Sales Tax Holidays: Not All that Meets the Eye


There are very few situations in life that are truly a win-win, but the idea of a week of shopping sans sales tax seems like a scenario with little downside.

On the surface, it is difficult to devise a disadvantage for a tax break on back-to-school shopping. Retailers love sales tax holidays because they drive store traffic, shoppers like the idea of getting a deal on school supplies and politicians like looking as though they are working to give their constituents a tax break. Yet think tanks are solidly of the opinion that these sales taxes holidays are not good tax policy.

You dont find a lot of unanimity in opinions on policy issues, but sales tax holidays is one issue where its really hard to find someone who thinks this is good policy, says Matthew Gardner, the executive director for the Institute on Taxation and Economic Policy (ITEP), a non-partisan tax research organization. For everyone except the lawmakers, the benefits [of these tax holidays] may be an illusion.

Indeed, the ITEP and the Tax Foundation, a non-partisan, DC-based think tank, both released research in July suggesting sales tax holidays are not the break they seem to be.

Many of the proponents of the sales tax claim its a progressive tax cut, meaning it directly benefits low-income and middle-income families with children. This argument posits that because low-income families spend a greater percentage of their income on necessities, such as school supplies, a sales tax break benefits them more than high-earning families.

Gardner argues that this is not necessarily the case.If you cut sales taxes in almost any way, its going to benefit low-income families a bit more. The difficulty is that because sales tax holidays happen on one weekend or one week a year, the people who can take advantage of this have enough discretionary that they can afford to buy that very weekend.

In other words, the people who would actually benefit most from a tax holiday usually buy things only when they can afford to, not when theres a specific, state-sanctioned week, thus a sales-tax holiday would most benefit high-income families with the discretionary income to time their purchases. Gardner also cites anecdotal evidence that when sales tax is eliminated, retailers do not cut their prices as much as they would normally would to lure in customers, meaning even less cost benefit is actually passed back down to the consumer.

Mark Robyn, an economist with the Tax Foundation, says that sales tax holidays are burdensome, and if state governments really want to give their constituents a tax break, they should consider lowering sales taxes altogether. Or better yet, just reduce income taxes.

Its a gimmick; I mean if you want to give low-income people a $10-$20 tax cut, just reduce the income tax level, Robyn says. The problem is no one would care. They would say, oh, great, you cut my income tax by $20, but everyone just loves that sales tax holiday.

Despite claims against their merits, these breaks remain popular; in 2010 a record 19 states held sales tax holidays. However, the popularity of these tax breaks may be fading as many states continue to struggle with widening budget deficits in the wake of the recession. In Maryland, tax-free week started last Sunday, and despite the states own $1.1 billion budget gap expected for next year, political support for the holiday is strong.

The tax free holiday benefits the retail stores in Maryland, which provide 70% of the jobs in our state. Most importantly, it helps the citizens, many who have been hammered by the recession, to get a little relief, said Peter Franchot, comptroller for the state of Maryland in an email to Our retailers have been so hurt by the ongoing recession that the $10 million we could lose in tax revenue is, in my opinion, more than paid off by shopping by consumers that week and return visits after that."

Maryland also happens to neighbor Delaware, a state that never has a sales tax, and proponents of the sales tax holiday argue that it helps to stem losses from consumers crossing the border to do their shopping. Robyn argues that the cost to implement a week-long sales tax holiday outweighs the potential benefits.The government must make sure that retailers comply by the rules of the holiday and retailers have to train staff and make adjustments so that they can correctly follow the rules.

Furthermore, the argument that consumers are likely to spend more than they otherwise would, thanks to the tax savings is flawed, argues Robyn. She says research supports that a tax holiday really amounts to a shift in the timing of the purchases, underscoring the fact that the policy does not have a huge net benefit for the economy.

West Virginia used to have a sales tax holiday but recently eliminated it. West Virginia Governor Earl Ray Tomblin and the state legislature opted not to renew the sales tax holiday, but rather to reduce sales tax on food purchases. The state has reduced taxes on food purchases from 6% to 3% and plans to eliminate all taxes on food sales by 2013.

The state as a whole, were in a surplus, so were able to provide tax relief, but just in a different way, says Danny Forinash, public information officer for the West Virginia state tax department. We do realize a lot of consumers and businesses like the concept [of a sales tax holiday], but the governor is promoting general tax relief, rather than for a certain period of a few days or weeks. Ultimately, state governments may have to cut out tax holidays, as budget issues continue to remain at the forefront. Robyn said hes not opposed to tax cuts, just the way these tax holidays are implemented.

My point is that there is a good and bad way to cut taxes, Robyn says. The more rules there are in the tax policy and the more it affects people and businesses behavior, the poorer the tax policy it is, generally.

Gardner hopes that state governments will take a more serious look at the costs and benefits of sales tax holidays before deciding whether or not they should offer them to constituents, since even though the holidays are popular, the benefits are unproven.

The problem right now, of course, is that states face a very challenging fiscal environment, Gardner says. Hardly anybody can afford to cut taxes right now, so you can certainly see a scenario where lawmakers will look for ways that are highly visible and dont cost much so they can get the biggest bang for their tax cut buck.