In February, the Wisconsin State Assembly passed a bill to provide a $100 per child tax rebate and a sales tax holiday as a means of refunding a projected budget surplus. Both parts of the bill were met with criticism. Democratic legislators argued against both proposals, questioning the timing and whether the rebates were the best use of funds from a yet-to-be-realized surplus. Republican leaders in the state Senate have backed the child credit but have called the tax holiday a “gimmick.” Now, because of differences in the two legislative chambers, the passage of both parts is up in the air.

While policymakers may question whether the proposed tax rebate and tax holiday are the appropriate use of funds or appropriately targeted, recent research suggests that they would lead to an increase in consumption and output. As relatively small and one-time policy changes, the economic impacts of both policies are likely to be modest. Nonetheless, research suggests that a substantial portion, anywhere from 30-66 percent, of the tax rebate would be consumed. Further, although a primary impact of sales tax holidays is a shift in the timing of spending, recent research has shown that they also tend to increase overall spending by roughly 30-40 percent.

The proposed tax rebate walks a middle path between targeting benefits toward taxpayers in need and providing a broad-based refund. The flat payment of $100 per child would distribute revenue to lower incomes compared to an equal-sized reduction in income tax rates, which would give a larger benefit to higher income households. While the rebate would surely be a welcome gain for all families, for many it would not be a sizeable addition to income. However, for some families, the $200 average rebate would be much more important. In particular, single female households with children have a median income of $26,803 and poverty rate of 35.9 percent, compared to a median income of $95,429 and poverty rate of 4.4 percent for married couples with children. Although not targeted solely to low-income families, the rebate would provide them assistance.

Recent research has studied the impact of the recent federal income tax rebates, finding that on average roughly 30 percent of the income tax rebates were consumed shortly after receipt, with a cumulative response of 67-90 percent as part of the rebate was used for down-payments on larger durable goods. While the Wisconsin rebates are smaller, they also differ in what they signal about future conditions. The federal rebates happened in recessions and were at least in part in counter-cyclical policies to try to stimulate consumption and output. By contrast, the Wisconsin proposal comes in an economic expansion in response to forecast tax revenue surpluses, and thus signal higher future incomes. Based on these factors, we estimate that households will consume approximately 50 percent of the tax rebate within six months of receipt. Thus the $122 million rebate increase consumption by $61 million, with an equal increase in output.

While the proposed child tax rebate received more support, the proposed sales tax holiday faced opposition in the state Senate. Opponents argue that sales tax holidays simply shift the timing of purchases and that they are an ineffective form of tax relief. But while recent research confirms that sales tax holidays do change significantly the timing of purchases, they also lead to an increase in overall consumption spending. Studies have found a 30-40 percent increase in consumption from sales tax holidays, with the effects particularly strong for apparel purchases.

The proposed sales tax holiday in Wisconsin was set for early August and limited to purchases up to $100, in an effort to provide relief form families during the back-to-school shopping season. The sales tax holiday would particularly advantage consumers who are very responsive to price changes, which tend to be lower income households.

The Wisconsin Department of Revenue estimates that the sales tax holiday would lead to a revenue loss of $51.5 million on allowable purchases, representing a consumption base of $1.03 billion. If the sales tax holiday increased total sales by 30 percent, this would be a consumption increase of $309 million. The corresponding multiplier of 6.0 from tax revenue to consumption is on the low end of the estimated impacts of sales tax holidays.

In total, the proposed policies should lead to an increase in consumption in Wisconsin of roughly $370 million over the next year and an increase in output of roughly the same size. Thus, although the policies are not designed for a growth impact, they may lead to a modest increase in output with a multiplier of slightly greater than 2 from revenue to output.

Noah Williams is the Juli Plant Grainger Professor of Economics and the Director at the Center for Research On the Wisconsin Economy at the University of Wisconsin – Madison. This is adapted from a longer version which appeared at the Center for Research on the Wisconsin Economy website.
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