Both Virginia and the District of Columbia recently hosted back-to-school sales tax holidays; Maryland’s version starts on Aug. 23. The idea behind these events is to suspend collection of some sales taxes temporarily to give financially strapped parents a break when purchasing school supplies and clothing for their classroom-bound youngsters. Who could be opposed to that?
The Scrooges du jour are Jonathan Williams, Curtis Dubay and Johanna Mausolf of the Washington-based Tax Foundation, who argue in a recent paper that, while such tax holidays are politically popular, they are nonetheless good examples of bad public policy: “Sales tax holidays introduce costly economic distortions to the tax system, while adding compliance costs for retailers and saving consumers far less than advertised,” the un-jolly trio point out.
When the government essentially discounts specific items — even for such a short period of time, they argue — it distorts the marketplace and subtly alters consumer behavior. For example, data from New York demonstrated that the Empire State’s sales tax holidays did not increase overall consumer spending, just the timing of retail purchases.
And, while many merchants love the free publicity a sales tax holiday provides, they have also been known to raise their prices right before one is scheduled to make up for the not insignificant burden of complying with more than one set of tax rules. So in many cases, consumers only think they’re saving money.
But in areas like Washington, where regressive sales taxes increase the cost of even basic necessities while rising property and income taxes take bigger and bigger bites out of many young families’ stretched-to-the-limit budgets, what’s wrong with a little tax relief now and again?
That’s the problem, the three Tax Foundation experts say. Tax holidays are nothing but temporary fixes. “If lawmakers wish to reduce the burden of taxes on consumers, they should enact permanent, broad-based tax relief that avoids the costly economic distortions caused by tax holidays,” Williams and his compatriots maintain.
The Three Scrooges may have a point. But that would mean less tax revenue and, if taken to the extreme, less money for government officials to spend and more for families to keep. Such an outcome would be better than a holiday for families, but don’t expect those in government or who depend upon government to celebrate.
