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Tax holidays, popular but bad policy

By Kay Bell · Bankrate.com
Tuesday, July 27, 2010
Posted: 2 pm ET

If you're a shopper, especially one with school-age children, you love state sales tax holidays.

If you're a retailer, you love them, too, even though the short-term changes in tax collections causes you some administrative hassle.

And if you're a politician, especially in an election year, you definitely love tax holidays.

So who's not so fond of them? State budget officers.

Take, for example, the Comptroller of Public Accounts for Maryland. The state is holding its first tax holiday in four years.

The Old Line State's 2006 tax holiday was only five days. The last time it held a week-long event similar to the one coming up this month was in 2001; that year, the state lost $5 million in revenue.

In 2010, estimates are that Maryland's treasury will lose close to $10 million because of today's higher tax rate and inflation.

So why give up all that cash when states are struggling to make ends meet?

Cynics might say that the tax-free week was reinstituted this year because Democratic incumbent Gov. Martin O'Malley, who's up for re-election this fall, is trying to make voters forget that a couple of years ago he raised Maryland's sales tax from 5 percent to 6 percent.

I say that's probably true. Sadly, voters are as short-sighted as politicians when it comes to taxes.

I understand that we're in a recession folks and many of you, especially if you've lost your job, are looking to save every possible cent. But tax holidays are not the best way to deal with individual or government money woes.

Indeed, a couple of jurisdictions this year held a firm fiscal line. Georgia lawmakers decided their state couldn't afford to forgo sales tax collections this year and canceled the Peach State's tax holiday. So did the leaders in the District of Columbia.

Tax policy analysts applaud those states that don't succumb to what they describe as gimmickry that distracts lawmakers and taxpayers from real, permanent and economically beneficial tax reform.

"Sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy," says the Tax Foundation in its latest report on the holidays. "They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers."

If a state truly believes that its residents need a "holiday" from its tax system, then that’s a sign, say Tax Foundation researchers, that the state's tax system is uncompetitive.

Policymakers who really want to save money for consumers should cut the sales tax rate year-round.

Yeah, that'll happen. When we have elections every year.

Do you depend on state sales tax holidays to save a few tax dollars? To help you out, Bankrate has compiled a table of the states holding tax holidays this fall.

Do you just buy items that are tax-free during the holiday? Or do you also end up purchasing a few nonexempt items during the sales tax holiday period?

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