Back-to-school time in Massachusetts isn’t just celebrated by stir-crazy parents. It’s also a chance to shop sales tax free — or at least it was, until the state decided not to reinstate its sales-tax holiday this August for the first time since 2009 due to slowing state revenue.
The Bay State isn’t the only state to forgo its sales-tax holiday in order to raise additional funds. Kansas, North Carolina, Nebraska, Rhode Island and Wisconsin, state legislators are among those that have also decided against holding new tax holidays or reinstating them during the last few years, and they’ll be saving money as a result, according to a July report by the Institute on Taxation and Economic Policy, or ITEP, a nonpartisan think tank.
"There are lots of things tax experts disagree on, but we all agree sales tax holidays are not good tax policy," said Joseph Henchman, vice president of legal and state projects for the Tax Foundation.
ITEP estimates that state and local governments that retain the holidays will lose out on more than $300 million in revenue due to the holidays this year. Those losses in revenue come as states are also poised to see aggregate tax revenue growth below 4 percent this year, down from 5.5 percent in 2015, according to Moody’s Investors Service.
The holidays typically take place during a few days in August and allow for states to exempt certain items from sales tax, such as school supplies and clothing. Some states have separate tax holidays for items such as energy-star products, firearms and hurricane preparedness items.
Seventeen states will have a sales tax holiday this year, according to the Tax Foundation.
The tax holidays are a "perfect example" of economics and politics being at odds, said William Fox, a business professor at the University of Tennessee at Knoxville. The holidays only move the time of year that people buy items rather than encouraging them to buy more, thereby reducing any economic stimulation, he said. Still, they sound appealing from a political standpoint, which is why legislators keep passing them.
"What could be better from a political perspective than a holiday from paying taxes?" Fox said. "This is great, right? Politically, I think they’re incredibly easy to sell."
Georgia state legislator Brett Harrell, a Republican, said the state should forego its tax holiday and instead lower its sales tax rate and broaden the base of items taxed. The holiday causes the state to lose about $70 million in revenue each year, he said.
"Things such as a sales tax holiday on a few chosen products make it more difficult to adopt more comprehensive and permanent tax reform," he said, adding that an increasing number of legislators in Georgia are realizing that the holidays have limited benefits.
Officials in Massachusetts decided not to reinstate the state’s sales tax holiday this August due to slowing state revenue, said Democratic legislator Stanley Rosenberg, who is president of the Massachusetts Senate. The state has struggled to maintain government services due to rising health-care costs, he said.
The Massachusetts Department of Revenue estimated the state lost about $25.5 million from the holiday in 2015. This lowered the amount of money given to a trust fund for school construction by about $4 million, the department said in a Dec. 31 letter to the state’s comptroller.
Rosenberg hasn’t encountered much pushback from residents, other than a few e-mails, he said. The state senator did run into one resident who asked him about it and gave him a "glare," he said.
A growing number of state senators say they will not vote in favor of the holiday again, Rosenberg said. "It is a politically popular thing, but an increasing number of members are saying there’s a better way to spend $25 million than a sales-tax holiday," he said.
But the holiday generates other economic benefits, such as retail employees working additional hours, said Bill Rennie, vice president of the Retailers Association of Massachusetts. For some of the association’s members, the sales-tax holiday has become a bigger sales event than Black Friday weekend, Rennie said.
Massachusetts retailers close to the border have to compete with neighboring New Hampshire, which doesn’t levy a sales tax at all. Additionally, the retailers are negatively impacted by shoppers buying items that aren’t taxed from out-of-state companies online, he said.
"It might be only two days, but it’s that equalizer," he said. "It puts the sellers here on an equal playing field."
State revenue raised indirectly from the sales-tax holiday, such as from related income and corporate taxes, totaled $2.5 million in 2015, according to estimates from the Massachusetts revenue department.
The Institute on Taxation and Economic Policy said in its report the holidays are being used as a substitute for reforming state sales taxes, which negatively impacts lower-income people. The short-lived exemptions offer minimal relief to residents, according to the report.
"Revenue lost through sales-tax holidays will ultimately have to be made up somewhere else, either through painful spending cuts or increasing other taxes," the report states.
Other states with fiscal pressures, such as Louisiana, are sticking with their sales-tax holidays this year. After enacting major budget cuts this year, Louisiana will provide residents with a 2 percent tax exemption on the state’s 5 percent sales tax rate on Aug. 5 and 6.
Louisiana’s "goofy" version of the sales-tax holiday probably was a result of "political horse trading" when the state temporarily raised its sales tax by 1 percent this spring, said Scott Drenkard, director of state projects for the Tax Foundation.
"That’s really frustrating as someone who wants a neutral tax code, one that raises the amount of revenue necessary but doesn’t affect business or personal decisions to the most extent possible," he said.
© Copyright 2023 Bloomberg News. All rights reserved.