Back to school: Are sales tax holidays worth it?

August 20, 2013

Millions of school children are counting down their last days of freedom before school resumes, and millions of parents are preparing to shell out big bucks for new clothes, fresh pencils and new notebooks. In some states, those parents will get a break from paying sales tax on at least a part of their back-to-school shopping. But do those sales tax holidays actually spur any economic activity, or do they only rob cash-strapped states of millions in potential revenue?

This year, 17 states will offer respites from sales taxes in some form or other. Sixteen states will offer tax breaks on school supplies or clothing, while Alabama, Louisiana and Virginia will let residents skip taxes on hurricane supplies and South Carolina misses out on taxes on towels and bedding. The weekend after Labor Day, Louisiana will offer a sales tax holiday on firearms, ammunition and hunting supplies.

Studies conducted by retail trade groups, which favor sales tax holidays, show the brief tax-free windows boost state revenue. A study conducted by the Alabama Retail Federation showed state tax revenue grew by between 2.4 percent and 10.4 percent in six of the first seven years Alabama offered a holiday. The Florida Retail Federation estimated that sales during the Sunshine State’s three-day tax holiday would reach $400 million, well above last year’s total, because the state included electronics in the exemption this year.

“Our members that track these find they drive traffic into the stores. When you’re driving traffic into the stores, you’re increasing sales not just on items that are subject to the sales tax holiday but on items that aren’t subject to the sales tax holiday,” said Rachelle Bernstein, of the National Retail Federation. “Based on our tracking, retailers are able to find that there are greater sales occurring than otherwise would, and they’re sales that are occurring on items that might be exempt from the holidays, so the state might be picking up revenues from that.”

Critics say there’s no evidence that sales tax holidays generate economic activity, and that consumers aren’t saving that much anyway.

“It’s a short-term gimmick. It’s a way for a politician to say, ‘I’ve cut sales taxes for a few days a year.’ If you have to cut [taxes] for a few days a year, your tax system is probably prohibitive to begin with,” said Liz Malm of the Tax Foundation, which opposes sales tax holidays.

What’s more, Malm said, the holidays simply help consumers to shift their purchases from one part of the year, when a sales tax would be in effect, to a period when taxes are lifted. “If I were to make a big purchase on something that were tax-free, I would do that as well,” Malm said.

Retail federations make the case that the higher tax revenue, which the Alabama study showed, means consumers aren’t simply altering their spending plans.

But state revenue departments think the holidays cost their coffers hundreds of millions of dollars in lost tax revenue. Georgia, which gave consumers a weekend holiday on clothing, school supplies and computers earlier this month, will lose $89 million in revenue, according to data compiled by Georgia State University’s Fiscal Research Center. When North Carolina gave shoppers a break on taxes up to $3,500 for computers and $100 each for clothing and school supplies, the state missed out on $13.6 million in taxes, according to the state Department of Revenue. Massachusetts lost $23.3 million during its 2012 sales tax holiday, according to the Commonwealth’s Department of Revenue.

No one disputes that sales tax holidays are good for the retailers themselves. For one thing, the absence of a sales tax means brick-and-mortar stores are able to compete with Internet retailers; any purchase made online from a store without a physical presence in one’s home state doesn’t come with sales tax, which means online retailers can charge lower prices than the local neighborhood store.

The idea of a sales tax holiday is about three decades old. In 1980, Ohio and Michigan enacted a holiday on automobile sales. But the holiday didn’t come into widespread use until after 1997, when New York became the first state to give consumers a break on clothing. Florida followed suit in 1998, and Texas joined them in 1999. By 2004, a dozen states were holding sales tax holidays.

The number peaked in 2010, when 19 states offered some form of respite. This year, states that will hold a tax holiday stretch, uninterrupted, from Maryland to Florida and west to New Mexico. Connecticut, Missouri and Iowa also cut back-to-school shoppers some slack.

Reid Wilson covers state politics and policy for the Washington Post's GovBeat blog. He's a former editor in chief of The Hotline, the premier tip sheet on campaigns and elections, and he's a complete political junkie.
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Reid Wilson · August 20, 2013