Ohio Lawmakers Should Reject Sales Tax Holiday “Reform”

September 2, 2009

A group called the Ohio Sales Tax Reform Incentive is trying to get a sales tax holiday passed in the state’s legislature. The holiday would apply to school supplies, computers and accessories, and sports equipment, all with price limits. They also support a “Made in Ohio” sales tax holiday for products manufactured in-state. The group makes some standard claims to support the sales tax holidays: The economy needs a boost. Sales tax holidays pay for themselves through increased revenue from increased sales. Consumers are suffering and need a tax break.

We have recently released a Special Report detailing why these claims and others are false or greatly exaggerated. The truth is that sales tax holidays are a political gimmick meant to appease the public and make politicians look good. But they are poor tax policy. Sales tax holidays do not deliver on their promises and they are accompanied by heavy costs that outweigh the minimal benefits that they do provide.

Not all tax reforms are created equal, and sales tax holiday are without doubt poor tax policy. Sales tax holidays are band-aids that serve as indicators that a state’s tax system needs real reform. If the sales tax in Ohio is too burdensome, then lawmakers should consider reducing the rate all year for all purchases and paying for it by cutting wasteful spending. This type of reform has real long term benefits for the economy and taxpayers.

The Ohio Sales Tax Reform Incentive also wants a sales tax holiday specifically for products manufactured in Ohio. In addition to the usual problems with sales tax holidays, a “made-in-Ohio” holiday has additional serious problems.

First, what does it even mean to be manufactured in Ohio? Do all the parts of the product have to be manufactured in Ohio? Or over 50% of the parts? Or do all the parts just need to be assembled in Ohio? What if some of the parts are assembled elsewhere? Where is a computer “made”? What if the processor comes from one place and the hard drive comes from another, and they are assembled in a third location? What about the packaging? The answer is that even the simplest of products, like a pencil, requires thousands of people in hundreds of locations in order to become a reality (the classic I, Pencil by Leonard Read is a fun read). The term “made in Ohio” will have a necessarily arbitrary definition and is essentially meaningless.

Plus, a protectionist made-in-Ohio sales tax holiday raises constitutionality questions. As we wrote in a U.S. Supreme Court brief in 2007, “the commerce clause embraces the principle of competitive neutrality, which prohibits states from taxing activity out-of-state while not taxing identical activity in-state.” A made-in-Ohio holiday would come very close to that line, if not cross it entirely.

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