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.