It’s back-to-school shopping season, meaning parents everywhere are dragging their kids to the store to stock up on notebooks and supplies or to nab the perfect first-day-of-school outfit.
Sixteen states, including Maryland and Virginia, have offered or will offer some sort of sales tax holiday in July or August, a policy that can give families a financial break at a time of year when they’re likely to be opening their wallets.
But do sales tax holidays actually stimulate consumer spending?
A recent study released by the nonpartisan research group Tax Foundation argues that these exemptions do little to increase purchases. Liz Malm, an economist who co-wrote the report, said her research found that tax holidays don’t appear to prompt consumers to shell out more money. Rather, they simply prompt shoppers to change the timing of a purchase they probably would have made anyway.
“These aren’t going to induce new behavior; they’re just going to provide a consumer a benefit for a thing they’ve already done,” Malm said.
Sixteen states will hold a tax-free holiday this year, a slight decline from the 18 states that did so last year.
The Tax Foundation’s study is one of few research papers that aims to examine the impact of tax holidays: Little data exists on how much revenue states miss out on as a result of these policies.
Matt Gardner, executive director of the Institute on Taxation and Economic Policy, a left-leaning think tank, said he believes many states hang on to these policies because they make for good politics.
“That’s part of the reason why lawmakers love them,” Gardner said. “Where else can you come up with a high-visibility tax break that doesn’t cost that much?”
Local retailers offer a mixed view on what kind of impact these tax exemptions have on their sales.
Paige Healey of Lou Lou, the local chain of accessory and clothing stores, said it’s difficult to determine how much influence the tax holiday has on sales. Healey said that sales were up at Lou Lou’s Virginia clothing stores on the weekend of Aug. 1-3, when the commonwealth had a tax holiday on apparel items under $100 and school supplies under $20. However, she said the tax break doesn’t appear to be luring shoppers to her stores.
“It always seems like we’re reminding the customer it’s the tax-free holiday,” said Healey, the retailer’s communications director.
But other businesses say the tax policy gives them a lift. Katherine Glorioso Dress, owner of Arlington clothing boutique Gossip on 23rd, said she typically sees more customers as well as more purchases per customer during the tax-free weekend.
“People love the tax-free holiday,” Glorioso Dress said. “I was busier this past weekend than I am on Black Friday or Small Business Saturday.”
Patrick Donoho, president of the Maryland Retailers Association, says he thinks the state’s sales tax holiday provides a temporary advantage to Maryland retailers competing with neighbors with differing tax policies.
“It really helps our guys compete. If you’re on the shore, you’ve got Delaware with no taxes. And if you’re on the northern border, you’ve got Pennsylvania that doesn’t tax clothing,” Donoho said. “And above all, you’ve got the Internet,” he added, where many sites do not collect a sales tax.
Donoho said that administering the tax exemption isn’t a particular challenge for retailers, especially now that it’s been in place for five years. He said most cash-register software can be easily programmed to account for it, and he hasn’t heard of any instances in which the tax holiday put a particular strain on inventory planning.
The Maryland Comptroller’s office said that the state estimates it lost $10.1 million in revenue during its 2012 tax holiday, the most recent year for which that calculation is available. This year, Maryland’s holiday runs from Aug. 10-16 and applies to clothing purchases of items that cost less than $100.
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