NEWS ANALYSIS:
Planning on buying your daughter some sexy lingerie for her first day back to school this fall?
Well, now you can — free from Virginia state sales tax, thanks to this weekend’s back-to-school clothing and supplies tax holiday.
But, if you’re planning on purchasing some new shin guards for your same soccer superstar daughter who plays on her school’s team, forget it.
Those goods aren’t exempt from the state sales tax during the Friday-through Sunday tax holiday, because state officials decided that doesn’t fall under the category of “clothing.”
“That’s kind of a good example of how it’s really arbitrary,” said Elizabeth Malm, a Tax Foundation economist who worked on this year’s sales tax holiday study ’Sales Tax Holidays: Politically Expedient but Poor Tax Policy.’
“The term ’clothing’ can mean a lot of things,” Ms. Malm added. “So you get these weird distortions as to what applies and what doesn’t.”
Virginia politicians, some of whom sent out emails reminding taxpayers of the holiday this weekend, tout sales tax holidays as a chance to buy needed supplies free from the state’s sales tax, which ranges from 5.3 percent to 6 percent, depending on where you live in the Old Dominion.
“I hope Virginians will go out and take advantage of this holiday by spending their back-to-school dollars at Virginia retailers,” Gov. Robert F. McDonnell said in an emailed statement this week. “Not only will this continue to benefit our state’s economy and employers, it will save Virginians some money at the same time.”
But that’s just not accurate, according to economists like Ms. Malm, and the arbitrary list of qualified items is just one issue. Sales tax holidays are really just political gimmicks that benefit politicians more than taxpayers and consumers, she said.
Virginia shoppers have more reason to pay attention than those from other state. With three annual sales tax holidays — one for school items, one for hurricane supplies and one for Energy Star appliances — Virginia is tied with Louisiana for the most annual sales tax holidays in the nation.
Here are the top 10 reasons Tax Foundation economists say sales tax holidays are poor policy:
1. The state-selected list of exempt items is arbitrary, meaning the state can distort consumer choices by picking market winners and losers. Lingerie and wedding attire count as clothing, but shoulder pads do not. For another example, backpacks are exempt from taxes, but duffle bags aren’t.
“It’s sort of distorting what people like to buy,” Ms. Malm said. “I think the tax code should minimize any decision that’s based on taxes from what you buy. It should be based on economic reasons or your preferences.”
2. Tax holidays give politicians points with the public while distracting from the real issue of reforming the tax code. If there’s a need to ease the burden of taxes, maybe the burden is the real issue, conservative advocates say.
“If the problem is that policymakers 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 Tax Foundation’s vice president of legal and state projects, told Watchdog.org during last year’s back-to-school tax holiday.
3. Sales tax holidays give businesses the opportunity to boost prices beforehand, so shoppers may actually pay more during the tax holiday than they would have a week earlier. In 2009, for example, a reporter in North Carolina found that some prices at a local JC Penney were much cheaper the week before the tax holiday than during it.
“It’s kind of misleading to consumers,” Ms. Malm said. “They might not actually be getting the benefit that they think they’re gaining. So, it’s kind of good for them to be smart about doing their research before they go out and shop on those holidays.”
4. Tax holidays seem to simply shift spending, rather than increase it, so the economy doesn’t really get a boost. Virginia’s Department of Taxation acknowledged to Watchdog.org during last year’s back-to-school sales tax holiday that it can’t really show any net benefit.
“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.
5. Tax holidays may not actually help low-income families, as advocates for them say, in part because poorer people use more of their income on necessities, the purchases of which are harder to defer than luxuries.
“Some politicians will tout that they helped low-income individuals because it lessens their tax burden for a little bit,” Ms. Malm said. “But there’s also research that shows that higher-income individuals are better able to shift their consumption because they have a little more cushion. They can wait to buy something, and a low-income person may not be able to.”
6. Tax holidays sometimes have pretty low dollar caps on qualified items. In Virginia’s upcoming school-related sales-tax holiday, only school items under $20 qualify. And as the fine print in the tax-free list notes, anything over $20 is automatically disqualified from any tax exemption, even if it otherwise meets the criteria.
7. Tax holidays can place a burden on businesses, which have to restructure their technology systems to eliminate the tax that’s usually there. The Tax Foundation found that the “extra administrative and labor costs associated with a sales tax holiday are an unjustifiable burden” given that sales tax holidays seem to shift, rather than increase, sales.
8. Shoppers may unknowingly buy items that look like they “should” be on the list, but actually aren’t because the list is arbitrary.
“Some research shows those impulse buys are also shifted in time, not really increased in the aggregate overall,” Ms. Malm said. “Even if they do make impulse buys, I don’t know if I like to see the fact that consumers are kind of misled or tricked to buy into things, just because the sales tax holiday has led them to do so.”
9. Tax holidays simply become an arms race among states, fostering beggar-thy-neighbor windfalls that really don’t improve the economy overall. Like tax incentives for film production, sales tax holidays just become one more tool for states to up each other in tax breaks, Ms. Malm said.
“You see one state do it — other states want to do it just because they know they’re competing with the state next to them.”
10. Some states are beginning to eliminate their tax holidays. In 2013, 17 states are offering at least one tax holiday instead of the 19 that did in the peak of 2010, indicating that states are rethinking things, according to the Tax Foundation.
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