Two-month sales tax holiday may not make economic sense

Debate over Baker proposal turns partisan

THE DEBATE OVER Gov. Charlie Baker’s proposed two-month sales tax holiday has turned into a partisan, interest-driven dispute.

Baker, a Republican who has not yet announced whether he will run for reelection, portrayed the tax holiday as a way to keep more money in the hands of consumers, while helping small businesses. “We are proud to offer this proposal to keep money in the hands of taxpayers and promote economic development amidst Massachusetts’ recovery from the COVID-19 public health emergency,” Secretary of Administration and Finance Michael Heffernan said in a statement.

Businesses that would benefit from increased sales are, unsurprisingly, supportive. Retailers Association of Massachusetts president Jon Hurst, in a statement included in the governor’s press release, called it “a smart, exciting, and progressive economic incentive that will benefit our small businesses and our consumers just when they need it.”

But liberal groups panned the move as a gimmick that would divert an unexpected budget surplus away from other government spending priorities. “The tax dollars the Commonwealth would lose from this 2-month sales tax holiday could support local schools by accelerating funding for the Student Opportunity Act, provide opportunities for affordable childcare that will help businesses and families, and encourage travel by enabling transit authorities to stop collecting burdensome bus fares,” said Marie-Frances Rivera, president of the liberal-leaning Massachusetts Budget and Policy Center.

Sen. Eric Lesser, a Longmeadow Democrat widely viewed as eyeing higher office, who chairs the Legislature’s economic development committee, said businesses “need more workers and better infrastructure, not political gimmicks.” “Extra funds should be used to reduce class sizes, repair crumbling roads and bridges, improve broadband internet, or use to pay down debt,” Lesser said.

The State House News Service reported that Senate Ways and Means chair Michael Rodrigues, a Westport Democrat, also called the extended sales tax holiday a “short-term political gimmick,” while Senate President Karen Spilka was equally cool to the idea.

The presidents of the Massachusetts Teachers Association and American Federation of Teachers-Massachusetts issued a joint statement criticizing Baker for wanting to boost big box stores and online retailers instead of investing in colleges, public schools, and transportation. Merrie Najimy of the MTA and Beth Kontos of AFT Massachusetts called it “Baker’s billion-dollar giveaway.”

On one hand, the debate is coming down to the typical Republican versus Democrat dynamic, with Baker favoring lower taxes and putting more money into the hands of consumers, and Democrats wanting more government spending to shore up public infrastructure.

But largely lost in the political shuffle, points out Evan Horowitz, executive director at the nonpartisan Center for State Policy Analysis at Tufts University, is whether the move makes any sense economically. Horowitz said from an economic perspective, this is not the right time for additional stimulus. There is already a lot of stimulus money out there, distributed by the federal government. Many people have actually been saving money during the pandemic, since they had fewer activities to spend it on.

And with the economy reopening, there is already a tremendous amount of pent-up demand. Spending on clothing is way up. Spending on travel is increasing.

The increased spending is already leading to inflation. A surge in construction and home renovation projects are resulting in lumber shortages. A microchip shortage, caused by COVID-related supply chain disruptions, is making it harder to buy cars and other electronics.

Meet the Author

Shira Schoenberg

Reporter, CommonWealth

About Shira Schoenberg

Shira Schoenberg is a reporter at CommonWealth magazine. Shira previously worked for more than seven years at the Springfield Republican/MassLive.com where she covered state politics and elections, covering topics as diverse as the launch of the legal marijuana industry, problems with the state's foster care system and the elections of U.S. Sen. Elizabeth Warren and Gov. Charlie Baker. Shira won the Massachusetts Bar Association's 2018 award for Excellence in Legal Journalism and has had several stories win awards from the New England Newspaper and Press Association. Shira covered the 2012 New Hampshire presidential primary for the Boston Globe. Before that, she worked for the Concord (N.H.) Monitor, where she wrote about state government, City Hall and Barack Obama's 2008 New Hampshire primary campaign. Shira holds a master's degree from Columbia University's Graduate School of Journalism.

About Shira Schoenberg

Shira Schoenberg is a reporter at CommonWealth magazine. Shira previously worked for more than seven years at the Springfield Republican/MassLive.com where she covered state politics and elections, covering topics as diverse as the launch of the legal marijuana industry, problems with the state's foster care system and the elections of U.S. Sen. Elizabeth Warren and Gov. Charlie Baker. Shira won the Massachusetts Bar Association's 2018 award for Excellence in Legal Journalism and has had several stories win awards from the New England Newspaper and Press Association. Shira covered the 2012 New Hampshire presidential primary for the Boston Globe. Before that, she worked for the Concord (N.H.) Monitor, where she wrote about state government, City Hall and Barack Obama's 2008 New Hampshire primary campaign. Shira holds a master's degree from Columbia University's Graduate School of Journalism.

Meanwhile, businesses like restaurants and hotels are struggling to hire enough workers to keep up with demand.

Horowitz said in an interview that in the long term, these problems will probably solve themselves. But in the short term, “The economy can’t take much more spending.” Trying to stimulate spending – generally the goal of a sales tax holiday – will only exacerbate the short-term problems, Horowitz said.

Horowitz said there may be ways to effectively target aid to individuals and small businesses that still need help. But the problem for many businesses is no longer a lack of people buying. “Lots of businesses are having the opposite problem,” Horowitz said. “You can’t keep up with demand.”