This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The True Cost of State Sales Tax Holidays

By Sheryl Nance-Nash, DailyFinance

NEW YORK ( DailyFinance) -- 'Tis the sales-tax-holiday season, when states give the gift of tax-free shopping for clothing, computers and other back-to-school supplies.

It seems like a good thing: Take a little pressure off the pockets of cash-strapped parents, make retailers smile and make politicians look good for supporting tax relief.

But as states grapple with huge budget deficits, the debate is on over whether states should be more like Scrooge than like Santa.
More from DailyFinance
Overdraft Fee Misery Continues Despite Fed Rules
New Green Scheme: $18,000 Flip-Flops
Chinese Families Save Way More Than Americans

Last year, Illinois passed legislation creating a sales tax holiday. Now the state is sitting on the sidelines because it "just cannot afford it this year," according to State Sen. Toi Hutchinson (D-Chicago), who was the chief sponsor of the state's holiday last year.

What It Costs

It's expensive to be generous. When states give up their portion of the sales tax, they give up much-needed revenue for a weekend or, in some cases, for up to a week. Massachusetts will see a revenue reduction of $20 million to $25 million, projects Sujit CanagaRetna, senior fiscal analyst with the Council of State Governments. That's not far-fetched considering that last year's loss was about $20 million, according to Tom Astore, tax director at Rodman & Rodman.

Another example is North Carolina. According to press reports, the state department of revenue last year estimated that it gave up $14.5 million during its back-to-school tax holiday and $1.7 million during its November tax holiday for Energy Star appliances.

"Our sales-tax holiday results in the loss of $12 million each year, money that could support early childhood education or improve the educational attainment level of the state's young work force -- both of which were cut this year because of the failure to take a balanced approach to closing the budget shortfall," wrote Alexandra Forter Sirota, director of the North Carolina Budget and Tax Center, a public-interest organization, in The News & Observer. "The sales-tax holiday simply further undermines the adequacy of the revenue system to support shared investments."

Administering the sales-tax exemptions also creates significant red tape. Retailers and revenue departments, as well as local governments, must monitor and document the distinction of eligible and ineligible products, for example. In her opinion piece, Sirota calls for better, long-term solutions that will lead to real improvements in the state's revenue system.

Some States End the Holidays

In 2011, 17 states will conduct sales tax holidays, down from a peak of 18 states in 2010, according to Mark Robyn, staff economist and co-author of the Tax Foundation's Sales Tax Holidays: Politically Expedient but Poor Tax Policy.

The dip is not surprising. "Any effect on revenue must be a consideration for lawmakers, especially in light of the flailing economy," says Carol Kokinis-Graves, a state tax analyst for CCH.

Several states considered canceling their sales-tax holidays for that reason. "Texas broached the topic, but as far as I know, Illinois was the only state that cancelled it," CanagaRetna says. Aside from school supplies, some states also include Energy Star appliances, hurricane-preparedness products, firearms and hunting supplies in their sales-tax holidays.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $112.00 -0.81%
FB $89.56 -0.19%
GOOG $633.89 -0.58%
TSLA $242.99 0.00%
YHOO $33.69 0.00%

Markets

Chart of I:DJI
DOW 16,654.77 +369.26 2.27%
S&P 500 1,987.66 +47.15 2.43%
NASDAQ 4,812.7080 +115.1720 2.45%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs