States Find Back-to-School Sales Tax Holidays Pricey

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By Che Odom

Back-to-school sales tax holidays are popular with consumers, but cash-strapped states often find them hard to justify.

“Politically, it is a very appealing thing to sell to constituents. But I reviewed a lot of literature, and what generally happens is there really isn’t much of an impact,” Allen Lynch, associate professor of economics and quantitative methods at Mercer University, told Bloomberg BNA.

The tax holidays are designed to bring relief to consumers for two to three days a year, usually in late July to mid-August, on clothes and other items students may need for the new school year. At a peak in 2010, 19 states offered the tax-free days. The number is 16 this year.

Lawmakers in Georgia, which is surrounded by states with back-to-school sales tax holidays, opted against continuing it this year over protests of retail and some business groups. The state doesn’t expect a budget gap this year or next, but rising pension costs are a concern.

The holiday cost state and local governments in Georgia as much as $70 million each year, according to Wesley Tharpe, Georgia Budget & Policy Institute’s research director.

“That adds up to real money at a time when Georgia’s state and local lawmakers are struggling to fully fund schools, meet transportation demand and keep rural hospitals from shuttering,” Tharpe wrote in a 2015 post. “Redirecting the funds Georgia loses through its sales tax holidays to these and other public investments could provide real benefit to Georgia families and a real boost to the state’s economy.”

Dropping the Holiday

Holidays in Illinois, New York, North Carolina, West Virginia, and Vermont were either short-lived or repealed, according to a July 12 report by the Institute on Taxation and Economic Policy (ITEP). Lawmakers in Indiana, Kansas, Maine, Nebraska, Rhode Island, Washington, and Wisconsin recently rejected new back-to-school holidays.

Many states repeal or suspend the holidays when facing budget difficulties, tax groups say. Thirty-three states face revenue shortfalls in fiscal years 2017 and 2018, according to the Center on Budget and Policy Priorities.

Legislators in Massachusetts, bordered by pro-holiday Connecticut and sales-tax-free New Hampshire, also voted against tax-free days. Though the state has a statutory sales tax exemption for clothes priced at $175 or less, the state revenue department estimated that the 2015 holiday cost $25.5 million in lost tax revenue.

‘Wise to Follow’

The District of Columbia Office of Taxation and Revenue estimated $640,000 in tax revenue savings by canceling its sales tax holiday in 2009, according to a July 25 report from the Tax Foundation. After eight years of such holidays, tax officials “found the holiday did not spur enough economic growth to offset the costs.”

The Tax Foundation also reported that North Carolina officials found that repealing their sales tax holiday in 2013 would save $16.3 million the following year. The state funneled those dollars toward individual and corporate income tax cuts.

“Other states would be wise to follow D.C.’s and North Carolina’s lead and reevaluate the costs and benefits of sales tax holidays,” the report said.

Consumers, Retailers Favor

However, Todd Pack, a spokesperson for the National Federation of Independent Business, told Bloomberg BNA that his group’s retail members generally like state sales tax holidays for the business that those events tend to generate.

“It does get people shopping,” Pack said. “There is a lot of buzz around these sales tax holidays.”

The NFIB encourages people to use such events not only to shop at large retail chain stores, but also to support their local small businesses, he added.

Some also argue that the money saved by consumers can be meaningful to individual families. According to the National Retail Federation, a retail trade association based in Washington, D.C., consumers can save about 5 percent to 10 percent during sales tax holidays, depending on the state.

Tax Groups Oppose

Finding sales tax holidays an “ineffective alternative to real sales tax reform,” the liberal-leaning ITEP reported that a two- or three-day sales tax holiday does nothing to reduce taxes for low- and middle-income taxpayers “during the other 362 days of the year.”

Wealthier taxpayer are better positioned to benefit, because they have more flexibility in timing their purchases to take advantage of a tax holiday—"an option that isn’t available to families living paycheck to paycheck,” ITEP said.

The Tax Foundation concurred, saying in its report that in order to give a small amount of tax savings to those with lower incomes, sales tax holidays give a large amount of savings to higher-income groups.

‘Political Gimmicks’

Lawmakers are implicitly acknowledging with sales tax holidays that their state’s tax system isn’t competitive, and they should instead reduce the year-round sales tax rate, according to the Tax Foundation.

“Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief,” it said.

In fact, said Lynch, at Mercer University, most retailers raise prices for the sales tax weekend, so shoppers aren’t really missing much without a holiday.

“It’s very appealing to consumers to hear that they’re going to get this tax break,” he said.

“Consumers are generally very rational, but consumers find this notion of a tax break to be psychologically very appealing,” Lynch added. “And consumers really don’t take the time to really study how prices change.”

With assistance from Andrew M. Ballard in Raleigh, N.C.

To contact the reporter on this story: Che Odom at COdom@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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