3 Downsides to Back-to-School Sales Tax Holidays

  • Share
  • Read Later
Abi Bell / Flickr / Getty Images

This summer, 17 states are hosting sales tax holidays, down from a peak of 19 states holding such events in 2010. On the surface, the concept—in which states waive sales tax on many goods for back-to-school shopping season—seems like a win-win-win for consumers, retailers, and the states alike. But how much are shoppers truly saving? And do such events really help the economy as promised?

August is the peak month for back-to-school sales tax holidays around the country. CNN Money helpfully lists the dates and restrictions for the tax-free days in all 17 states; from August 12 to 18 in Maryland, for example, sales tax is waived on clothing and footwear selling for $100 or under.

What’s wrong with that? Well, nothing. But for a few reasons, the reality of avoiding sales tax on certain specific purchases may not represent quite the deal that consumers think it is.

(MORE: Food Stamps: More Benefit to Big Food Than to the Poor?)

You’re Not Going to Save Much
First off, in a retail setting in which many stores host nonstop sales and it’s a cinch to get 20% or even 30% off without much effort, the prospect of knocking a measly 5% or 7% off the price by eliminating the sales tax doesn’t seem worth getting excited about. As a St. Louis Post-Dispatch columnist put it, in Missouri, where sales tax is 4.2%, you’ll never see a newspaper ad in proclaiming “4.2 percent off selected items. What a deal!” And why not? “It’s not much of a discount.”

At their best, back-to-school sales tax holidays represent a little bonus markdown. But it’s only worth taking advantage of the no-tax period if the prices are decent to begin with. The key, according to a Consumer Reports back-to-school shopping guide, is to strategically snag “loss leader” essentials like notebooks, pencils, scissors, binders, and staplers when they’re offered at incredibly cheap prices throughout the summer, regardless of whether it’s a sales tax holiday or not. Having to pay sales tax on a notebook isn’t much of a problem when notebooks only cost 10¢ apiece.

“Just don’t buy other overpriced supplies while you’re there” in the store scoring the super deals, CR advises. If the timing just so happens to work out and there’s a sale on goods you need when there’s no sales tax, then by all means “add to your savings by shopping for school supplies and clothes during a state-tax holiday.”

(MORE: Top 10 Conspicuously Expensive Purchases)

More often than not, during sales tax holidays the best deals are almost always on clothes. An Orlando Sentinel story noted the many deals on clothes from Kohl’s, Sears, Gymboree, and Aeropostale over last weekend’s sales tax holiday in Florida. That’s nice and all, but it’s not like schools put a new wardrobe on the list of items students absolutely need when the fall semester begins.

You’re Likely to Spend Plenty on Fully Taxed Purchases
All sorts of big ticket purchases subject to full sales tax during sales tax holiday events. So too, often, are many back-to-school essentials. Each state’s allowances are different, but all limit the maximum amount of a purchase that can be made without sales tax, and all limit what is and isn’t eligible for the no-tax discount. As mentioned above, Maryland waives sales strictly for clothing items and footwear, and only if the goods are priced at $100 or under.

That state and others (including Connecticut and Mississippi), by the way, charge full sales tax all summerlong on goods that are far more essential for school than new clothes. Namely: notebooks, erasers, pencils, backpacks, computers, and such. Shoppers in these states will pay sales tax on these items regardless of whether or not it’s a “sales tax holiday.”

(MORE: 10 Things You Should Be Buying Used)

Many other fully taxed purchases take place during these no-tax days as well. Citing a study by the Washington Economics Group, a South Carolina newspaper states that the sales tax holiday actually “increases state revenues through sales tax on ancillary purchases, such as trips to the food court and increased hotel bookings in areas around popular shopping centers, as well as increased jobs and payroll taxes that come from this event.”

During the 2010 sales tax holiday in Florida, sales of goods with the tax waived increased by 50% compared to the same period a year earlier (when there was no tax holiday). Sales of good also increased by 35% on goods and services that were fully taxed during the “tax-free” week.

The picture that emerges is that shoppers seem to skip over the fine print on what is and isn’t subject to sales tax during these periods. They see the words “no sales tax” and assume that means no tax on pretty much anything and everything at the mall. Either that or shoppers use the saving of 5% or 6% on a few small purchases as a justification for buying plenty of items that are taxed as usual.

The Economic Stimulus Is Questionable
While data like the above seem to indicate that sales tax holidays give state revenues and retailers quite a boost, a study from the Tax Foundation holds that such events do not increase sales, let alone tax revenues:

Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases.

(MORE: If You Build It: Google and Microsoft Follow Apple into the Hardware Market)

In other words, the days and weeks before sales tax holidays are phenomenally slow because shoppers are just biding their time waiting for the no-tax special to kick in. The sales that take place during the holidays are sales that would have otherwise been made a little earlier, hence no net gain in sales. Nonetheless retailers love sales tax holidays and lobby for them to continue because media coverage of them event gives them “free advertising for what is effectively a paltry 4 to 7 percent sale.”

To the nonprofit Tax Foundation, the sales tax holiday is not only a gimmick, but “poor tax policy” as well. “If policymakers want to save money for consumers,” the study’s authors suggest, “then they should cut the sales tax rate year-round.”

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.