Sales Tax Holidays: Easy to Sell but Hard to Justify

Starting late this week and continuing through mid-August, some 16 states will kick off an event that has become a ritual of back-to-school season. They will temporarily suspend sales taxes on pens, pencils, binders and bookbags, as well as moderately-priced clothes, and in some cases, computers.

For Illinois, it will be the first time ever that a sales tax “holiday” has been declared. From August 6 to August 15, shoppers can buy school supplies or clothes and shoes worth up to $100 without paying the 5 percent state sales tax. The move is expected to cost state coffers $60 million, even as Illinois wrestles with a $5 billion backlog of unpaid bills.

On the other hand, in Georgia, where tax breaks on back-to-school products have been a staple since 2002, the Legislature decided to forgo it this year, much to the dismay of retailers. Lawmakers didn’t want to be subsidizing clothes for children to wear to school at a time when they were cutting back spending on the schools themselves.

Sales tax holidays have been around since New York passed the first one 15 years ago. According to the Federation of Tax Administrators, states have found lots of excuses to declare the holidays. Louisiana and South Carolina kick off hunting season with a tax break on guns. Louisiana and Virginia begin hurricane season with a tax break on preparedness items such as flashlights, batteries and generators. And six states, including Maryland, Missouri and West Virginia, offer temporary sales tax breaks on Energy Star appliances.

The holidays are popular with shoppers who like getting a deal, retailers who like getting a flood of customers, and politicians who like getting credit for making it all happen. But critics on both sides of the political spectrum say sales tax holidays are an ineffective gimmick.

The Tax Foundation, a conservative research organization, argues that sales tax holidays don’t actually encourage shoppers to buy anything. Instead, shoppers purchase things they would’ve bought anyway, but on a different day. Retailers still benefit from the arrangement, says Mark Robyn, an economist with the nonpartisan group. “It’s sort of like advertising a sale,” Robyn says, “but they don’t have anything to give up.”

Meanwhile, Citizens for Tax Justice disputes a common claim that the holidays help poor families save money on essential items. Matt Gardner, a policy analyst for the liberal group, says the tax breaks actually are geared toward upper-income families. “It’s a real question of who’s best positioned to take advantage of them,” he says. “Low-income people are less likely to shift the timing of their purchases.”

One point that both the Tax Foundation and Citizens for Tax Justice agree on is that since the holidays only include special items — school items during back-to-school season, guns and ammunition during hunting season — they still unfairly impose sales taxes on everything else. In other words, they discriminate against consumers who don’t go hunting every fall and don’t have to buy their children notebooks and pencils.

Retail psychology

Retailers have their own studies to point to, showing positive impacts from sales tax holidays. One they like came from the Texas, where the state comptroller found that sales tax holidays saved shoppers $442 million from 1999 to 2008. In Florida, which is reinstating a back-to-school tax holiday after a two-year hiatus, the state retail federation sponsored a study that concluded that gross sales increased by about 8 percent during the month the school tax holiday was last held in 2007.

“The consumer loves it,” says Rick McAllister, president of the Florida Retail Federation. “It’s psychological. It’s hard to explain.”

But other studies support what the critics of sales tax holidays have to say. A 2009 University of Michigan study said as much as 90 percent of increased sales during a sales tax holiday could be attributed to consumers merely shifting their buying from one time to another. And a 2001 study from the University of West Florida suggests that retailers raise prices during sales tax holidays, helping themselves to some of the savings intended for consumers. However, this kind of profit padding can be difficult to measure.

One thing most tax experts agree on is that a few days of tax breaks on selected items doesn’t do much to stimulate a state’s economy. The amount of money involved is too small, and the event is over too quickly. That was one reason why Georgia was quick to get rid of its back-to-school tax break this year. Typically, according to Alan Essig, executive director of the Georgia Policy and Budget Institute, the event would cost the state around $15 million.

On the scale of Georgia’s $17 billion budget, that’s not much. But during a budget crisis, every penny counts — especially in a state that’s had to make significant cuts in education. As Essig puts it, “the idea of having a school tax holiday while laying off teachers and cutting school hours didn’t make sense.”