States Score Political Points with Sales-Tax Holidays
Back-to-school shoppers in 12 states are getting a break from paying sales tax on clothes, shoes, even computers this summer under temporary "state tax holiday" programs.
These "state tax holidays" are popular with shoppers and politicians alike, but some critics say they are political gimmicks that score points with voters, but deprive states of millions of dollars of much-needed revenue.
States with sales tax holidays this summer are Connecticut, Georgia, Iowa, Florida, Massachusetts, Missouri, New York, North and South Carolina, Texas, Vermont and West Virginia.
The fact that three more states are offering the programs in 2004 than last year is another sign states are betting their economies have bounced back enough, according to Ryan Burruss a spokesman for the Federation of Tax Administrators, a Washington, D.C.-based organization that provides research to state tax officials.
States such as Florida that had recently dumped their tax holidays have jumped back on the bandwagon, according to FTA, which has a summary of this year's programs.
Massachusetts and Missouri are the states offering sales tax holidays for the first time this year.
"Politically both Democrats and Republicans are strong advocates," said Sujit M CanagaRetna, who specializes in states budgets and taxes at the Council of State Governments. Republicans like the opportunity to say they got rid of a tax and Democrats like to tout they are helping consumers and working families.
The state legislatures that approve tax holidays often do as a way to boost local economies and to help working parents. "It's a nice idea for families with a lot of kids going back to school," said William Ahern, a spokesman for the Tax Foundation, a Washington, D.C.-based think tank. "But it's not the greatest tax policy," he said. He said economically, it makes more sense for a state to have a slightly lower state sales tax throughout the year than to have a higher tax rate with a two-week holiday.
Risa Williams, editor in chief of State Tax Publications at Tax Analysts, a Virginia nonprofit, calls sales tax holiday programs "gimmicks" that aren't good deals for consumers. During tax holidays, retailers often jack up their prices, she said, so consumers flock to the store to save 6 percent on the sales tax but end up paying 10 percent more for the product. "It definitely makes politicians look good when they can give consumers an alleged `break'."
States take multi-million dollar hits with these temporary programs. The amount depends on how long the program lasts, how high the state sales tax rate is and the how much merchandise is exempt from the state sales taxes. Most states put a limit on the amount of merchandise exempt; typically $100 to $300 per clothing and between $1,500 and $4,000 for computer equipment.
Texas expects its Aug. 6-8 state tax holiday to cost the state $36 million in lost state sales tax revenue. Massachusetts figures its first ever state holiday Aug. 14 will mean between $6 million and $10 million in uncollected state sales taxes.
One reason that the Texas sales tax program has such a higher price tag is that Texas has a higher state sales tax (6.25 percent) than Massachusetts (5 percent). Shoppers in Texas program also have had the program since 1999 and many now plan to make major purchases during the sales tax holiday much like shoppers across the nation plan for the post-Thanksgiving sales.
Connecticut and West Virginia put loses at $3.3 million and $2.2 million respectively for their holidays.
"On the revenue side, the programs obviously are going to have some negative implications," CSG's CanagaRetna said. "States are still not completely out of the woods in terms of revenue numbers," he said. State tax revenue grew 6.7 percent for the April June 2004 quarter, the third straight quarter of growth, the Rockefeller Institute of Government, the public policy research arm of the State University of New York, said in a August preliminary report. However, the institute also said that state revenue levels "still have a way to go before they have fully recovered from the recession."