Sales Tax Holidays: Back to School Bargain or Retail Rip-off?
NEW YORK ( MainStreet) Many back-to-school shoppers have been waiting for this weekend . At least a half dozen states will be sponsoring "sales tax holidays" this weekend, with an handful more held in the coming few weeks. These government-sponsored tax exemptions draw shoppers like magnets, but are they really a good deal or more smoke-and-mirrors than real savings?
Of course, at their best, sales tax holidays only yield a 4-7% price reduction. But every little bit helps, right? Researchers for The Tax Foundation at the University of West Florida studied the price effect of Florida's sales tax holiday in 2001 and found that in some cases real savings may be only an illusion.
"Using ten different types of apparel across ten 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," the Tax Foundation reported. " Based on the prices observed in Pensacola before the sales tax holiday , it was expected that shoppers would save $125.58 during the holiday. Due to changes in the before-tax price of the various products, actual savings observed during the holiday were $100.06."
This means that basically retailers took some 20% of the benefit of the sales tax holiday -- skimping consumers of the potential upside of the blowout weekend.
The study may not be conclusive for all tax holidays, but it does strongly demonstrate that such tax holidays may not be as much of a boon for consumers as they first seem.
The Tax Foundation report also said that a reporter in Charlotte, N.C. found that consumer price savings were better at six large stores the week before the 2009 tax holiday than during it.
The Institute on Taxation and Economic Policy (ITEP) finds another fly in the sales tax holiday ointment.
"One popular rationale for sales tax holidays is that they increase local consumer spending and boost local retail, but this has not been demonstrated," ITEP says. "Rather, increased sales during sales tax holidays have been shown to be primarily the result of consumers' shifting the timing of their planned purchases."
The nonprofit think tank also reports that state revenue lost during sales tax holidays ultimately has to be recouped "either through painful spending cuts or increasing other taxes." As a result, fewer states are offering the consumer tax break. The Tax Foundation says the number of states offering the exemption peaked in 2010 at 19. Last year, 17 states offered sales tax holidays. About the same number of states are planning such promotions this year.
"Tax holidays are a gimmick that distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform," the Tax Foundation says. "Their creation came about as a way to avoid addressing the negative effects of high sales taxes."