For seven days in August, Maryland shoppers can purchase certain clothing items costing less than $100 without paying the state's 6 percent sales tax.
It's not as good a deal as it sounds.
A 2007 law established Aug. 8-16 of this year as a "sales-tax holiday" because legislators thought that by now the state would have a budget surplus and could afford the revenue loss. But tough economic times have lasted longer than anyone expected, to the point where what the state is really doing now is giving up money it doesn't have.
The tax holiday is expected to cost the state treasury about $9 million in lost revenues. That's enough to provide 1,000 families with emergency housing assistance, or state college scholarships for 4,500 students. And it comes as the state is about to grapple with how to fill an expected $1.5 billion revenue hole resulting from lower revenues brought on by the recession.
The tax-free week is supposed to help Maryland families with back-to-school expenses, and to promote Maryland retailers. Will it?
Since 1997, at least 20 states and the District of Columbia have held more than 180 tax holidays. They mostly involve clothes, computers, school supplies and appliances. Florida has extended tax holidays to hurricane-preparedness items. Maryland held sales tax holidays in 2001 and 2006.
Many experts think stores don't benefit much from sales tax holidays. Research has found that in many cases removing sales taxes for a few days affects the timing of purchases rather than the volume. Business might be up during a sales tax holiday, but it goes down at other times. One Florida study showed that retailers raised prices (or lowered their normal discounts) during the tax holiday, so they got 20 cents out of every dollar customers saved on taxes.
Tax holidays can be confusing, too. In Maryland, for example, the purchase of clothing under $100 will be tax free, but if you exchange the item after the tax holiday, you need to pay tax on the new item (unless you exchange it for the same item in a different color or size). If you get a rain check and redeem it after the tax-free week, you need to pay tax. The store can't break up something that's normally a set (like selling the parts of a suit separately) to get the prices of the individual components under $100 and sell them tax-free. The tax holiday does not apply to accessories, like belts, scarves and neckties. Buy a set with a shirt and a tie, for example, and you owe state tax on the whole set.
More importantly, the sales tax holiday provides no relief to low-income Marylanders the other 51 weeks of the year, while giving an unnecessary break to a millionaire. Low-income families have to spend most or all of what they make just getting by. With less disposable income than wealthier taxpayers, they aren't as able to shift the timing of their purchases to coincide with the sales tax holiday without throwing their finances out of kilter.
A better way to help families that struggle to stay afloat would be to have a tax system in Maryland that provides the revenue needed for services like education, health care and job training that help people make their own way over the long haul. Reinstating the recently expired upper bracket for the highest-income households in the state would make more sense than a sales tax holiday — it's just not as much fun.
The tax holiday does provide a little excitement and free promotion for retailers. It gives government officials a visible boon for taxpayers that they can claim credit for. It may provide a small bump in retail sales for the merchants. It may help families a little bit with back-to-school shopping. But let's face it, few shoppers would get excited about a "giant 6 percent off sale." It costs us real money from our state treasury during a time when Maryland is cutting public services and can ill afford to make the hole we are trying to dig out of even deeper.
Call me a wet blanket, but the tax holiday is not a good use of our limited resources. Interestingly, both the progressive Institute on Taxation and Economic Policy and the conservative Tax Foundation agree with me. While the tax holiday might help consumers and businesses a little bit, a strong economy will help them more. That takes investments, and those investments take money.
There are more-direct, less-costly ways to help retailers and working families. We can't afford to spend money on gimmicks like tax holidays when we still have high unemployment, foreclosures, and lost revenue that's needed for vital services like education and health care.
Neil Bergsman is director of the Maryland Budget & Tax Policy Institute, a nonpartisan policy research center that is part of Maryland Nonprofits. firstname.lastname@example.org.