August 23, 2006

Sales tax ‘holiday’ more hoopla than helpful

(The following article originally appeared in the August 23, 2006 edition of the Baltimore Sun.)

For Maryland shoppers, the back-to-school shopping frenzy is a celebrated annual tradition. But there's another annual event that has proliferated in its wake: the growing use of sales tax "holidays" that aim to temporarily cut costs for shoppers.

Between today and Sunday, shoppers throughout Maryland will be able to avoid the state's 5 percent sales tax – if they purchase what lawmakers have designated as "back-to-school" items, chiefly clothing. In the past month, Virginia and the District of Columbia also offered sales tax holidays.

Supporters of sales tax holidays claim the holidays deliver real savings to consumers and boost sales for retailers. However, the evidence from previous sales tax holidays suggests otherwise.

According to the New York State Department of Taxation and Finance, while the Empire State's first sales tax holiday increased sales during the period of the holiday, sales for the year were virtually unchanged. In other words, shoppers didn't buy more; they just shifted the timing of their purchases.

Other studies have indicated that retailers may raise their pre-tax prices during the tax holiday, leaving consumers out of the full tax savings.

As it turns out, sales tax holidays are more hype than anything. Not only do they fail to live up to their advertising, they generate numerous problems. For one, the complexity and administrative burden that sales tax holidays create can be mind-numbing for small-business owners. Tax holidays create unstable tax codes that force businesses to develop new administrative and compliance strategies every time a tax holiday is enacted.

Sales tax holidays also essentially allow government to artificially shape what products are purchased and when. By doing so, the government places itself in the business of deciding economic winners and losers – a function that should always be the sole responsibility of the free market.

Sales tax holidays give the dangerous impression that government can manipulate the prices of goods in the free market. When prices fall during a temporary suspension of sales taxes, consumers can mistakenly believe the government directly controls prices. In reality, the government can do very little to affect the price of any good or commodity.

Considering the economic problems with sales tax holidays, why would anyone still support such an idea? It's simple: Our elected officials love to be seen as tax cutters – even if the tax relief is paltry.

When lawmakers have so many good tax-cutting alternatives to choose from, it is truly unfortunate that tax holidays are so popular. Our friends in Delaware have no statewide sales tax. They have a 365-day sales tax holiday.

It's time for lawmakers to reject the gimmick of sales tax holidays and support long-lasting tax relief for all. If tax relief for consumers looks good for a few days, why not give it to them all year long?

Jonathan Williams is an economist at the Tax Foundation in Washington.