2-month sales tax holiday makes sense to me

THINKING OUTSIDE the box is always difficult.  We are pre-programmed to look at things in certain ways and seldom venture outside of our comfort zones. I confess, I am one of those individuals.  However, when I first heard about Gov. Charlie Baker’s proposal for a two-month sales tax holiday, for the months of August and September, I immediately thought “what a wonderful idea.” Quite frankly, I wish I had thought of it.

We cannot deny that for the past 16 or 17 months, our way of life and our economy have been turned on their ear.  Many people lost their jobs and many small business owners have lost significant portions of their investment in their businesses.  Those affects will be felt for years.  These previously unthinkable economic conditions have had a devastating effect on so many.  Some people – especially those with higher incomes – have managed to weather the storm, but many people in Massachusetts are still reeling from the effects of the COVID shutdown and the associated economic downturn.

Massachusetts – ever resilient – is bouncing back; so much so that projected tax revenues are exceeding expectations to the tune of at least $3.9 billion dollars.  That sounds like a good thing, and it is, but the question becomes what should we do with this unexpected windfall?  A certain portion of that excess revenue, which comes from the state’s capital gains taxes, is earmarked for the Commonwealth’s stabilization fund, and that is an automatic, statutory requirement.

After adding to the stabilization fund, how should our state government  spend the remainder of this excess revenue to create the most “good?”  It is at this point, that I offer these words of caution – we should resist the temptation to spend a majority of this excess revenue on new initiatives.  A very wise man once told me that expenditures always rise to the level of revenues with government spending, and it is very difficult – almost impossible – to reverse that process.  I know that sounds myopic, but if the Legislature channels all of that excess revenue into increased spending, then we will not be able to revert to prior spending levels should the need arise.

What happens if the excess revenues are not present in subsequent years?  How do you reduce funding for these new programs to balance the decrease in revenues?  How do you tell the people of Massachusetts, some of whom now depend on these programs, that the money is just not there anymore?   I urge caution and restraint and hope that the Legislature will avoid the temptation to channel the excess tax revenue into additional spending.

I have read some of the commentary that labels the governor’s legislation a “a short-term political gimmick” and “fiscally imprudent.” I am sure that some cynics believe that to be true.  But I have also found that policy analysts lose sight of the fact that there are real people – individuals – who bear the brunt of the consequences of political decisions.

If you are a low-wage worker supporting a family, then the weekly savings on your grocery bill from the sales tax holiday would be a real help.  And before the nay-sayers counter with the claim that groceries are not taxable, I would respond that food and beverage items are not, but other things that we all purchase on a weekly basis are taxable.  Items like paper towels, disposable diapers, toilet paper, sanitizing wipes, aspirin, trash bags, aluminum foil are subject to the 6.25 percent sales tax.  The aggregate savings for a two-month sales tax holiday on these items alone could amount to a couple of hundred dollars.

Imagine being unemployed for almost a year and one of your children is finally ready to leave for college.  Reducing the cost of their laptop computer and printer translates into real savings; along with the additional savings on all of the dorm room necessities like a small refrigerator and microwave oven, along with sheets, towels, cleaning supplies, notebooks, pens, and textbooks.  Any tax savings over the proposed two-month tax holiday would be a help to people who have been suffering through the negative economic effects caused by the pandemic.

Second, let us not lose sight of the fact that the proposed two-month sales tax holiday is a temporary measure.  If the goals of this tax cut are not realized, we do not need to do it again.  This is nothing new.  In the past, the Legislature has suspended the current version of the annual sales tax weekend-holiday due to adverse economic conditions.  This temporary measure, by its very nature, is not engraved in stone.

Third, there is some well-reasoned disagreement in the estimates of how much this measure would cost the Commonwealth in foregone tax revenues.  I have heard figures ranging from $900 million to $1.1 billion.  I think those estimates are rather high.  Because purchases above $2,500 are exempt from the current sales tax holiday (if you buy a new car, you still pay the full amount of the sales tax), as are meals, hotel, and other use taxes; my calculations show the cost to be somewhere between $600 million and $750 million in forgone tax revenue and some of that amount will be mitigated by income taxes on the increased profits from increased sales.  Even if my calculations are incorrect and the forgone tax revenues are closer to $1 billion, then it still leaves just over $2 billion for additional spending proposals.

Critics of the plan counter that most of the benefit would go to online retailers.  That is hardly a valid reason to not even consider the governor’s proposal.  The legislative branch, working with the executive branch, could craft a bill that would mitigate those effects – perhaps restricting the tax-free nature of the transaction to in-store purchases immediately comes to mind.  But that is a practical discussion that we should be having, and I look forward to a vigorous policy discussion on the matter.

Paul L. DeBole is an assistant professor of political science at Lasell University in Newton.