By Kathryn Watson – Watchdog.org Virginia Bureau
ALEXANDRIA—Parents and their school-age munchkins will stampede Virginia Walmarts and Targets this weekend for the annual back-to-school sales tax holiday, spared the 5 percent state sales tax and spurring the economy.
That’s how it’s supposed to work.
In fact, such sales tax holidays are “political gimmicks” that merely concentrate spending, rather than liberate consumers or the economy, according to a study released Monday by the Tax Foundation, a nonpartisan tax research group.
Seventeen states offer sales tax holidays—and some of those states offer several throughout the year. In 2012, Virginia and Louisiana offered three.
“If the problem is that policy-makers want to distract from real tax reform and get credit for being tax cutters and doing ribbon cuttings without actually achieving anything meaningful, well then it’s hard to come up with a better solution to that than sales tax holidays, because that fits perfectly,” Joseph Henchman, the report’s author and the Tax Foundation’s vice president of legal and state projects, told Watchdog.org Virginia Bureau.
The 16-page report said sales tax holidays impose “serious costs on consumers and businesses without offsetting benefits” rather than provide a real economic boost or meaningful tax relief.
That’s more conclusive than anything the state has said about the practice.
“The department does not have sufficient data to report the revenue impact of its three sales tax holidays or to determine whether the sales tax holidays spur economic growth or increase consumer purchases,” Joel Davison, public relations manager for the Virginia Department of Taxation, said in a statement emailed to Watchdog.org Virginia Bureau.
And yet, for the seventh summer in a row, the governor’s office has dubbed a Friday, Saturday and Sunday the back-to-school sales tax holiday weekend, striking the 5 percent sales tax on selective school-related items under $20. The other two tax holidays come in May for hurricane and emergency preparedness, and in October for Energy Star and Water Sense products.
“What better way to beat the summer heat than to go out and shop and support Virginia businesses,” said Gov. Bob McDonnell last week in a statement.
The Tax Foundation report concludes that tax-free holidays:
- Shift the time of sales, rather than boost the amount of sales
- Create added tax compliance and labor burdens for businesses
- Distort consumer choices by arbitrarily choosing some products over others
- Give only a small amount of tax savings to the poor, and more to others
- Distract policy-makers from permanent tax solutions
- Give stores room to raise their prices so consumers pay more
PS: Stores can boost their prices and customers often make “impulse” purchases for things they thought were on the tax-exempt list but aren’t, said Henchman. And in Virginia this weekend, shoppers will have to double-check price tags to make sure each item falls under the $20 limit to qualify. Henchman called that a “relatively low” cap.
The tax break is also more of a burden than a blessing for many businesses — especially smaller ones — that have to reprogram registers and boost staff, the Tax Foundation says.
“From the perspective of a business trying to operate at maximum efficiency, the extra administrative and labor costs associated with a sales tax holiday are an unjustifiable burden, considering the unlikelihood that sales tax holidays increase overall sales,” the research group found in a similar 2011 report.
That’s the case for back-to-school weekend in Lynchburg, where Thomas Joyner is the executive team leader for logistics at Target. The annual back-to-school sales tax holiday definitely drives foot traffic — by roughly 30 to 40 percent over a normal weekend. But it doesn’t necessarily drive sales, he said.
“It doesn’t increase the sales as much as you’d think because there are so many small items, so many 10-cent books and pencils,” Joyner said. “And so you’re doing a lot of traffic, but it’s on a smaller scale.”
And all those items require more hands on deck.
“It does take a long time to ring all those things up … notebooks and portfolios, binders,” Joyner added.
Henchman said the alternative to a sales tax holiday depends on what the policymaker views as the problem that tax relief would be needed. If the sales tax is too high, reduce it year-round, not just for one weekend. If low-income citizens don’t have access to the goods they need, then the solution is a targeted, narrow program rather than a tax-free-for-all.
But no matter how ineffective a sales tax holiday is economically, it stays popular politically, said Henchman. Retailers like the free, government-publicized sale. People view taxes as a heavy burden, so they’ll take the paltry sale. And politicians?
“Politicians appreciate the ability to be labeled a tax cutter even though they’re not really cutting taxes in any meaningful way,” said Henchman.