Nixing tax-free sales will benefit consumers, retailers

Allison Cryer
Wednesday, July 25, 2018
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The Town Cryer

Many tax preparers argue that sales tax holidays don’t do much to boost annual retail shopping overall, but simply shift spending from one time of the year to another.

The tax deal struck by lawmakers and Gov. John Bel Edwards to balance this year’s budget will end state sales tax holidays for seven years. When lawmakers renewed 0.45 percent of an expiring one-percent state sales tax, they also reworked sales tax breaks, according to a report by the Associated Press. Louisiana’s revenue department says that means shoppers won’t see annual state sales tax holiday weekends through mid-2025.

Those state sales tax holidays that won’t be held include a general sales tax holiday in August, a hurricane preparedness sales tax holiday in May and a Second Amendment sales tax in September. Local sales tax exemptions on the books for the Second Amendment tax holiday will remain.

There is a commonly held myth that tax holidays generate business and help all retailers.

Most tax holidays focus on backto-school savings or hurricane preparedness or ammunition — all items that would typically be purchased regardless of the tax holiday. Sale tax holidays really aren’t an effective way to stimulate a state’s economy because individuals are still buying the same amount of purchases, just all at once instead of gradually.

The Economics Center at the University of Cincinnati released a study on the pros and cons of tax holidays in 2013. According to the study, any “increase in retail sales during the tax holiday would be offset by an equal decrease in sales when consumers would otherwise make their purchases.”

On the other hand shoppers in Louisiana, ranked 33rd in the nation for the highest state sales tax at nearly five percent, are accustomed to buying school and hurricane prep items tax-free. But does the tax break really save shoppers money?

The Tax Foundation ranks Louisiana as the state with the highest combined local and state sales tax, and is the only state to exceed 10 percent. So it is understandable that many consumers will feel they are losing money without the holidays.

However, tax-free periods create complexities for tax code compliance, efficient labor allocation and inventory management, according to the Foundation’s most recent data. Many retailers have to hire more staff to handle the tax holidays, which costs more money. They say that the temporary increase to their bottom line is not worth the trouble it costs to prepare for these weekends.

Also, these holidays usually only last for one weekend, limiting access for consumers who are working or too busy. According to the Institute on Taxation and Economic Policy (ITEP), such holidays benefit higherincome households the most because those who earn under $30,000 annually were less likely to be able to shift the timing of necessary purchases to coincide with sales tax holidays.

Some (not all) retailers even mark up their prices during tax-free weekends. A tax holiday typically saves consumers anywhere from four to 10 percent, while retailer sales can slash prices by 20-40 percent or more, according to the Tax Foundation. Even with the state’s combined sales tax topping 10 percent, the savings still do not compare with many regular promotions or sales that would take place regardless.

So far this year, tax holidays in the U.S. cost an estimated $300 million in tax revenue, according ITEP.

This is money that will have to be made up somehow. Considering that Louisiana is in the seventh-worst fiscal condition of any U.S. state, does continuing to give up tens of millions in tax revenue make any sense?