On Thursday, the New Jersey Legislature is being convened in order to discuss ways that the state can deal with the current economic crisis. Today, in advance of that meeting, New Jersey Republican leaders have proposed an unprecedented 5 week sales tax holiday, right through the heart of the Holiday spending season. From the Star Ledger:
The proposal would cut the sales tax in half — to 3.5 percent — during the busiest retail buying season, Thanksgiving through Jan. 4. The sales tax in the state’s 32 Urban Enterprise Zones — areas where economic incentives, such as reduced sales taxes, are offered to encourage development — would also be cut in half, to 1.75 percent, to stimulate buying in cities.
The proposal would affect any item subject to New Jersey’s sales tax, from restaurant meals to automobiles.
Two Republican officials said it would jump-start the economy by allowing customers to pay less for merchandise and increasing retail sales.
Both parties are going to come out with ideas, some grandiose and some small, in order to deal with the economic crisis. While I am not economist, an idea like this seems like it could spur consumer spending. While it may not stop the hemorrhaging that some national retailers are going to experience this season, it may slow down losses enough, on a localized level, to help some small businesses and niche retailers get through this tough time.
That’s not to say that it is a plan without flaws. The article above estimates the loss of tax revenue to be at $500 million, which is a huge financial hit to a state that is already strapped and proposing many alternative ideas for how to raise money. Residents here have seen many ideas floated around – from tax increases, new surcharges on gasoline, and toll hikes. With decreased spending and already lower tax revenues, is now really the time to take half a billion dollars more from state revenue? Can the lower tax rate really increase consumer spending to overcome the decrease in state revenue?
My gut feeling is that the tax cut, on it’s own, will increase consumer spending on large ticket items and increase traffic to stores on the borders with other states. Businesses that will see a boost from this proposal will be car dealers and the Best Buy on Route 17 (right across the border from New York). I don’t know if, overall, the spending increase is going to be large enough to offset the decreases we are already going to see.
A sales tax decrease is only going to work if one of two things happens. First, it requires that people have money to spend. The family who isn’t making their mortgage payment probably is going to spend more now that the sales tax is reduced. The second requirement is that people want to spend the money. People may be making their bills and have money to spend, but that doesn’t mean they are going to want to spend more money just because the sales tax is slashed. They may want to take that money and put it towards other debit or savings rather than spend.
I can very well see an economic proposal coming out of New Jersey on Thursday that includes a sales tax reduction as one part of a multi-prong economic package. What else will be included, I’m not sure, but I can very realistically see the sales tax reduction as one facet of the package.
I previously talked about the economic impact of the sales tax rising from 6% to 7% in New Jersey.
