Legislation being considered with bipartisan support in the Ohio Senate would permanently extend the state’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. holiday on back-to-school gear.
Senate Bill 264 would permanently eliminate sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es on the first Friday, Saturday and Sunday of each August on select back-to-school items, including:
- Clothing items (ranging from hats and coats to diapers and wedding apparel) of $75 or less in value
- Traditional school supplies (pens, pencil, calculators, etc.) of $20 or less in value
- School instructional material (textbooks, reference books, etc.) of $20 or less in value
“For retailers it’s a great weekend,” says State Rep. Niraj Antani (R-Miamisburg) per the Dayton Business Journal.
This is probably true, but it does not follow that a tax holiday increases economic output. Rather, economists generally agree that consumption will just shift from periods of normal taxation to tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. . This is known as the permanent income hypothesis: A person’s consumption is determined by both their current income and anticipated income. In the context of Ohio’s back-to-school tax holiday, the purchasing power of a parent’s income increases during the tax holiday relative to the days and weeks leading up to and following the holiday; a parent will plan for this and shift consumption away from the periods of higher taxation. The net effect on the economy is approximately zero.
Some lawmakers will also suggest tax holidays provide relief for low-income consumers.
“You have people who could really use the break,” says State Sen. Kevin Bacon (R-Defiance), the primary sponsor of the legislation, in a comment to the Dayton Daily News.
But this argument misses the mark too: If the goal is to provide relief for low income individuals, then a three-day period of sales tax exemption for everybody, of all incomes, on back-to-school items is a peculiar and inefficient strategy. Tax rebates or even a spending program on back-to-school supplies for people below a certain income threshold would provide better targeted relief without adding substantial tax compliance burdens (also of note: Ohio already directs tax credits to low income individuals via the earned income tax credit).
These measures do little in the way of providing economic growth while simultaneously shrinking the level of revenue collected by the government. Rather than permanently extending the back-to-school tax holiday, Ohio should consider eliminating it in favor of broad based cuts, to the sales tax or even to more damaging taxes. May we recommend starting with Ohio’s CAT?
See our full report on sales tax holidays here.
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