Buzz grows over state tax holidays
Tax-free days cost states money but can prod lagging American spending.
The mother-daughter team of Renee and Kristen Turner stuck it to the man this weekend.Skip to next paragraph
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A new MacBook, iPhone, and printer in tow, the duo didn't pay a cent of sales tax, saving about $100. "That's a lot of money right now," says the elder Ms. Turner. The downside? They had to wait in line outside the computer store at Lenox Square Mall for nearly two hours.
Across Georgia, Alabama, the Carolinas, and the handful of other states that held back-to-school tax holidays last weekend, shoppers jostled for pens and pads, stood in line for new computers, and tried on sneakers in droves in what has become the year's second-biggest shopping splurge.
The stakes were higher than usual this year as consumers looked to pick up some value for their inflation-eroded dollars and restless retailers vied to recoup a 0.2 percent dip in consumer spending due to high prices.
To some, the growing popularity of tax holidays – and the willingness of states to hold them even in the face of dwindling tax revenues – represents a troubling shift in tax policy. Not only are states using a gimmick to manipulate consumer behavior, critics argue, but the resulting revenue losses can also have a destabilizing effect on how states govern.
"At one time the tax system was used to raise revenue and right now it's being used to implement this or that social policy or goal," says economist Patrick Fleenor at the Tax Foundation, a tax research and public education organization in Washington.
New York held the first back-to-school tax holiday in 1997. Since then the events have grown, kudzu-like, often expanding into neighboring states as legislatures engage in cross-border retail wars to keep their residents from shopping out of state.
With Massachusetts last week adding a mid-August holiday, 16 states plus the District of Columbia will have staged such events this year. Five states, including Georgia, have added special tax-free days on energy-efficient appliances.
"With regard to sales tax holidays, economists uniformly pan them and elected officials love them," says Don Boyd, a senior fellow at the Rockefeller Institute of Government, in Albany, N.Y. "They're not hugely costly, but the impact on the total amount of spending by consumers is virtually indiscernible. No state should expect any boost to the economy from a sales tax holiday."
But many retailers hope to capture some of the $594 each American family is expected to spend this year on back-to-school supplies (including computers) – up from last year's $563, according to the National Retail Federation. What's more, one-fifth of parents say they've set aside a portion of this year's federal stimulus check for back-to-school purchases.