U.S. States Increase Sales-Tax Holidays as Record Deficits Loom

Illinois, Florida and Maryland will offer sales-tax holidays for back-to-school shopping this year, bringing the number of states doing so to 18, even as officials cope with record budget deficits.

The Tax Foundation said in a report today that states implementing tax holidays in 2010 may reach a record-high of 19 if Massachusetts approves a proposed two-day exemption in August for merchandise costing less than $2,500. Sixteen states had sales-tax holidays last year and 17 offered them in 2008, the foundation said.

The tax moratoriums don’t prop up economic growth or significantly boost consumption, according to the Washington- based research group. Instead, they alter the timing of purchases.

“Sales-tax holidays are gimmicks designed to win political points for lawmakers,” Mark Robyn, who co-wrote the report with Joseph Henchman and Micah Cohen, said in a statement. “If lawmakers want to cut taxes, they should do so in a way that benefits everyone, no matter what they purchase or when they purchase it. Unfortunately, sales-tax holidays only distract from genuine, permanent tax relief.”

The holidays distort consumer choices while favoring certain industries over others, increase tax-code complexity and distract from real, permanent tax relief, the report said.

State budget deficits will rise to a record $140 billion in fiscal 2011, which for most states began July 1, according to a June report from the Center on Budget and Policy Priorities, a Washington-based research group.

Georgia Scraps Plan

Georgia dropped its holiday this year, citing a $2 billion deficit, according to the Tax Foundation report. The state had offered a sales-tax holiday for school supplies, energy- efficient products and water-efficient merchandise.

“Taxes should raise revenue, not micromanage a complex economy by picking winners and losers in the market,” Henchman said in the statement.

Illinois Governor Patrick Quinn signed legislation July 11 that waives the 5 percent state portion of sales taxes collected on school supplies such as paper, pens and pencils and clothing costing less than $100 per item from Aug. 6 to Aug. 15. The holiday doesn’t affect local government sales taxes.

“Back-to-school shopping can be expensive and difficult for families that are already struggling to make ends meet,” Quinn said in a statement.

‘Worst Fiscal Position’

Illinois’ tax holiday comes as the fifth-most populous state ended fiscal 2010 in “the worst fiscal position in its history” as its backlog of unpaid bills and fund transfers rose to $4.7 billion from $2.8 billion a year earlier, State Comptroller Dan Hynes said in a quarterly report. Illinois shares an A1 debt rating from Moody’s Investors Service with California, the lowest among U.S. states.

“We don’t know what the budgetary impact will be,” Susan Hofer, a spokeswoman for the Illinois Department of Revenue, said in a telephone interview today. “We’ll analyze the results when the holiday is over.”

In Massachusetts, the House approved the tax holiday, and the legislation now awaits action in the Senate.

“We hope that with a tax-free weekend, we can offer some relief, while giving our retail stores a little boost,” state Representative Charles A. Murphy said in an e-mailed statement. “The sales-tax holiday is one part of a larger effort by the House of Representatives to encourage spending and stimulate the economy in Massachusetts”.

The nonpartisan Tax Foundation, founded in 1937, promotes Tax Freedom Day, which it says marks the day Americans have earned enough money to pay the year’s federal, state and local tax obligations. This year, the day fell on April 9, according to the Foundation.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE