Ready to splurge on sales tax-free school supplies and clothes now that September is around the corner?
You might want to slow down.
While sales-tax holidays sound like a great way for buyers to save money, they disproportionately benefit wealthier shoppers, according to a report from the Institute on Taxation and Economic Policy, a Washington, D.C.-based tax policy research center.
"No matter which state it is, sales taxes fall heavily on low income families as a share of income," said Meg Wiehe, state tax policy director at the institute. "They spend the vast majority of their income on consumable items."
The problem with sales tax holidays is that a two- to three-day break on taxes for school supplies and clothes provides a greater benefit to those who can afford to spend more on those items, the report said.
A total of 17 states are participating in sales tax holidays this year.
Interestingly, a 2010 study from the Federal Reserve Bank of Chicago found "no statistically significant change in consumption" during sales tax holidays for households earning less than $30,000 a year. On the other hand, households earning more than $70,000 per year increased the amount of clothing they purchased during sales tax breaks by 48 percent, the study said.
"Wealthier taxpayers are often best positioned to benefit from the holidays since they have more flexibility to shift the timing of their purchases to take advantage of the tax break," the institute's report said, noting that this option isn't available to families living paycheck to paycheck.
Further, sales tax holidays are a revenue drain for the municipalities that host them. These tax breaks are expected to cost more than $300 million in 2016, according to the report.
An alternative to a sales-tax holiday might be the addition of an earned income tax credit or even a refundable credit that's linked to sales taxes paid, Wiehe said.
States with sales tax credits include Arizona, Hawaii, Maine, New Mexico and Oklahoma.
"The credit isn't a one-to-one [rebate] of sales taxes, but it was designed with the knowledge of the average amount of sales taxes these families pay," she said. Two other states with tax credits, Idaho and Kansas, include food purchases in their tax credits.