers.

On the subject, Massachusetts is debating whether to resurrect their broader sales tax holiday. Retailer Carol Moore puts it accurately: “I don’t think I would go anywhere for [a] 6 percent [sale], but people like it.” This November, Massachusetts voters will consider a year-round sales tax cut.

More on sales tax holidays here.

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