Sales-Tax Holiday Prompts Discussion of Expansion

Some Iowa lawmakers and groups are pushing for an expansion of state's annual sales-tax holiday despite the $1-billion state-budget shortfall expected in Fiscal Year 2011. This year's holiday is slated to save clothing shoppers across the state an estimated $2 million to $3 million.

"If you're talking about the essentials, we don't tax groceries, we don't tax prescription medicine, [and] we don't tax utilities, and maybe there ought to be a discussion about not taxing clothing," Senator David Johnson (R-Ocheyedan) said this week.

Johnson this year introduced a bill that would make clothes exempt from sales tax at all times of the year, instead of just items less than $100 sold during the first Friday and Saturday of August. Johnson lives a few miles from Minnesota, where clothing is tax-exempt year-round.

"Clothing is an essential part -- it's always food, shelter, and clothing -- and we get tax credits for our housing in some respects and all that, so I just wanted to put it out there because there are states that do not tax clothing," Johnson said.

Iowans for Tax Relief President Ed Failor, Jr. said "it wouldn't be a bad thing" to expand the sales-tax holiday to other times as well, and that the holiday benefits struggling families during the back-to-school shopping season.

Failor noted that the sales-tax holiday attracts shoppers from Nebraska and Illinois, where no sales-tax holiday or clothing exemptions exist. Missouri has a similar sales tax holiday August 7 through 9, which includes clothing up to $100, computers up to $3,500, and school supplies up to $50.

"In this weekend, what happens for Iowa businesses is people in Illinois and Nebraska come over and shop in Iowa businesses," Failor said. "The businesses make more, so there's more income tax to be paid at the end of the day."

Senator Tom Hancock (D-Epworth) this year introduced a bill that would bring Iowa's law closer to Missouri's by including information-technology devices in the sales-tax holiday, while Jim Henter with the Iowa Retail Federation said retailers would like to see school supplies included in the bill.

"Obviously there's a cost involved, and with budget concerns that's probably fairly unlikely in the near future," Henter said. "But it is very successful, and we've heard a lot of comments that this would be a great way to expand it into school supplies."

Henter agreed that Council Bluffs- and Quad Cities-area retailers probably see the most benefit from the law because of cross-border shoppers, but he expects that retailers across the state will see a significant boost in sales this year -- in part due to families' tight budgets.

Others are not as keen on expanding the holiday. Victor Elias of the Iowa Fiscal Partnership said his group has not taken a position on the issue but is calling on politicians to re-evaluate all tax credits, tax breaks, and tax exemptions the state offers - including the sales-tax holiday.

"We are facing a problem that needs to be faced on both sides of the budget, expenditures and revenues," Elias said.

Elias said tax breaks like the sales tax holiday need to be evaluated the same way spending is being evaluated, and on a regular basis -- but especially during a tight budget situation.

All parties agreed that it would be difficult to repeal the law because of its popularity and relatively small impact on the budget.

Governor, Analyst Differ on State-Revenue Picture

Total gross receipts to the state's general fund were $412.1 million in July, which was $4.7 million or 1.2 percent above the same period last year, but when refunds are taken into account, total net receipts for Fiscal Year 2010 decreased by $23.1 million or 6.1 percent.

Governor Chet Culver this week touted the positive number, saying state tax receipts for July are ahead of projections made by the Revenue Estimating Conference, which estimated an annual growth rate of negative 0.1 percent.

But the nonpartisan Legislative Services Agency's monthly revenue memo included refunds, resulting in the bottom line of a 6.1-percent decrease in year-to-date Fiscal Year 2010 net receipts.

Republican Party of Iowa Chair Matt Strawn criticized Culver's spin on the numbers. "Anyone who has spent two minutes in the private sector knows that gross revenues only tell half the story of a business's financial health," he said. "Either the governor doesn't understand his own budget or is deliberately misleading Iowans. Quite frankly, either is a problem."

Meanwhile, two separate indices -- the Iowa Business Conditions Index and the Iowa Leading Indicators Index -- showed continued declines.

Iowa's Business Conditions Index slipped below 50 in July after rising above "growth neutral" in June, according to Creighton University's monthly survey of supply managers. The index, a leading economic indicator, dipped slightly to 49.8 from June's 51.2.

"I expect Iowa's seasonally adjusted unemployment rate to peak at 6.5 percent, its highest level since 1986, in the fourth quarter of this year," said Creighton University Economics Professor Ernie Goss. "The state will continue to bleed durable-goods-manufacturing jobs in the months ahead. However, the pace of these job losses will diminish significantly from the rate experienced earlier this year."

Meanwhile, the value of the Iowa Leading Indicators Index dropped in June for the 15th consecutive month, although it was the smallest drop since October 2008, according to a report by the Iowa Department of Revenue. The 15-month streak of declines comes after the index reached a peak of 108.4 in March 2008.