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Tax Holidays Continue as State Budget Deficits Loom

Although states continue to slash programs to close budget gaps, many still plan to hold sales-tax holidays to lure budget-conscious shoppers to hit the stores.

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While these tax-free weekends are intended to increase consumer spending and economic growth, a July 29 report from the Tax Foundation claims that these promotions do not increase growth and instead merely shift the timing of shoppers’ purchases.

Of the 17 states that will hold tax-free weekends this year, 16 faced budget shortfalls for the 2012 fiscal year. Although some states have cancelled their tax holidays due to budget concerns, most have kept them.

“There was discussion about it, but lawmakers continued it because it was a chance for Texas families to continue saving,” said R.J. DeSilva, spokesperson for the Texas comptroller, about possibly canceling Texas' tax-free weekend.

Texas will lose an estimated $62.1 million this year in sales and local tax revenue during the Aug. 19-21 weekend, DeSilva said. According to the Center on Budget and Policy Priorities, the state faced a $9 billion budget shortfall for fiscal 2012.To close these gaps, Texas has made deep cuts to K-12 education, higher education, and Medicaid.

Florida also faced significant budget gaps as its legislature recently cut programs to close a $3.7 billion budget gap, according to the Center on Budget and Policy Priorities. The state is projected to lose an estimated $25.5 million during this year’s sales holiday, said Renee Watters, a spokesperson for Florida’s Department of Revenue.

“I’ll tell you right now—$25 million would not have filled any one of those gaps by itself,” said Lane Wright, press secretary for Gov. Rick Scott of Florida.

Wright added that although the state would take a “small hit” by losing out on potential revenue for programs, Floridians and their wallets would still benefit from the weekend.

2011 State Sales Tax Holidays

State
2011 Dates
Alabama August 5-7
Arkansas August 6-7
Connecticut August 21-27
Florida August 12-14
Iowa August 5-6
Louisiana August 5-6
Louisiana May 28-29
Louisiana September 2-4
Maryland August 14-20
Maryland Feb. 19-21
Massachusetts August 13-14
Mississippi July 29-30
Missouri April 19-25
Missouri August 5-7
New Mexico August 5-7
North Carolina August 5-7
Oklahoma August 5-7
South Carolina August 5-7
Tennessee August 5-7
Texas August 19-21
Texas May 28-30
Virginia May 25-31
Virginia August 5-7
Virginia October 7-10
Source: http://www.taxadmin.org

Proponents of these tax holidays argue that the lure of sales tax holidays entices consumers to spend more money than they normally would have when sales tax is imposed. This, in turn, is supposed to improve sales for retailers, create jobs, and promote economic growth.

“Retailers have long found that sales-tax weekends do an incredible job of bringing people to their stores and encouraging them to spend,” said Ellen Davis, vice president of the National Retail Federation.

Not everyone agrees.

“It’s argued that this has a sort of stimulus effect,” Mark Robyn, one of the study’s authors and an economist with The Tax Foundation. “The evidence and common sense show that this just shifts the timing of their purchases.”

The report also claims that tax holidays cause extra administrative and labor costs that impede efficiency, as companies must hire temporary workers or pay their employees overtime to handle the additional traffic.

The report also said retailers sometimes increase prices of goods before tax holidays to earn a higher profit from the increase in shopper traffic to their stores.

Davis of the National Retail Foundation disagrees with this claim.

“Retailers realize that this market is extra competitive,” she said. “Many retailers offer savings and promotions on top of this holiday. The last thing that retailers would do is raise their prices.”

Davis added that many states have expressed concern about the lost revenue they incur by holding these weekends.

George Whalen, president and CEO of Retail Management Consultants, echoed the dilemma states face when deciding whether to cut additional programs or to collect more taxpayer dollars.

“Today, that’s always the tradeoff,” Whalen said. “How do you decide what stays and what goes?”

Questions? Comments? Email us at consumernation@cnbc.com.

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