A Holiday from Fiscal Responsibility

The case against sales tax holidays


It's August, with autumn looming, and that means something bad is happening. No, not Brett Favre scheming for attention. The bad thing is the spectacle of state governments from Texas to Vermont trying to buy off voters with their own money.

It's an annual ritual known as the sales tax holiday, which lets consumers make certain government-approved purchases without remitting the usual levy to the Department of Revenue. According to the Tax Foundation, 18 states will hold these events in 2010. The gimmick usually is deployed this time of year so that parents can save on school supplies and clothing.

In spite of the "back-to-school" label, you don't necessarily have to be a student or the parent of one to get the break. A colleague of mine used the opportunity to buy her husband a pair of golf shirts. That's because Illinois extends the preferred treatment to most clothing and shoes under $100.

The state exempts 24 different school supplies, including lunch boxes, transparent tape, and legal pads, but to qualify, they "must be used by students in the course of study." In Texas, backpacks under $100 are tax-exempt only if they are "used by elementary and secondary students." Good luck enforcing those requirements.

The relief allows politicians to depict themselves as stalwart champions of the average person. "I am confident this tax break will help students, families and businesses as they prepare for a new school year," said Florida Gov. Charlie Crist when he signed the law creating a sales tax holiday.

Right now, it can also be peddled as an ingenious form of fiscal stimulus. "This is a way to give our economy a shot in the arm," Illinois Gov. Pat Quinn insists. Some supporters even claim total revenue rises because of all the economic activity it generates.

But if sparing shoppers the sales tax is such a blessing, why don't our leaders get rid of it the whole year round? If it's a dose of adrenaline to a weak economy, why not repeat the treatment next month, and the month after? If we can increase state collections by suspending the sales tax, couldn't we increase them even more by abolishing it?

In reality, the exemption doesn't increase overall economic activity. It merely induces people to delay or accelerate purchases to fit into the time window. When New York had a sales tax holiday for clothing in 1997, sales jumped during the week it was in effect—but for the full quarter, it was a wash.

Nor is this alleged favor necessarily of much benefit to the ordinary family. A 2003 study found that Florida retailers responded to the incentive by setting prices higher during the tax holiday than after. In other words, they grabbed the "savings" for themselves.

All the claims about boosting revenue amount to castles in the air. Massachusetts canceled its holiday after feeling remorse about squandering nearly $15 million in sales taxes in 2008. The offsetting increase in income and corporate tax collections, by contrast, added up to less than $1.8 million.

Georgia likewise scrapped the program, on the theory that the state treasury didn't have $13 million to toss overboard. Illinois may lose $67 million on its 10-day spree.

The only plausible value of this ploy is to take business away from neighboring states. But if adjacent locales have their own tax-exempt periods, each state loses revenues and none gains sales.

Some people favor any measure that leaves more cash in the pockets of citizens. But if taxes are to be cut, it would make a lot more sense to cut them year-round on all goods, instead of providing a temporary benefit to favored sectors. "The government sticking its hand in the economy to create an artificial shopping rush is not productive in any way," says economist Mark Robyn of the Tax Foundation.

Reducing sales tax receipts, alas, does not reduce state outlays, which means that every dollar that escapes the revenue collector is a dollar that must be recaptured somewhere else. In Illinois, the governor who endorsed the idea is also pushing an income tax increase to help close a huge budget deficit, which the sales tax holiday will enlarge.

In the end, taxpayers will have to bear all the expenses of state governments, either now or later. So we may take a holiday today, only to find ourselves working overtime tomorrow.