Retailers are banking on Maryland shoppers packing stores beginning Aug. 14 to take advantage of a temporary rollback of the 6 percent state sales tax.
But what's good for consumers and retailers will come at a cost to the state, which expects to lose as much as $15 million in revenue because of the weeklong tax holiday.
Nationally, consumer spending dropped 0.2 percent in June, the latest figures available by the U.S. Department of Commerce. Although the country technically emerged from the recession months ago, many people still talk — and act — as if it hasn't.
Lifting the sales tax has become a popular way for states to say they are spurring economic growth, helping consumers save money and promoting political goodwill. Even if the savings aren't as big as at a typical sale, many people like the idea of not paying taxes.
But the practice also raises questions about whether temporary tax cuts make good financial sense, especially when states are facing their own budgetary problems due to the sluggish economy.
"Public officials like to be able to say they are doing something to help," said Neil Bergsman, director of the Maryland Budget & Tax Policy Institute. "It seems to be very popular with politicians, but economists and public finance experts think it's silly."
Maryland's tax reprieve was made possible by legislation passed in 2007 that designates a sales tax holiday for a week in August.
The tax exemption, timed during the busy back-to-school shopping season, can be applied to clothing or footwear under $100. Accessories such as umbrellas, watches and sunglasses are excluded.
"It benefits the retail stores in Maryland, which provide 70 percent of the jobs," said state Comptroller Peter Franchot. "Most importantly, it helps the citizens, many who have been hammered by the recession, to get a little relief."
The state has estimated it could lose $10 million to $15 million during this year's tax vacation — a sum Franchot said is well worth it. "Our retailers have been so hurt by the ongoing recession that the $10 million we could lose in tax revenue is, in my opinion, more than paid off by shopping by consumers that week and return visits after that."
Critics say the costs of the tax holiday outweigh any benefits.
A weeklong tax vacation in 2001 cost the state about $5 million, according to a study by the comptroller's office. It is unclear how much was lost from last year's tax holiday, because the state didn't do such a study. Retailers don't have to report sales that aren't taxed, making the revenue loss difficult to track.
Bergsman said the tax break affects the timing of purchases but not volume. Shoppers may just buy a week earlier then they intended. He argues that the money could be going to fund programs and that tax repeals are politically driven.
A study by the Tax Foundation, a conservative think tank based in Washington, said tax holidays don't provide any significant boost to the economy and don't offer much relief to consumers, especially the poor. The group says states should spend more time focusing on ways to provide permanent tax relief to constituents.
Some critics also say the savings from tax holidays may be more perceived than real. The Tax Foundation found that some retailers raise prices during the holiday so there really aren't much savings.
"What it does is it gives us the thrill of feeling like we're able to be a little naughty and get away with evading our tax legally for a week," Bergsman said.
Still, many Maryland retailers like the tax holidays and are planning their back-to-school promotions around that week. They say total sales for the back-to-school shopping period increase because of the tax-free period.
JCPenney will extend store hours for three days during the tax-break week and promote it through some of its advertising. The retailer will also offer its own bargains on top of the tax savings.
Tax-free shopping: Who benefits?
Shoppers love it; others say its bad for the economy
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