The voices of Tax Policy Center's researchers and staff
Our children returned to school yesterday, with backpacks full of new supplies. Every year, teachers post lists and we shop for supplies, new clothes and other items our kids need or want for a great school year. This annual back-to-school shopping spree is so important to retailers that they begin advertising sales as early as July 4.
Sixteen states offer sales tax-free weeks or weekends, when certain items are exempt from sales tax. Some states have more than one “holiday,” timed not only to items purchased for the new school year (products ranging from school supplies to clothing to computers), but also covering hunting (firearms) or weather (emergency preparedness equipment or energy efficient appliances). The idea: Boost local economies and make voters happy by cutting prices.
The idea of a sales tax exemption makes sense if a state is trying to encourage first-time purchases of pricey goods like an energy efficient refrigerator. But for products that most residents will buy anyway—like school supplies—it doesn’t. While sales tax holidays may modestly reduce those consumer costs, they often do little more than shift the timing of purchases. At the same time, they can cut into state revenues that are used for, among other things, schools.
The average cost of basic school supplies (excluding digital technology and clothing) for an elementary school student is $110.78; for a middle schooler, $270.76; and for a high schooler, $304.61. Holiday states tax these products at between 4 percent and 7 percent. That means a back-to-school shopper could save from $4 on an elementary school student in Alabama to as much as $20 on a high school student in Tennessee. Including computers and clothing can increase consumer savings.
Savings like that are nice, especially when buying supplies or clothing for multiple children. One parent in Illinois—a state without a tax holiday—wishes she could join in the savings. “A tax holiday would be fantastic! I spend hundreds each year, between the three boys.”
And while savings of $4, or even $20, may not matter much to high-income households, they can be important to lower-income families. Says a friend who lives in no-holiday North Carolina, where the sales tax ranges between 4.75 percent and 7.5 percent: “From what I've seen, many people in my immediate area need all the help they can get.”
But holidays may be less of a good deal than my friend—and many state lawmakers—think. Here’s why:
Not everybody can shop during a state’s scheduled sales tax holiday. My Tax Policy Center colleague Richard Auxier notes that in fact “the holidays are more beneficial to affluent shoppers, who have the means to change the timing or amount of their purchases.”
Or, as one busy parent of two sons acknowledged, “I would try to take advantage of it, but something would happen to distract me.” Another parent of two daughters who are busy on weekends with sports, “What if we’re not ready to buy supplies during the scheduled holiday? It might be hard to reap benefits.”
The holiday may help shoppers, but not the overall economy. Richard explains that tax holidays are more likely to shift the timing than increase total consumption. If Illinois adopted a tax holiday, my friend would not likely buy more pencils or more shirts. As a result, a tax holiday does little if anything to increase overall economic growth.
There’s no holiday for tax administration—by retailers or state employees. The Tax Foundation explains how sales tax holidays can make collections more complex. Retailers must reprogram registers and computers to comply with the temporary tax changes. Depending on a state’s regulations, they may have to operate under multiple sales tax laws in a single year. “For example,” explains the Tax Foundation, “Mississippi’s sales tax holiday regulations prohibit the sale of individual shoes [evidently to avoid common holiday price caps], permit the use of coupons, prohibit layaway sales but permit rain checks, and exclude shipping costs from the holiday.”
As one friend put it, a sales tax holiday “might be more of a royal pain in the [rhymes with glass].”
Back to school sales tax holidays can reduce revenue for… schools. For instance, when Massachusetts held a sales tax holiday last summer, it lost between $16.7 million and $37.7 million in tax revenue. As a result, its School Modernization and Reconstruction Trust Fund lost about $4.3 million in funding for 2018.
A decade ago, my TPC colleague Kim Rueben noted that in good times, sales tax holidays might be an easy way for states to give money back to residents without permanently shrinking their tax base. The problem: In many states, these holidays have become as much a permanent part of the retail landscape as Christmas or Halloween.
Kim argued for a holiday from tax holidays, given the explicit tradeoff between saving consumers a few dollars and cutting government services or raising other taxes. Today, while states are generally experiencing fairly strong revenues, there is uncertainty related to the overall economy and future revenues. This means that Kim’s argument has grown stronger.
Maybe shoppers in tax holiday states need to see something other than “Back to School Sale” signs in stores. Something like: “Back to School Buy Off: Pay No Sales Tax This Weekend, Fund Less Public Education This Year.”
But that’s probably too explicit.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Elise Amendola/AP Photo