As the days of summer wane, it’s almost time for kids to return to school dressed in new fashions and toting backpacks filled with notebooks, pencils and school supplies.
To boost back-to-school shopping for all of these items, states hold annual tax-free holidays when they suspend or lower sales taxes on clothing, school supplies, and even electronics. This year, 17 states are participating. Some states such as Georgia, Maryland, Missouri, and Virginia are also using this as a chance to move energy-efficient appliances off the shelves. Mississippi and Louisiana will have their own tax-free holiday for firearms and hunting supplies. Maybe back-to-the-woods shopping?
Politicians and the retail industry love tax-free holidays. Stores love the burst of traffic in their stores during. According to the National Retail Federation, families with kids will spend an average of $674 on back-to-school shopping, so taking advantage of the suspension of a state’s 5-percent sales tax suspension co TV promoting how they are helping poor and working class families save money during the back-to-school season. It’s all for the kids we’re told.
However, states are realizing that tax-free holidays are not quite like Christmas in August shopping bonanzas. Some states have been adjusting their offerings or dropping out of back-to-school tax-free holidays altogether.
Economists on both sides agree that it’s bad policy:
“The sales tax holiday is really a state-sponsored advertising program for retailers,” says Joseph Henchman of the Tax Foundation, a conservative-leaning think tank in D.C. A research team in Florida found that enough retailers were boosting their prices during a sales tax holiday that the intended savings for consumers were reduced by up to 20 percent.
It is also unclear whether or not tax holidays boost overall sales. The nonpartisan Institute of Taxation and Economic Policy finds that shoppers shift the timing of their planned purchases towards tax holidays, but aren’t necessarily buying more products than they would otherwise.
“Gimmicks like sales tax holidays distract from that larger goal of fundamental tax reform,” says Henchman. “Politicians can come out and say, 'Look, I’m saving you money,' even though it’s just for a $70 pair of shoes that you bought on this one weekend, and the retailer raised the price on it.”
The Tax Foundation makes it clear in a new report that tax-free holidays don’t necessarily generate more revenue and may not save families all that much. Stores increase their prices in time for the holiday, so they eat up the savings instead of passing it on to consumers:
Researchers at the University of West Florida studied the price effect of Florida’s sales tax holiday in 2001. Using 10 types of apparel across 10 retail locations, data was collected over a three-week period to analyze whether before-tax prices were comparable before, during, and after the sales tax holiday. Based on the prices observed in Pensacola before the sales tax holiday, it was expected that shoppers would save $125.58 during the holiday on a representative basket of $1,674.41 worth of consumer goods. Due to changes in the before-tax price of the various products, actual savings observed during the holiday were $100.06. In short, retailers absorbed up to 20% of the benefit of a sales tax holiday, significantly reducing the benefit that consumers received. Their study is not conclusive for all tax holidays, but it strongly suggests uncertainty about how much consumers actually benefit from sales tax holidays.
Furthermore, sales taxes are regressive – hitting poor Americans harder. A sales-tax holiday is a one-time reprieve from taxes on a few items. Lower taxes overall would be better for American families. Some poor families don’t have the money to go shopping during the tax-free holiday, so it does them no good. The Tax Foundation proposes a solution:
If the purpose of sales tax holidays is to make school supplies and clothes cheaper for low-income individuals, then a 4 to 7 percent price reduction for all consumers, but only for a brief period, is an odd and ineffective way of achieving that. It’s an example of politicians using a fire hose when a garden hose will do a better job.
If the citizens of a state determine that there truly is a legitimate need to help low-income consumers obtain particular products, a more targeted and effective approach could be a rebate or voucher program. Such a program would be administratively similar to existing food stamp programs and would only be available to the needy, avoiding a windfall for higher-income consumers.
If retailers want to help families, they would keep their prices low during the tax-free holiday.
If policymakers want to help all families, they would lower taxes overall, which would put more money in our pockets all year round. We don’t need gimmicks that alter our shopping habits. American families are struggling with relatively flat wages that leave budgets more stretched, especially with the rising costs of housing, food, and healthcare. A few days of reprieve is a poor substitute for needed tax reform that should lower taxes for all Americans to leave families better off.