The Institute on Taxation and Economic Policy (ITEP) hits the nail on the head with a two-page policy brief about sales-tax holidays. Typically scheduled for back-to-school shopping and used in 17 states, they drain revenue, and feed unfairness in a state tax system.
In “Sales Tax Holidays: A Boondoggle,” ITEP notes sales tax holidays “are costly. Revenue lost through sales tax holidays will ultimately have to be made up somewhere else, either through painful spending cuts or increasing other taxes.”
Iowa’s tax holiday is Friday and Saturday of this week. The timing for the holiday couldn’t be worse, as it comes right before the start of the first school year in which state lawmakers have frozen school districts’ per-pupil spending. Giving up that revenue for a “back to school” sales gimmick is ridiculous.
ITEP identifies the problems with all such “holidays,” including the Iowa break:
— they do not target sales-tax relief to low-income families that are most affected by sales taxes, but offer it to the wealthiest families as well;
— they do nothing to stimulate local economies, because the purchases would be made anyway; and
— for the other 363 days of the year, they leave a state tax system unchanged in its favoritism toward the wealthy.
“Regrettably,” ITEP states, “these holidays may lull lawmakers into believing that they have resolved the unfairness of sales taxes.”
Finally, beyond these standard tax-policy concerns, the sales-tax holiday raises consumer protection issues. It actually provides an incentive to businesses to charge customers more than they would have without the break.
Think about it. The holiday saves Iowans 7 percent on a sale of a clothing item. How many stores promote a “7 Percent Off” sale? But a “no tax” sale — watch the ads this week. Why offer 15 percent off, or 20 percent off, or half off, or 2 for 1, when the state is handing you this promotion?
A “holiday” should be something to celebrate. Fixing problems with Iowa’s sales-tax law could be accomplished in better ways than a two-day boondoggle.
Posted by Andrew Cannon, Research Associate