Governor’s sales tax reduction not effective stimulus

As we’ve been hunkering down in the budget bunker this week, I was surprised to find the issue of stimulus back in the discussion.

The Governor’s proposed 1/8th percent statewide sales tax cut has been sometimes described as a possible “stimulus.” The word “stimulus” has been thrown around a lot lately, and perhaps a bit too loosely. Not everything that might bolster the economy is stimulus – but rather the concept refers more to things that are meant to give the economy a short-term jump start.

Effective stimulus plans are said to be “timely, targeted and temporary“.

In one sense, the Governor’s sales tax proposal would be timely because it would go into effect quickly. However, it would not be timely in the sense that the benefit is slowly spread out over multiple purchases. Just think about it, what would provide you with more of an incentive to buy: a one-time $12 discount, or a $12 rebate that would be paid back as 12 monthly payments of $1?

Targeted stimulus measures get to those most likely to spend the additional resources (low- and moderate-income people). I guess we could say the sales tax reduction is targeted in that that proportionally low- and middle-income people will get a greater benefit, although the sales tax reduction is not limited to these taxpayers.

But the Governor’s proposal clearly fails to be temporary, because it is permanent. So even if the reduction in sales tax provides some kind of incentive to make a purchase, there is no reason to make that purchase sooner rather than later – you’d get the sales tax reduction either way.

I would add that for a stimulus measure to be effective, it needs to be of a sufficent scale. Keep in mind that the federal economic stimulus plan is in the ballpark of $168 billion dollars. The Governor’s sales tax proposal is $77 million.

The other main reason that it is unlikely to be effective is that the Governor’s sales tax proposal has to be paid for through cuts elsewhere in the state budget. While the federal government can do deficit-spending to fund a stimulus proposal, the state must balance its budget.

-Nan Madden

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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