Friday, August 6, 2010

Pat Quinn's Tax Holiday - Good Idea, Bad Execution

Ask most Democrats about lowering taxes to help the economy and they'll roll their eyes and tell you that taxes are good and everybody ("especially the rich") need to pay more. Ask most Democrat state legislators in Illinois why they don't lower taxes to help the economy and you'll get a similar reaction. And yet, yet... Sometimes a temporary burst of sanity hits a Democrat square between his eyes. Illinois Governor Quinn, for example, who is currently touting a "sales tax holiday." Clout Street (Chicago Tribune) reported this on August 6 (my emphasis added): Gov. Pat Quinn today defended his push for a back-to-school sales tax holiday despite the cost to a state government that's badly in the red. The governor predicted that waiving the 5 percent state sales tax will result in more revenue for the state because it will entice more shoppers into stores. Once there, those shoppers will spend on items such as electronics and sports equipment that aren't covered by the tax holiday. More at Clout Street.... Gov. Quinn is correct, of course, but his stand on this only highlights his - and his party's - contradictions about taxes and their effect. Look, this "back-to-school sales tax holiday" is temporary. Now, if Quinn thinks that lowering taxes will (a) result in more revenue for the state because (b) it will "entice more shoppers" to shop, why can't he - and his party - understand that a permanent sales tax cut would do the same thing but for a much, much longer period of time? Furthermore, if Quinn is so cocksure that this will encourage people to buy more back-to-school merchandise, why is it so difficult for him - and his party - to grasp the reality that lowering the sales tax on other merchandise would similarly boost consumer spending and, thereby, sales tax revenues? Note that, unlike Quinn, I speak of "lowering" the sales tax, not "waiving it." I acknowledge the need for some taxation, but the level at which Illinois (and Chicago and Cook County) tax people on just about everything is over the top. What Quinn admits is that lower taxes spur higher levels of consumer purchases. What he does understand is that lowering those taxes significantly would have the same effect, and boost the state's tax revenues even more than his plan would. In addition, why not lower the sales tax on the non-school items that Quinn referred to? Sure, the tax holiday on school items would increase shopping by parents with kids in school. But is Quinn - and his party - really so ignorant as to think that all of them will also "spend on items such as electronics and sports equipment that aren't covered by the tax holiday?" What about the many people in the market for those items who are not shopping for back-to-school items? What's to entice them to buy electronics, sports equipment or anything else in Illinois rather than crossing the border? Gov. Quinn has the right idea in theory, but his plan to execute it is completely wrong. The fastest way to generate more tax revenue for virtually bankrupt Illinois is to lower the sales tax on all items and services. Don't even get me started on the income tax and the myriad number of fees that Illinois imposes on people. As I wrote here on July 13, this may seem counterintuitive, but makes perfect sense: Lower the taxes and suddenly more people can afford to buy more things. From the sales tax on a pack of gum, a washing machine or a condominium, part of the cost is taxes. Your real income is less because it, too, is taxed. When you raise taxes, people have less disposable income. They buy less or go to a neighboring city, county or state where the sales taxes are lower, or move there because the income tax is friendlier. This is simple, basic economics. Any kid running a lemonade understands that higher prices - whether they're higher because of taxes or not - result in fewer sales.