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Sunday, September 30, 2007

Tax Holiday

A sales tax holiday for back-to-school items? It sounds like a nice idea at first glance. One would be able to save a few dollars here and there and put them to better use. But is it really going to help those who this bill is intended for? In the Rocky Mountain News article “Tax Holiday,” a Colorado State Representative, Mike Kopp, believes that “[t]his is a tax break to help working families get their kids back to school. Every little bit helps.” The plan Representatives Kopp and Stephens are willing to present in the next legislative session would address the idea that any back to school item less than $100 would be exempt from the sales tax for a period of four days. Examples of these items include: “notebooks, pencils, computer software, footwear, clothing, and books on schools reading lists” (“Tax”).

Yet, there are many things that are funded by the Colorado sales tax revenue. “State income and sales tax make up 90 percent of the General Fund. The General Fund is the state’s primary operating account used to support general functions of state government, such as K-12 and higher education...” (“Glossary”). In many cities and counties this tax makes up a large percentage of revenue that is then used for many different purposes. Some examples include schools’ operating budgets, police protection, fire departments, street repairs, and park maintenance (August 2007 Sales & Use Tax Collections). While this holiday would be limited to four days, many people might take advantage of this time to buy items that would have benefited these programs. Since it is known that sales taxes take a larger share of income for low and middle income families than for high income (“Overview”), it would appear these representatives are attempting to redistribute the wealth though a “tax holiday”.

Would this really have the desired outcome? Wouldn’t the outcome still be the same except the state funding would lose revenue during those four days that would help fund other programs, including schools, and the lower and middle classes would not be better off as a whole but only individually if they could take advantage of the holiday? This might be the case because in an economic view point the demand for these back to school items will increase because everyone will get the advantage of the “cheaper” prices due to no sales tax. These individuals might include parents, students, businesses, and other individuals, even from neighboring states, since the retailers will not be able to tell who is not buying items so their children or the purchaser could go back to school as the plan describes. This increase in demand would shift the demand curve to the right but leave the supply curve in the same location. This movement will cause a shortage in supply leaving fewer items available during the four day period. Since everyone cannot buy the supplies at the same time, some will have an advantage, but others will lose out on this sales tax break, perhaps even those for whom it was intended to help the most. This plan for redistribution through a “tax holiday” would be inefficient in the outcome and would not better the state, cities, counties, or people of Colorado and the programs they support with the loss of revenue.

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If decreasing a sales tax for 4 days would be a good idea, then I wonder why it would not be a good idea to just reduce the sales tax for all the days?
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