Tax Free Week: Wasteful, Ineffective, and Expensive

Again this year, Maryland is promoting its annual back-to-school “sales tax holiday.” And again, we are obliged to point out that the sales tax holiday is a popular but expensive and ineffective program, as we did in 2012 and 2011.

From August 10 to 17, purchases of clothing under $100 in Maryland will be exempt from the regular six percent sales tax.

So, back-to-school shoppers get a “GIANT 6 PERCENT OFF" that week.

So what’s wrong with that?

First of all, shoppers get better discounts in the normal marketplace. This week, Kohl’s is advertising “15, 20 or 30 percent off.” Macy’s: “Back to School – save 25 to 50 percent.” Sears: “50 percent off back to school styles.” And so on.

A clothing store would be embarrassed to advertise “SIX PERCENT OFF.” But they will promote “NO SALES TAX” in large type.

A study in Florida shows that the stores provide smaller sales discounts when they can promote the tax holiday – so the savings to customers is even less.

And other studies show that most of the increased business is really just people buying during the tax-free-week what they would otherwise have bought during another week.

And it’s complicated. If you buy a set with a blouse and a scarf, you have to pay sales tax, because the scarf is an accessory and is not tax exempt. If you return your purchase later and exchange it for the same item in a different size, you don’t need to pay tax. If you exchange it for a different item, you owe tax at that time (even though the new item would have been tax exempt if purchased during the tax free week). Here’s all the restrictions, exclusions and other fine print.

 And, the state government loses over $5 million in revenue. If we wanted to help struggling families with children, we could use this money in much more efficient, effective, and well-targeted ways. We could reduce the waiting list for child care assistance or provide school breakfasts for some of the 200,000 students in schools that are eligible but where funding is not available.

That little six percent is part of our contribution to important services in our communities - education being one of the largest and most important. The Institute on Taxation and Economic Policy has a nice fact sheet on tax holidays here.

Here’s a government program that does not really help families, does not really help businesses and is very expensive. So, if we want to eliminate wasteful, ineffective and expensive government programs, maybe we ought to start with the tax free week.