Some state sales tax holidays lose luster

Aug 4, 2017 at 10:28 pm | Print View

Consumers in 16 states including Iowa can take advantage of sales tax holidays this year — going on shopping sprees to buy items such as backpacks, computers and school clothes tax-free.

But some states confronting budget woes and a long list of spending priorities are questioning whether the events are worth the cost.

Left-leaning critics say the tax holidays are regressive and cost states money that could be spent on other priorities. Right-leaning groups agree that they are regressive, and argue that they don’t attract new business for retailers. Instead, they say, the holidays just concentrate buying into a weekend.

For more than a decade after New York started the modern trend in 1997, the number of states with annual sales tax holidays grew steadily. But the count peaked at 19 in 2010, and this year’s tally is one fewer than last year.

The liberal Institute on Taxation and Economic Policy estimates that states lost $300 million due to sales tax holidays in 2016.

For a few days this month in Texas, shoppers can buy backpacks worth up to $100 without paying sales tax. In Missouri, graphing calculators get the tax-free treatment this weekend, and in Virginia, it applies to generators, chain saws and other hurricane preparedness items along with school supplies.

In Iowa, the sales tax holiday applies only to clothing and footwear that costs less than $100. And it ends Saturday — not Sunday.

But for many states, the numbers don’t add up despite the hype.

Charley Ballard, an economics professor at Michigan State University, said two closely related factors may have helped to “take the shine off” sales tax holidays.

Lawmakers are feeling pressure from their constituents to do things that require money, Ballard said. At the same time, the holidays haven’t unleashed the promised burst of economic growth.

Georgia lawmakers voted this year to scrap the state’s July sales tax holiday, which applied to clothes, school supplies and computers. Massachusetts, which gave up its holiday in 2016, rejected efforts to reinstate it this year in the face of a budget deficit.

In Florida, Republican Gov. Rick Scott’s plan to expand the sales tax holiday from three days to 10 was rebuffed by the Legislature. In Wisconsin, Republican Gov. Scott Walker’s plan for a two-day holiday was scrubbed by lawmakers in favor of eliminating the personal property tax for businesses. In Oklahoma, the sales tax holiday for school clothes and shoes was on the chopping block to help close a budget deficit, but survived by one vote.

In Georgia, retailers fought hard to keep the holiday in place. But “policymakers came around to realizing that the benefits of the sales tax holiday didn’t outweigh the cost,” said Wesley Tharpe, research director of the Georgia Budget and Policy Institute, a progressive group.

Most consumers saw only modest savings at the register, Tharpe said. But the state lost out on $42 million in taxes in fiscal 2016, according to Georgia State University researchers.

Advocates for the holidays, led by retailers, argue they bring in shoppers who buy not just the items that are tax free, but lots of other “impulse” items. And, they argue, the holidays help level the playing field for brick-and-mortar retailers who face competition from online sales, much of which are tax exempt.

“The sales tax holiday has given us a two-day equalizer,” said Bill Rennie, vice president of the Retailers Association of Massachusetts. “Consumers have responded.”

Critics Left and Right

The liberal ITEP group says sales tax holidays are inherently unfair because they favor better-off consumers who can shift purchases to holiday times, while lower-income, paycheck-to-paycheck folks can’t.

The Tax Foundation, a right-leaning think tank, agrees that the holidays don’t effectively target tax relief to low-income individuals. In a report last month, the group also complained that the holidays allow politicians to arbitrarily pick which products and industries to favor with the exemptions, and are a distraction from comprehensive tax relief.

Some critics contend that consumers might save even more without the holidays, as retailers would mount sales of their own timed to events such as back-to-school.

Bill Fox, director of the Boyd Center for Business and Economic Research at the University of Tennessee, said he took advantage of Tennessee’s recent holiday to buy several pairs of running shoes. “That 9¼ percent I saved is minuscule in terms of savings,” he said. “The stores would be giving a much better discount if they had a sale. Back-to-school sales would have been like 25 percent off, not 9 percent, and people would have saved more.”

Stateline, an initiative of the Pew Charitable Trusts, is distributed by Reuters.

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