4:42 PM CDT, July 29, 2013
The state of Illinois doesn't make a lot of good fiscal decisions, but it made one two years ago when it canceled the sales tax holiday it had held in 2010. The reason was that the state was low on money and couldn't afford to give up the revenue. Too bad other states haven't followed suit.
The idea behind sales tax holidays, which are customarily timed to coincide with late-summer back-to-school shopping, is to increase store sales, boost the economy and help consumers, particularly poor ones. But the benefits are greatly exaggerated.
As the Tax Foundation notes, they "do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings." Poor consumers may pay a little bit less, but the bulk of the freebie goes to consumers who are not poor
The idea is a political gimmick that distracts from bigger tax issues. If the state doesn't need the revenue, it would be more rational to reduce the effective rate year-round rather than ladle it out once a year. If cutting taxes briefly is good for the economy, cutting taxes permanently would be better. On the other, hand, if a state is giving up revenue it truly needs, leaving money on the table makes no sense at all.
Illinois figured that out. But 17 other states have yet to learn.
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