Everyone loves a bargain, but at what price? The sales tax holiday being debated on Beacon Hill is an enticing prospect — a little gift legislators can offer both to consumers and retailers looking to boost sales during the traditionally slow dog days of summer. But the sweetener comes with real costs to the common good, and the state would be better off putting this expensive bauble back on the shelf.
Massachusetts has lifted the 6.25 percent sales tax on specified items for a weekend in August since 2004, with a few exceptions. The Great Recession year of 2009 was one. Last year, in the face of a $311 million budget gap, legislators also declined to authorize the holiday. Even Governor Charlie Baker, no one’s idea of a tax-happy big spender, agreed that skipping the holiday should be “on the table” while the state repaired its finances. The decision saved Massachusetts an estimated $26 million.
Now the fiscal situation is palpably worse, as made evident earlier this month by the bond rating agency Standard and Poor’s. The agency reduced the state’s credit rating to its third-highest tier, citing the looming budget shortfall in the coming fiscal year — at least $750 million, according to the Mass. Taxpayers Foundation – and the state’s failure to meet benchmarks for contributing to the “rainy day” fund. To be sure, the state’s AA rating is still enviable, and the $25 million to $30 million the sales tax holiday will cost won’t by itself break the bank. But the needle is moving in the wrong direction. The response to the rating agency’s warning light should be to slow down, not gun the engines with costly tax breaks.
Making the sales tax holiday permanent, as some bills propose, would be even worse, locking the state into a bad deal. More than 20 states have flirted with sales tax holidays since the 1990s, and many have dropped or paused the experiment.
Because sales taxes are regressive, those arguing for their suspension often paint it as favoring the working class. But it’s the better-off consumers who have the flexibility to time their purchases to take advantage of the holiday. Even some retailers concede that the tax holiday is mostly psychological; shoppers enjoy poking a stick in the eye of the tax man. For all the hoopla and crowds attracted to the tax-free weekend, though, it’s hard to prove overall increases in sales. Most consumers planning big-ticket purchases will wait for the holiday, so their spending is just shifted around.
The retailers do have a legitimate beef that they face unfair competition from online sellers, because Web shoppers can often avoid sales taxes. This is an obsolete vestige of the 1990s, when Congress thought the nascent industry needed coddling. Under existing law, Internet sales may be taxed only if a company maintains a physical presence in the state. Massachusetts has proposed a novel interpretation of that law in a new regulation slated to take effect on July 1, claiming that web browser “cookies” constitute a physical presence. Predictably, the state has been sued by online retailers, so this particular fix is in doubt. But the way to level the playing field is to make Web shoppers pay their fair share, not starve the state of needed revenue. The lost money will have to be made up somewhere, in cuts to already-strapped state services that benefit a broad swath of residents.
In an interview with Globe reporters earlier this month, Baker called the S&P bond rating downgrade “a wake-up call.” Let’s hope the siren song of an easy tax giveaway doesn’t lull him and the rest of Beacon Hill back to sleep.
Renée Loth’s column appears regularly in the Globe.