The Week Ahead, Dog Days of August Edition

Last week we blogged about the need to reform corporate income taxes as part of any rate-cut deal, and about why "the tax-free week" is a wasteful, expensive and ineffective program. Also Marceline White of the Maryland Consumer Rights Coalition guest-blogged about how Baltimore City's proposed use of foreclosure settlement funds would not actually help victims of foreclosures. 

For the week of August 12th through the 18th:

Monday, August 12 the Task Force to Study Economic Development and Apprenticeships meets at 3 pm in Annapolis.


Wednesday August 14 the Telemedicine Task Force Telemedicine Solutions And Standards Advisory Group meets at 9:30 am in Baltimore

Wednesday August 14 - Saturday August  17; The Maryland Association of Counties (MACo) holds its annual conference in Ocean City. The MACo conference is the traditional start of political and policy-making activity in preparation for the January legislative session. The Governor's address to the conference on Saturday is often our first look at the Administration's top priorities for the coming year - in this case Martin O'Malley's last year as Governor.

On Thursday, August 15, the US Bureau of Labor Statistics releases data on inflation and wages for July.

Stay cool.  

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.

Tax Free Holiday Not a Good Deal

Starting this Sunday, August 12th, through the following Saturday, August 18th, Marylanders will be able to purchase certain clothing items costing less than $100 without paying the state's 6% sales tax (you can find more information about the holiday here). However, it's not as good a deal as it sounds.

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.

Maryland's Giant Six-Percent-Off Sale

Maryland’s sales-tax-free week is almost here again. I call it “MARYLAND’S GIANT SIX-PERCENT-OFF SALE.” 

 

A law passed back in 2007 established August 14-20 of this year as a “sales-tax holiday” because legislators thought that by now the recession would be over and the state could afford the revenue loss. But tough economic times have lasted longer than anyone expected, to the point where state is really giving up money it doesn’t have.

For that week, there will be no state sales tax on clothing items under $100.

If the department stores advertised 6% off all clothes, it would not be a very exciting sale. But darn it, state Comptroller Peter Franchot and other politicians sure get excited about the tax-free week.

 You can see a good report from WMAR TV-2 here.   It includes about 20 seconds of an interview with me.

Anyway, it’s my job to be the wet blanket. This “tax holiday” is fun, but it’s a costly gimmick.

The holiday is estimated to cost the state treasury about $10 million in lost revenue. That’s enough money to provide 1,000 families with emergency housing assistance, or 5200 scholarships to state colleges. And it comes after the state made big cuts to education, healthcare, and other services to close a $1.5 billion revenue hole in the current budget.

 The tax free week is supposed to help Maryland families with back-to-school season expenses, and to promote Maryland retailers.

The economic research shows that stores don’t benefit much from sales tax holidays. They affect the timing of purchasers rather than the overall amount. Business might be up during a sales tax holiday, but it goes down other times as people simply shift their purchases to the tax-free days.

One Florida study showed that retailers raised prices during the tax holiday so they got 20 cents out of every dollar customers saved on taxes.  

More importantly, the sales tax holiday provides no relief to low-income Marylanders the other 51 weeks of the year while giving an unnecessary break to a millionaire who could easily afford the $4.80 tax on an $80 dress shirt. Low-income families have to spend most or all of what they make just getting by. With less disposable income than wealthier taxpayers they aren’t as able to shift the timing of their purchases to coincide with the sales tax holiday without throwing their finances out of kilter.

A better way to help families that struggle to stay afloat would be to have a tax system in Maryland that provides the revenue needed for services like education, health care and job training that help people make their own way over the long haul. It would make more sense to reinstate the recently expired upper bracket for the highest-income households in the state, and using the money to prevent  cuts to education, health services, and job training programs.