There are certain things our elected officials do that make easy pickings
for a columnist, and right at the top of the list is the Bay State’s annual
sales tax holiday. (Make that mostly annual; we skipped 2009). As July waned,
the Legislature passed a bill declaring one for Aug. 10 and 11. Governor Deval
Patrick quickly signed it and so now, a few days hence, we all know where we’ll
be spending Saturday and Sunday: at the mall.
Sales tax holidays are a gimmick, a fake gift from politicians to
constituents. Retailers believe they are a cure for summer shopping blues, a way
to boost overall sales. For the most part, that doesn’t happen. Shoppers think
they are an opportunity to save money. In fact they often don’t. There’s a third
knock on the holidays, too: They cost state government money — last year,
Massachusetts lost an estimated $23 million. The better solution, if pols really
cared about helping retailers and shoppers, would be to cut the sales tax rate
across the board.
We’re hardly alone in this foolishness. The first sales tax holiday was in
1997, courtesy of New York. Massachusetts followed suit in 2004. This year,
according to the Federation of Tax Administrators, 17 other states are expected
to offer up their own version. Most are held in the summer. Some, like
Massachusetts, are only two days. The majority are three and a few —
Connecticut, Maryland, and Virginia — gave their citizens a full week.
I first wrote about the holidays in 2006, calling them “meaningless
anti-tax showpieces.” (You see just how much influence I have. . . ) Since then,
the academic arguments against the holidays have grown ever louder. In 2010, the
Federal Reserve Bank of Chicago raised doubts, finding some increase in the
sales of children’s apparel during the holidays but little effect otherwise;
they are “not a panacea,” the authors concluded. The Institute on Taxation and
Economic Policy in 2012 called them a “boondoggle.” And just last month, the Tax
Foundation ripped into the holidays, saying they “represent a real cost for
businesses without providing substantial benefits.”
All of this seems counterintuitive. How is it that saving money on taxes
wouldn’t be good for consumers? And given the crowds we’ll doubtless see this
weekend, how is it that anyone could credibly claim they don’t help
business?
Part of the answer is found in the first sentence of Globe reporter Michael
Levenson’s news story on this year’s holiday: “Wait. Don’t buy that television
just yet.” The holidays don’t really encourage more spending. They just
encourage people to delay their spending until the holiday occurs (or accelerate
the purchase of something they had planned to buy later). Yes, business will be
booming this weekend. But that comes at a cost of somewhat less business the
other 51 weekends of the year.
On the flip side, consumers don’t benefit that much either. Most studies
find retailers in effect use the tax breaks as a substitute for cutting their
prices. For example, as soon as the holiday was announced, major furniture
retailers such as Jordan’s started promoting a “double sales tax” discount of
12.5 percent up until the day of the holiday. Then on the holiday, the double
discount ends. Consumers won’t notice, since the state is paying the difference,
but in truth, from one weekend to the next, prices are actually rising 6.25
percent.
All of this might not matter much except that — even though they benefit
neither retailers nor consumers all that much — the holidays do hit state
coffers hard. Eventually, that needs to be made up, perhaps through budget cuts
or (this being Massachusetts) through a tax increase. Consider the absurdity of
Massachusetts raising its sale tax from 5.0 to 6.25 percent in 2009, and then
the next year offering a holiday that reduces revenue from that hike.
“If a state must offer a ‘holiday’ from its tax system, it is a sign that
the state’s tax system is uncompetitive,” argues the Tax Foundation. Since we
compete against other states, it would make much more sense to cut the rate
year-round. A sales tax holiday is like a torturer offering his victim a moment
of respite. Better to simply stop the torture altogether.
This column originally appeared in The Boston Globe on August 6, 2013.