The sales tax holiday was established in 2007 as a way to help families with back-to-school expenses and to promote Maryland retailers. At the time, legislators thought that the state was on track for budget surpluses and could afford the lost revenue. The recession derailed that plan, and the state is still struggling to recover. Now, the sales tax holiday is a loss the state can ill afford.
Estimates are that the sales tax holiday costs the state treasury about $10 million in lost revenues. That's enough money to provide 1,000
families with emergency housing assistance, or state college scholarships for 4,000
students. And it comes as the state begins to grapple with how to fix the remaining $400-500 million structural deficit in the FY 2014 budget.
Since 1997, at least 20 states and the District of Columbia
have held tax holidays. They mostly involve clothes,
computers, school supplies, and appliances. Florida extended tax holidays to
hurricane-preparedness items. Yet many experts don't think stores benefit much from sales tax
holidays. Research has found that in many cases removing sales taxes for a few
days affects the timing of purchases rather than the volume. Business might be
up during a sales tax holiday, but it goes down at other times as people shift their purchases to the tax-free days. One Florida study even showed that retailers raised prices (or
lowered their normal discounts) during the tax holiday so they took 20 cents out
of every dollar customers saved on taxes.
Tax holidays can be confusing too. In Maryland
the purchase of clothing under $100 will be tax free; but if you exchange the
item after the tax holiday you have to pay tax on the new item (unless you
exchange it). If you get a rain check and redeem it after
the tax-free week, you'll have to pay tax. The store can’t break up something
that’s normally a set (like selling the parts of a suit separately) to get the prices
of the individual components under $100 and sell them tax-free. And the tax holiday
doesn't apply to accessories, like belts, scarves and neckties.
More importantly, the
sales tax holiday provides little relief to low-income Marylanders who are less able to shift the timing of their purchases
to coincide with the sales tax holiday.
A better way to help families struggling to stay afloat would
be to reform the tax system in Maryland to ensure the long-term revenue needed for services
like education, health care, and job training that help people make their own
way, take risks, and be productive. Asking out-of-state web-based retailers to play by the same rules as those on Maryland's main streets would be an excellent start.
Is the sales tax holiday worth it? It provides a little
excitement and free promotion for retailers. It gives government officials something to claim credit for. It may help families a little bit with back-to-school shopping,
but few shoppers would get excited about a “giant 6%-off sale,” which would amount to the same thing. It costs us, as
citizens, real money from our state treasury during a time when Maryland is
cutting public services and can ill afford to make the hole we are trying to
dig out of even deeper.
The bottom line is the tax
holiday is not a good use of our limited resources. Interestingly, both the progressive Institute on Taxation and Economic Policy and
the conservative Tax Foundation agree with me. While the tax holiday might help consumers and
businesses a little bit, a strong economy and safety net will help them more. That takes public
investment and those investments take money. There are more direct, less costly ways to
help retailers and working families. We can’t afford to be spending money on
gimmicks like tax holidays when we still have high unemployment and foreclosure rates,
and losses of revenue needed for education and healthcare.
