Sales Tax Holidays Hardly Bargains, Analysts Say

Almost everyone loves a sales tax holiday, and it's not hard to see why. Consumers save a few dollars on sales taxes. Retailers watch their stores fill with eager shoppers. And politicians get credit from both groups. What's not to love here?

Well, quite a bit, according to a growing chorus of tax analysts and academics who say tax holidays are not the bargains they appear to be.

"They're gimmicks," says David Brunori, contributing editor of State Tax Notes magazine and adjunct professor of law at George Washington University. "They are shrouded in this, 'Well, we're going to take care of working families,' and, 'Who doesn't love children,' and all that stuff. But there's no meat on those bones."

The nay-sayers claim sales tax holidays are rife with problems: they're inefficient, they're inequitable, they're expensive, and so on. But one of the detractors' more curious claims is that sales tax holidays don't even accomplish their main goal: saving families money.

"Businesses that normally would reduce prices during the back to school season don't reduce prices and in some cases actually increase them," says Brunori. In these cases, the tax savings would bypass the families -- who are paying higher base prices -- and go directly to the retailers charging higher prices. Richard Hawkins, associate professor of economics at the University of West Florida, is in the final stages of a study to determine if this is indeed what happens. Hawkins says anecdotal evidence of the practice abounds, but he wants to take a closer look at his data before making broader claims.

Retail representatives say these criticisms result from a fundamental misunderstanding of the retail industry.

"If anything, it's a race to the bottom on markdowns," says Scott Cahill, vice president of industry and government affairs at the National Retail Federation. "And sales tax holidays only exacerbate it, it's a feeding frenzy." Cahill says retailers offering lower markdowns or increased prices during sales tax holidays wouldn't survive.

The typical sales tax holiday provides a temporary moratorium, anywhere from 2 to 14 days, on the collection of sales taxes on various goods within a state. They are often scheduled for late summer and early fall to coincide with the back-to-school shopping period. Tax-free items include clothing, shoes, school supplies, and in some cases, computers. Forty-five states levy sales taxes, which account for roughly one-third of total state revenue.

In 1997, New York became the first state to hold a sales tax holiday. It proved to be so popular that the state soon enacted a permanent sales tax exemption on shoes and clothes that cost less than $110 per item.

Today, seven states -- Connecticut, Florida, Iowa, Maryland, Pennsylvania, South Carolina and Texas -- as well as the District of Columbia have sales tax holidays.

Pennsylvania's is the most targeted of the bunch. The state charges no sales taxes on all personal computers and accessories purchased during its two tax-free periods -- Feb. 18-25 and Aug. 5-12. Clothes are already tax-free in the state. In 2000, the holiday cost the state $8 million in tax revenue, a pittance compared to the state's $20.7 billion budget approved for this fiscal year.

But even the small price tag of tax holidays can be a big deal when budgets are tight.

"During strong economic times sales tax holidays are a politically popular way to give something back to the electorate," says Jeff Dale, policy specialist at the National Conference of State Legislatures. "As the economy cools, certainly states are going to be more cautious."

In 2000, four states jumped on the sales tax holiday bandwagon, according to NCSL. But in 2001, no state approved one. Dale attributes this to the slowing economy.

Perhaps the biggest fan of tax holidays is the retail industry.

"Consumer reaction has been remarkable," says NRF's Cahill. "In fact, these holidays have generated crowds in Florida, Texas and Maryland usually only seen during Christmas selling season."

The Texas Comptroller says consumers purchased $400 million worth of tax exempt clothing during last year's tax-free holiday, double the clothing sales of a typical August week.

Maryland Sen. Barbara Hoffman remains skeptical.

Her state just finished its first sales tax holiday, which it had approved last year. Hoffman says there's little question that people bought a lot of stuff. But she's not sure whether the big sales numbers represent new sales or just shifted sales that would have occurred anyway.

As chairperson of the Senate Budget and Taxation Committee, Hoffman will have a significant say in whether Maryland holds a sales tax holiday next year. She's waiting for the numbers from this year's holiday to come in before she commits one way or the other.

"The test is whether anyone has bought anything more," she says.

But even if the numbers look good, Hoffman will still have doubts about the policy.

"Big deal. 5 percent off. It's not a big benefit. But to the state it's $6 million," she says. "This isn't for kids. It's for retail merchants."