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Sales tax holidays: Great for companies, loathed by economists

Parents of school-age children will be heading out this month to purchase back-to-school supplies, with some aiming to shop on a sales-tax holiday. (Patrick T. Fallon/Bloomberg/File)

Update: An earlier version of this post incorrectly reported numbers from Georgia State University. The school estimated the state would lose $41 million in tax revenue.

Children all over the country know the beginning of August means another school year is right around the corner. For parents, it means mandatory shopping trips for school supplies and new clothes. And in a handful of states, those parents can save some cash, thanks to holidays that exempts those purchases from sales tax.

Sales tax holidays apply to clothing or school supply purchases in 15 states in August, most of which are designated for the first weekend of that month. Most states place caps on exempt purchases, usually $100 for clothes and $20 to $50 for school supplies.

Six states exempt computer purchases from sales taxes. Residents in Alabama don’t pay tax on the first $750 in computer equipment; people in Georgia and New Mexico have up to $1,000 to spend with no taxes; and residents of Missouri get $3,500 in computer purchases tax-free.

South Carolinians have the widest leeway to spend this weekend. From Aug. 1-3, residents can spend as much as they want, with no cap limiting the sales tax exemption, on clothing, school supplies, computers, towels and bedding.

These sales tax holidays are popular with state legislators — and the voters who elect them. But economists say they don’t make good public policy.

“Just because sales tax holidays are popular among politicians, consumers and businesses, that doesn’t mean they make economic sense,” said Liz Malm, an economist at the nonpartisan Tax Foundation. “If a state must offer a ‘holiday’ from its tax system, chances are there is something wrong with the tax system overall, and it isn’t competitive.”

Studies show the holidays cost states tens of millions in lost tax revenue. Georgia lost an estimated $41 million on its sales tax holiday in 2013, according to Georgia State University’s Fiscal Research Center. Massachusetts left $23.3 million on the table during its 2012 holiday, the state Department of Revenue reported.

Industry groups, however, love the tax holiday, which they say drives more traffic to their stores.

“Our members that track these find they drive traffic into the stores. When you’re driving traffic into the stores, you’re increasing sale,s not just on items that are subject to the sales tax holiday but on items that aren’t subject to the sales tax holiday,” Rachelle Bernstein, of the National Retail Federation, said in an interview last year.

Ohio and Michigan were the first states to offer sales tax holidays, back in 1980. At the time, it was an effort to spur the sputtering automotive industry by limiting sales taxes on cars. New York spawned the idea of sales tax holidays during back-to-school shopping season in 1997 as a way to entice residents to shop in-state, rather than traveling to New Jersey, which had a lower tax rate. Massachusetts did the same thing in 2005, when it offered residents the chance to save sales tax on up to $2,500, rather than traveling across the border to New Hampshire, which has no sales tax.

But some states killed their sales tax holidays when revenue began trending downward during the recession. Florida, Maryland, Massachusetts and the District of Columbia have all either taken a break from tax holidays or ended them altogether. Twenty-three states and the District have experimented with tax holidays at some point since 2002.

Reid Wilson covers national politics and Congress for The Washington Post. He is the author of Read In, The Post’s morning tip sheet on politics.



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