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Wednesday, August 4, 2010 - 3:14pm

States' Tax Holidays Are Irresponsible, Critics Say

This weekend, nearly a dozen states will suspend taxes on back-to-school supplies, from notebooks and pens to new clothes and shoes. The sales tax holidays are popular with retailers, many of whom see a boost in sales without giving up any revenue.

Jared Lowry, a manager at Pacers Running Store in Arlington, Va., says that last year his store saw about a 20 percent boost in sales during the tax-free weekend. And he's expecting about the same thing this weekend, when sales taxes will be suspended on clothing and shoes that cost $100 or less. That means that with a 5 percent sales tax, a shopper would save about $2.50 on a $50 shirt.

"We think [the tax holidays are] a good thing," Lowry says. "On certainly a big purchase item, it will make a big difference, and it can even help bring in new customers to our store."

The store will add its own incentives over the weekend. It won't charge tax on anything in the store, footing the bill for taxes on items that don't fit into Virginia's tax-free categories -- all to encourage people to buy.

Tax Breaks A Win For Politicians

Shoppers like the tax breaks, so they're an easy win for politicians, too. At a law-signing ceremony last month, Illinois Gov. Pat Quinn was enthusiastic about his state's first statewide sales tax holiday, which starts Friday.

"It's designed to get our consumers in Illinois back into the marketplace -- back into shopping, back into having confidence in our economy," Quinn said.

Illinois is facing a $13 billion budget deficit, and Quinn has faced criticism for signing a law that could worsen that deficit. But the governor says he's hoping the tax holiday will actually increase state revenue.

"We have great hopes that this will produce a revenue surplus, because when people come into the marketplace to buy school supplies, they may find other items that are not exempt that they want to buy," Quinn said.

J. Craig Shearman, with the National Retail Federation, says his group supports tax holidays. Shearman says they're successful at drawing customers into stores during a recession. And with more people than ever trying to make do with less, a tax break can make a significant difference for families trying to buy children supplies and clothing for school.

Critics Say Tax Holidays Shift Sales

Many policy analysts say the tax holidays are ineffective. Nicholas Johnson is with the Center on Budget and Policy Priorities, a research group that focuses on how fiscal policy affects low- and middle-income Americans.

"What the evidence shows is that sales tax holidays cause people to shift their spending, not increase it," Johnson says. "So there's no increase in retail sales consumption."

Johnson says sales tax holidays actually decrease state revenues. And for many states, that's a loss they can't afford right now.

"States are facing the biggest budget shortfalls in history, and this is an additional cost to them," Johnson says. "[Sales tax holidays are] a gimmick that costs states funds that they could otherwise be using for education, for health care, for transportation, and for the other core services."

This year, Georgia canceled its tax holiday. Washington, D.C., is forgoing a tax break for the second year in a row. Still, more than a third of states have a sales tax holiday this year.

Retailers and policy experts disagree on the impact of the tax breaks, but most agree on one thing: A few days or weeks of tax-free shopping have a relatively small effect overall. What retailers and state coffers alike really need is long-term economic recovery. [Copyright 2010 National Public Radio]

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