July 25, 2012

Time for a ‘holiday’ from sales tax gimmicks

This op-ed appeared in the Herald News of Fall River, MA.

Everyone likes saving money when they go shopping, and state lawmakers are poised to deliver just that opportunity to taxpayers, with a proposed two-day sales tax “holiday.” They claim it’ll have an array of benefits, from stimulating the Massachusetts economy to helping residents with household expenses in uneasy financial times, but unfortunately the reality is unlikely to match the hype.

The state legislature has voted to suspend collection of the sales tax for brief periods several times in recent years, similar to the Aug. 11-12 holiday recently proposed for this year by House Speaker Robert DeLeo. The Bay State is certainly not alone, either – over a dozen states now have sales tax holidays of their own, many of them scheduled to take place around the beginning or middle of August.

The attraction seems pretty straightforward — if you give consumers a break from paying sales tax for a couple of days, they’ll rush to the stores during an otherwise slow time for retailers and pump up the state’s economic activity. Shoppers like the extra cash in their pockets or bank accounts and stores like the extra customers, so it’s a win-win program, right?

Actually, economic research suggests that the positive results claimed on behalf of sales tax holidays are largely an illusion, especially for businesses. The increased sales generated by rolling back the sales tax tend not to be “new” purchases that would not have been made otherwise, but the same ones that customers would have made anyway, just timed to coincide with the holiday period. More sales for the second weekend in August simply mean fewer sales the next weekend when the tax is back in place.

In addition, there is a cost to retailers in re-programming their computer systems to reflect the temporary disappearance of their tax collection obligations and their swift reappearance two days later. Any errors that crop up in the process are the responsibility of the retailer, both in preparing for the holiday period with less than a month of lead time — as will be the case if the legislature decides to pass the August holiday this year — as well as afterwards when the tax is back in place.

Even for consumers, the savings are relatively modest. The state’s sales tax rate is the thirteenth highest of all 50 states, but that still only translates into a 6.25 percent discount, an amount dwarfed by retail discounts commonly available at a variety of stores. Macy’s locations around Boston, for example, have historically advertised summer sales with discounts ranging from 20 percent to as much as 50 percent off certain items. A surge in consumer spending large enough to have a noticeable effect on the state’s economy is unlikely to be sparked by a discount so small, as welcome as it might be.

Which raises the question: Why do state lawmakers bother voting for a two-day sales tax holiday in the first place? First, they like voters to think they’re being given a tax break, despite its small scope and fleeting nature. They like to be seen to be “doing something” to goose the economy along, despite the almost nonexistent economic effects. They also like to be able to play favorites with certain products.

In several other states, sales tax holidays are targeted only at certain purchases. New Mexico will waive sales tax on school supplies, as long as items are less than $15. Georgia will let you buy a computer worth up to $1,000 with no sales tax, while Florida allows you to buy clothing under $75 and North Carolina entices purchasers of sporting equipment that costs less than $50. Massachusetts’ holidays have historically been broad based, but future efforts always face the political pressures that have led other states to make any number of particular carve-outs.

Ultimately, it becomes clear that sales tax holidays are simply political gimmicks that distract policymakers and taxpayers from genuine tax reform. If a state must offer a “holiday” from its tax system, it is a sign that the state’s system is not competitive or well-designed. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.

Richard Morrison (morrison@taxfoundation.org) is the manager of communications at the Tax Foundation in Washington, D.C.