For children across the country, the beginning of August signals another school year right around the corner. For parents, it means mandatory shopping trips for school supplies and clothes. And, in a handful of states, those parents can save some cash, thanks to holidays that exempt those purchases from sales tax.
Sales tax holidays apply to clothing or school supply purchases in 15 states in August, and most of the holidays were designated for the first weekend of the month. Most states place caps on tax-exempt purchases, usually $100 for clothing items and $20 to $50 for school supplies.
About a half-dozen states exempt computer purchases from sales taxes. Residents in Alabama don't pay tax on the first $750 in computer equipment; people in Georgia and New Mexico have up to $1,000 to spend with no taxes; and Missourians get $3,500 in computer purchases tax-free.
Sales tax holidays are popular with state legislators — and voters. But economists say they don't make good public policy.
"Just because sales tax holidays are popular among politicians, consumers and businesses, that doesn't mean they make economic sense," said Liz Malm, an economist at the nonpartisan Tax Foundation. "If a state must offer a holiday from its tax system, chances are there is something wrong with the tax system overall and it isn't competitive."
Studies show the holidays cost states tens of millions in lost tax revenue. Georgia lost an estimated $41 million on its sales tax holiday last year, according to Georgia State University's Fiscal Research Center. Massachusetts left $23.3 million on the table during its 2012 holiday, the state Revenue Department reported.
Industry groups, however, love the tax holiday.
"Our members that track these find they drive traffic into the stores," Rachelle Bernstein of the National Retail Federation said in an interview last year. "When you're driving traffic into the stores, you're increasing sales, not just on items that are subject to the sales tax holiday."
Ohio and Michigan were the first states to offer sales tax holidays of any kind, back in 1980. At the time, it was an effort to spur the sputtering automotive industry by limiting sales taxes on cars. New York spawned the idea of the holiday in back-to-school shopping season in 1997 as a way to entice residents to shop in-state, rather than traveling to New Jersey, which had a lower tax rate. Massachusetts did the same thing in 2005, when it offered residents the chance to save sales tax on up to $2,500 in purchase totals, rather than crossing the border to New Hampshire, with no sales tax.
But some states killed their sales-tax holidays when revenue began trending downward during the recession. Florida, Maryland, Massachusetts and the District of Columbia have all taken a break from tax holidays or ended them. Twenty-three states and the District of Columbia have experimented with tax holidays at some point since 2002.For children across the country, the beginning of August signals another school year right around the corner. For parents, it means mandatory shopping trips for school supplies and clothes. And, in a handful of states, those parents can save some cash, thanks to holidays that exempt those purchases from sales tax.