More States Miss Revenue, Cut Back to School Tax Holidays

(Photo: Wikimedia, Creative Commons)

(Photo: Wikimedia, Creative Commons)

In Massachusetts, back-to-school time is not only celebrated by parents who are ready to get back to the school routine, but it is also a time to shop tax-free. However, the state has decided not to reinstate the sales-tax holiday this month, for the first time since 2009, because of lagging state revenue.

Wisconsin, Kansas, Rhode Island, North Carolina, and Nebraska have decided not to hold new tax holidays or even reinstate them down the road. The Institute on Taxation and Economic Policy (ITEP), a nonpartisan think tank, says this choice will save money for the states, according to Amanda Albright for Bloomberg.

"There are lots of things tax experts disagree on, but we all agree sales tax holidays are not good tax policy," said Joseph Henchman, vice president of legal and state projects for the Tax Foundation.

ITEP explains that state and local governments that continue to have tax holidays will lose over $300 million in revenue during the holidays this year. Moody's Investors Service points out that these losses come even as states face aggregate tax revenue growth below 4% this year, down from 5.5% in 2015.

Tax holidays usually occur during a few days in August for such items as school supplies and clothing. Some states have holidays for articles like firearms, energy-star products, and items used to prepare for hurricanes. The Tax Foundation declares that 17 states will have sales-tax holidays this year.

William Fox, a business professor at the University of Tennessee at Knoxville, says tax holidays are an excellent example of the collision between politics and economics. The holidays only move the time at which a shopper buys a product to another time in the year, but they do not encourage buyers to purchase more.

Georgia State Legislator Brett Harrell (R – Snellville) advocates giving up the tax holiday and lowering sales tax rates to broaden the base of taxed items as a better idea. The holidays cost Georgia approximately $70 million in revenue annually.

The Massachusetts Department of Revenue calculated that the state lost roughly $25.5 million from the holidays in 2015. Legislator Stanley Rosenberg (D-Amherst) said:

"It is a politically popular thing, but an increasing number of members are saying there's a better way to spend $25 million than a sales-tax holiday."

Michigan, which will not be observing the holiday this year, and Ohio, which will, were the first two states to offer the sales tax holiday. In 1980, the two states allowed a temporary elimination of taxes on car purchases. New York applied it to clothing 17 years later, reports Zlati Meyer for the Detroit Free Press.

Assistant Michigan State University Marketing Professor Ayalla Ruvio pointed out one advantage of observing the holiday — the amount shoppers pay in general on the no-tax day may increase because of the savings from purchasing merchandise with the tax elimination. Also, customers may purchase not only tax-free articles, but also regularly taxed items.

In Ohio, Senate Bill 264 enacted a sales tax holiday covering the purchase of clothing below the price of $75, school supplies priced at $20 or less, and school instructional items priced at $20 or less per item.

Marie Thomas Baird of the Sentinel-Tribune says that if a shopper purchases $1,200 worth of merchandise, the savings from not paying tax is approximately $85.

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