CATCHING A BREAK
Holidays provide only modest benefits, hurt government funding, experts say
Texas among states going ahead with backto-school tax holiday.
Even though the coronavirus may make “back to school” a misnomer, many states are going ahead with summer sales tax “holidays” that give shoppers a break on back-to-school items.
This year, 16 states are temporarily exempting clothing, shoes, notebooks and other school supplies, sometimes including computers, from state — and often local — sales taxes.
Shoppers can save up to 9 percent during the promotions, which typically last for a weekend but can be longer in some states. A handful of states also waive taxes on items with other themes, like disaster preparedness, during the summer promotions or at other times of the year.
At least one state, Tennessee, added an extra tax holiday weekend in August, focused on restaurant spending.
“This year, we noted that consumers who have been cooped up at home might enjoy a sales tax holiday for purchases in restaurants, either dine in or take out,” State Rep. Susan Lynn, chair of the Tennessee House Finance, Ways and Means Committee, said in an email.
In many states, details around returning to school are still up in the air. But a survey by the National Retail Federation, a trade group, found that families are expecting to spend a record $790, on average, on back-to-school items this year, particularly on technology. Nearly two-thirds of families with children in kindergarten through 12th grade said they expected to buy computers and other electronics, up from about half last year, because of the potential for digital at-home classes.
“There’s a lot of uncertainty around the school year,” said Katherine Cullen, the senior director of industry and consumer insights at the Retail Federation. “Customers are budgeting for all possible scenarios.”
As details become clearer, she said, families may adjust their spending. Children need new clothes as they grow, regardless of whether they learn at home or in school, but items like backpacks or lunchboxes may not be necessary for remote lessons.
Fewer than half the states with tax holidays include computers on their tax-exempt menus, and all set limits on the exempt amount, according to a list compiled by the Federation of Tax Administrators. (The ones that do are Alabama, Florida, Massachusetts, Missouri, New Mexico, South Carolina and Tennessee.)
While popular with both politicians and shoppers, sales tax holidays are generally frowned upon by tax policy experts, who say they offer modest benefits to most consumers while starving states of revenue for needed services. Some research suggests that the holidays shift the timing of purchases rather than spur new spending.
This year, state sales tax revenues appear to be in free fall, according to an analysis by the Tax Policy Center, a joint initiative of two nonprofit think tanks, the Urban Institute and the Brookings Institution. Because of stay-at-home orders and business closings in the pandemic, along with tax payment extensions, state sales tax revenue in May fell $6 billion overall, or 21 percent, from a year earlier, the center calculated. In some states, the decline was more than 30%.
The declines are “unprecedented,” the report noted, and because of the pandemic, sales tax revenues are unlikely to rebound to normal anytime soon.
“At a time of public health and revenue crisis,” Lucy Dadayan, senior research associate at the Tax Policy Center, said in an email, “sales tax holidays will help some consumers to save very little but at a cost to governments.”
Recent state financial reports indicate, for instance, that Alabama’s back-to-school holiday cost the state $8 million, while Oklahoma gave up $7.4 million, said Janelle Cammenga, a policy analyst with the nonprofit Tax Foundation. Iowa’s 2015 holiday cost the state $3.6 million.
While those figures are relatively small, Cammenga said, “sales tax holiday expenditures represent revenue that is lost without gaining its intended effect of economic stimulation or job growth.”
Rep. Lynn said Tennessee’s two holidays would cost the state about $25 million in lost revenue.
(She noted that the holiday had been factored into the state budget passed in June, and that local governments would be made “whole” for local sales taxes lost during the tax-exempt periods.)
Because lost revenue from the tax holidays is typically a small proportion of state budgets, elected officials may see the promotions as an easy way to gain public favor without doing too much fiscal damage, said David Brunori, a specialist in state and local taxation at tax and auditing consultant RSM and a research professor at George Washington University Law School.
This year, he said, the thinking among state legislators may be that people have been suffering with virus-related shutdowns, civil unrest and now heat waves, so why not offer a bit of relief. “They’re ‘feel good’ measures,” he said.
Still, the drain on state revenue, combined with the incentive to crowd into stores looking for bargains when coronavirus cases are surging, suggests that 2020 may have been a good year for states to skip the tax holidays, said Dylan Grundman, senior state policy analyst at the Institute on Taxation and Economic Policy. “They should have called them off this year,” he said.
Here are questions and answers about sales tax holidays:
Q: How much can I save during a sales tax holiday?
A: State sales taxes range from about 4 percent to 7 percent, but can be as high as 9 percent when additional local option sales taxes are included. Most sales tax holidays include state and local taxes, but some exclude local taxes or make them optional, reducing the savings.
Your savings may also be limited by a dollar cap on purchases, whether it is based on the cost of an individual item or on the total receipt.
Q: I’m not comfortable shopping in stores because of the pandemic. Can I get the tax break by shopping online?
A: Generally, online purchases are eligible for the tax break, tax experts say. But that option may not help lower-income workers, who may lack internet access or the flexibility to be home from work to receive deliveries, Grundman said.
Q: What states are holding sales tax holidays this year?
A: States holding sales tax promotions in 2020, according to the Federation of Tax Administrators, are Alabama, Arkansas, Connecticut, Florida, Iowa, Maryland, Massachusetts, Mississippi, Missouri, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas and Virginia.
Alaska, Delaware, Montana, New Hampshire and Oregon don’t charge statewide sales taxes in the first place. And other states may exempt clothing and food from sales tax, at least up to certain limits, year round.