The problem with sales tax holidays

If the governor is going to throw money around, it should be directed at people who suffered the most during the pandemic.

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Governor Charlie Baker has money burning a hole in his pocket. He’s got some $900 million that he can’t wait to give back to the people of Massachusetts in the form of an extended sales tax holiday.

Instead of the holiday being a permanent weekend every August, the governor’s plan is to implement a two-month tax-free spree starting Aug. 1. We’d almost get used to not paying sales tax before the 6.25 percent rate returned to our lives.

It’s a major league head-scratcher and, at the same time, no doubt, a crowd-pleaser. Raise your hand if you want to pay sales tax. Baker described his proposal as a form of COVID-19 relief — his own idea of stimulus. “I think we owe some of this to the people of Massachusetts and to some of the small businesses” for the trauma and challenges they’ve endured, Baker said on GBH’s Boston Public Radio. “It will especially help lower-income residents who are the most affected by the sales tax in the first place.”

It’s true that $900 million, once considered real money in state budgetary terms, now feels like a $20 bill one happily finds blowing around on the sidewalk. The Commonwealth is drunk with cash, thanks mainly to the massive largess of federal relief funds. Massachusetts’ “rainy day” fund balance is at roughly $4.4 billion.

But $900 million eventually will seem like a significant sum again. And it’s best either not to spend the dough or to invest it more wisely. In several ways, the governor’s plan doesn’t add up.

For one, it won’t help lower-income people nearly as much as it will help wealthier people. Lower-income families generally spend their money on rent and food (neither taxed). When they go shopping for clothing, it’s also not taxed. They lack the disposable income to benefit on the level of those in the middle class and upper-income households who can afford the big-ticket items. Given such disproportionate buying power, the governor’s plan is more of a tax break for the affluent than anyone else.

The timing of an extended sales tax holiday isn’t economically strategic — to the contrary. The economy is overheating already, facing worker shortages, supply chain issues, and the threat of inflation. “Injecting stimulus this summer compounds all of these problems. It’s giving people money to spend when high spending is actually an economic concern, not a virtue,” Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts, told State House News Service.

There could be more unintended consequences. “Retailers are going to increase their prices,” said Lucy Dadayan, a senior researcher at the Urban-Brookings Tax Policy Center. They do that even for the weekend tax holiday, never mind for a two-month period, she told me. A lengthy sales tax holiday would widen the gap between low-income and high-income taxpayers, which makes it an imprudent fiscal policy. “It’s a manipulation to create a feel-good story for taxpayers and constituents,” Dadayan said.

Given the worker shortage, workforce training could be a priority. So could state-funded child care, where some 11,000 kids are wait-listed, according to Marie-Frances Rivera, president of the Massachusetts Budget and Policy Center. “If we’re thinking about bold proposals, imagine if [Baker] had said, ‘We’re going to invest $900 million in a guaranteed income program that’s going to be targeted to cities and towns that suffered disproportionately during the pandemic,’ ” Rivera said in an interview.

Sobriety will someday return to the state budget. In the meantime, if the governor is going to throw money around, it should be directed at people who suffered the most during the pandemic.