Buzz grows over state tax holidays
Tax-free days cost states money but can prod lagging American spending.
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Some retailers report spinoff effects far from the school supplies aisle. In Virginia last year, a billiards table company had its biggest sales weekend on record during the tax holiday.Skip to next paragraph
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"This summer has not been a graceful one for retailers, but will [consumers] let go of their purse strings [for the tax holiday]? That's the $64,000 question," says George Peyton of the Retail Merchants Association, in Richmond, Va.
In Georgia, total sales from the holiday were expected to set a new record. The full impact won't be known until quarterly reports are issued, when retailers and politicians are likely to pore over the results for insights into the American shopper's mood and mind-set.
From Wal-Mart to Foot Locker, the mind-set last weekend was glee, as consumers anticipated a respite from inflation. "They should do more of these," said Edward Underwood, a Chamblee, Ga., debt collector, who saved $7 on a pair of shoes.
The results have even turned some critics into supporters. Florida Tax Watch, a taxpayers' group, originally opposed the holiday in Florida, but this year lamented the Florida legislature's decision to renege on the holiday in the face of a $6 billion state budget shortfall.
"It's a tax cut, so it reduces revenue," says Kurt Wenner, senior research analyst at Florida Tax Watch. "In the short term, that means less money to spend, but in the long term it could ... stimulate the economy."
But can states afford tax cuts?
Massachusetts' approval last week of a mid-August holiday was misguided, says Mary Grant, a state representative who voted against the bill. In the Bay State, most of the 5 percent sales tax goes toward mass transit and school construction. The estimated $15 million revenue loss is simply too big, she says.
"We all have access to sales that were much higher than 5 percent at other points of the year, so I felt we still had our opportunity ... to buy these consumer items" at a discount, she says.
Nebraska state Sen. Bill Avery, who sponsored his state's tax holiday law, acknowledges that there's a "psychological element" to the policy.
"Consumers see it as a chance to stick it to the government, and the total revenue impact is basically a wash," he says. "You get to have your cake and eat it, too."
Economists generally dislike policies that create "distortionary" spending. Instead of a week-long tax holiday, for example, a 1/52nd reduction in the income tax would generate greater value for both consumers and the economy, says Mr. Fleenor at the Tax Foundation.
Yet the tax holiday has not proved to be as detrimental as many economists had warned, says Bryan Caplan, a George Mason University public-finance expert who this spring backed the idea of a federal gasoline tax holiday.
Despite the artificial stimulus of a tax holiday, he says, "we seem to be doing OK."