Sales tax holidays: Love them or hate them?

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More than a dozen states and the District of Columbia have sales tax holidays that last at least a couple of days each year, some last much longer. Usually the holiday coincides with back-to-school time to give parents a break on outfitting their kids with necessities. What consumers can buy during the sales tax holidays varies by state, but generally includes clothing, shoes, classroom supplies, and computers, often with a dollar limit. Another popular item that pops up in sales tax holidays is energy efficient appliances for the home.

These sales tax holidays date back to the late 90s as a way to give consumers a break and encourage spending. This year, some states are skipping the holiday altogether because, they say, their cash-strapped budgets can't afford the temporary loss of revenue, while other states have beefed up the list of items that qualify.

How well received are the holidays? The jury is still out. Retailers in most participating states say consumers flock to the malls in droves during tax holidays. Some stores extend their hours and add extra staff. One woman who says she bought six pairs of shoes and several dresses for her children told reporters that she would rather have just paid the sales tax. She said she worries about depriving schools of the much needed revenue. Of course, nobody is compelled to take advantage of the sales tax savings, so anyone who shares this concern could simply avoid shopping during on those days.

Some analysts, like those at the Tax Policy Center in Washington D.C., claim that consumers don't buy more during sales tax holidays, but rather they time purchases to coincide with the tax moratorium. Other experts say that this is like an added discount, and because consumers can buy more for less, they either buy more items or higher quality, higher priced merchandise. One indication that consumers do factor sales tax into their buying decisions is California. This is one state that does not have a sales tax holiday. But just over the border of northern California is Oregon, which has no sales tax. Residents who live within a couple of hours of the border regularly drive north to take advantage of automatic discount this provides.

Here's a rundown of what many states are doing this year. In almost every case, the purchases are subject to per item dollar limits.

  • For the third year in a row, Alabama permitted sales tax exempt purchases during one weekend in early August, on purchases of computers, clothing, and school supplies.
  • For Connecticut this was the ninth year of their week- long sales tax holiday, applicable to clothes and shoes. Last year the state coffers lost $3.8 million in sales tax revenue, but Connecticut officials decided the benefits to consumers outweighed the cost to the state.
  • The District of Columbia honored sales tax holidays for purchase of clothing and school supplies in early August.
  • Georgia, which is suffering from a $1.6 billion deficit, still opted to give consumers a break by having a sales tax holiday. Some Georgia state officials call it a mere political gimmick rather than good economic policy. But the flood of consumers in stores is an indication that shoppers appreciate the break.
  • Iowa offers a sales tax holiday in early August for select clothing and footwear.
  • Louisiana has two sales tax holidays, one in May for hurricane preparedness items up to $1,500 and another for two days in August, applicable to the first $2,500 of personal use items. The state sales tax is four percent, but consumers may have to pay local taxes.
  • In Massachusetts, all retail items up to $2,500 are sales tax exempt (on sales tax of five percent) for a two-day period. This may be the most generous sales tax holiday in the nation. State Senator Therese Murray takes issue with the claim by some that this is a gimmick, asserting that the holiday has a positive impact on both sales and consumer confidence.
  • Missouri also celebrated a sales tax holiday, from the first Friday in August through the following Sunday, pertaining to clothing, school supplies, computers, and other items as defined by statute.
  • New York takes a different approach to giving consumers a break by permanently exempting certain purchases.
  • North Carolina has been holding sales tax holidays in August for the last seven years, applicable to the purchases of school supplies and clothing, computers, sports equipment and other items.
  • Oklahoma exempts the purchase of clothing items for three days in August.
  • South Carolina has allowed tax exempt purchases of clothing, footwear, clothing accessories, school supplies, and computers on the first Friday through the first Sunday in August since 2000.
  • Tennessee holds a sales tax holiday in early August, but this year they reported that the turnout was disappointing even though this represents an additional discount of nearly ten percent.
  • Texas participates in the sales tax holiday, with retailers gearing up for huge crowds. The Texas state comptroller says the holiday takes $54 million out of the state's sales tax revenue over the three day period. But other officials point out that $54 million is an inflated figure, since consumers who save on necessities buy more of other items.
  • Virginia offers sales tax holidays during three separate times of year. In May, they allow a full week of tax exempt purchases of hurricane preparedness equipment, including generators. In August, there's a three day holiday for purchases of clothing, footwear, and certain school supplies. And in October, Virginia has a four day holiday for purchases of energy-efficient appliances.
  • For three days in August, New Mexico allows the sales tax free purchase of computers, clothing, and school supplies.
  • Vermont has a sales tax holiday in July for the purchase of non-business energy-efficient appliances.
  • In September, West Virginia permits the purchase of energy-efficient appliances.

Among states that have participated in the past but nixed the holiday this year are Florida and Maryland. Florida leaders say that the sales tax holiday cost $12 million each year in sales tax revenue, though others say this fails to take into account the increase in sales revenue, which some estimate to be about 10 percent. Absent specific data from the National Retail Federation that proves consumers increase their purchases on sales tax holidays, state officials decided to forego giving the taxpayers a break.

In Maryland, the already stressed state budget has officials boycotting the holiday until at least 2010. Opponents of the boycott predict that residents will flock to nearby areas like Washington, DC and Virginia that do have sales tax holidays, taking an unknown amount of sales revenue out of cash registers and out of the state's total income.

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