Sales tax holidays like the one happening in Iowa this weekend may sound nice, but they aren’t good public policy.
And, yes, I can already hear groaning from the parents and grandparents reading that first sentence. Bear with me.
For those who are unfamiliar, for the past 16 years, Iowa residents have been given two days in August to purchase various back-to-school items that cost under $100 without paying sales taxes. In addition, since 2000, the legislature has mandated that all retailers participate.
Supporters of these holidays assert the incentive stimulates the economy by encouraging shoppers to purchase more of the goods included on the state’s tax-free list, even if some are impulse buys. But, research has time and again shown this to be false.
The New York State Department of Taxation and Finance found in the late 1990s that temporary tax holidays on clothing did not stimulate local economies. What the holidays did accomplish was an incentive for shoppers to delay or speed up the timing of purchases they already planned to make.
More than a decade later, a University of Michigan study looked at nine different state holiday programs and found that timed purchases made up as much as 90 percent of sales during the tax holidays.
While the Iowa list of tax-exempt items has shifted with time, it continues to reflect what’s considered important by state officials and not necessarily what is most economical. And, at times, it just doesn’t make sense.
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For instance, if you purchase a belt with a buckle, your purchase will be tax-exempt. A belt with no buckle, however, is taxed. “Aerobic clothing” is exempt, but athletic pads and supporters are not. Bowling shirts are tax-free, but bowling shoes are taxed.
Most ready-to-wear everyday clothing (and bridal gowns) are free of tax, but those who hope to save a few bucks by sewing their own clothing will pay tax on fabric, thread and notions.
Perhaps worst of all, special tax-free holidays distract from the need for a larger conversation about tax reform. Wouldn’t it be better to broaden the tax base and lower the overall rate than to rely on complicated special exemptions?
State and local governments are expected to lose $3.7 million in revenue during this year’s sales tax holiday. That’s slightly up from last year’s $3.6 million deficit.
If politicians are truly interested in promoting economic development and helping consumers, they should focus on substantive and lasting reforms that provide genuine tax relief. They’d take aim at sales tax specifically because it is regressive, meaning it falls far more heavily on low- and middle-income taxpayers than on those with higher incomes.
Sales tax holidays are gimmicks that do not provide real or lasting relief. They generally shift planned purchases to a specific time frame.
Finally, special tax exemptions pose an additional administrative burden on Iowa’s small businesses. That the Iowa tax holiday includes state and local option taxes only increases the quantity of red tape retailers must wade through in order to comply with the law.
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