Virginia Needs a 365-Day Tax Holiday

August 6, 2007

Eleven states had a sales tax holiday this past weekend, among them Virginia, where shoppers could buy school supplies under $20, and clothing and footwear under $100, without paying the state’s 5 percent sales tax. The Virginia Department of Taxation helpfully notes, “All retailers selling these items MUST participate in the Sales Tax Holiday.”

Virginia is not alone in these tax holidays (see here for a chart of them), but they are bad tax policy, as we’ve reported here, here and here. Politicians love enacting these holidays as a gimmicky way to appear to cut taxes without really cutting taxes. There are certainly easier ways to help poorer students get supplies and clothes for schools other than giving everyone in the state a weekend-long exemption. If taxes are too high, the best solution would be to lower the tax rate year-round, not just for one weekend.

There is one group of people (besides politicians) who love sales tax holidays, and that’s merchants. I was shopping at the packed Leesburg outlets yesterday, and most stores proudly displayed in their window an official state document announcing the tax holiday and what items were included. Additionally, many stores added their own advertising trumpeting “Tax Free Weekend!!,” without really explaining that only a few items were exempt.

I discussed tax policy with a retail manager friend of mine, but he remained unconvinced: “You may be right about all that, but it’s free marketing for me. As long as it gets people into my store, I support it.” I might send him a New York study that concluded that the sales tax holiday there didn’t increase purchases, but simply shifted the timing.

My friend did admit that it was a pain going through his inventory and determining which items were exempt and which weren’t. He also said that some stores, to avoid that headache, were advertising that they wouldn’t charge sales tax on anything, and would pay the tax on non-exempt items out of their own pocket. Normally that’s illegal under Virginia law, but the state Department of Taxation waives that law “during the sales tax holiday, and the fourteen days immediately preceding the start of the sales tax holiday.” Illinois businesses aren’t so lucky.

My friend may like his free government marketing, but I’d like to think that a 365-day tax holiday would get more people into his store than a 2-day tax holiday. It would also reduce compliance costs, promote stability in the tax code, stop distorting consumer choices, and overall be better tax policy.

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