Published: September 25, 2009 02:38 pm      

Of litte value — 09/26/09

Sales tax holidays are good politics but not good policy

State Rep. Fitz Steele, a Hazard Democrat, is hoping to convince legislators in 2010 that Kentucky should join a growing number of states that have enacted laws creating sales tax holidays. However, while creating a temporary tax break for consumers, studies of sales tax holidays in other states have found them to have only a minimal impact on retail sales while actually increasing the burden on retail businesses by forcing them to temporarily adjust cash registers to not add the sales tax on exempted items.

Steele is proposing a three-day tax holiday just before the start of the school year in early August. As proposed, it would run from the first Friday in August through Sunday. The sales tax would be removed from such items as clothes, computers and school supplies, but it would remain on items not related to school.

At least 19 states have approved bills establishing sales tax holidays, and 10 states tie the holidays to the start of the school year.

However, among the opponents of sales tax holidays is the privately-funded Institute on Taxation and Economic Policy, an organization that calls the sales tax the most unfair levy imposed by states. While the Institute supports eliminating the sales tax, it also recognizes that the tax is a major source of revenue in most states, including Kentucky.

However, the Institute says sales tax holidays “create administrative difficulties for state governments and for the retailers who must collect the tax.” The Institute rightly recognizes that creating a temporary sales tax exemption on clothing and school supplies “requires retailers and tax administrators to wade through a similar quantity of red tape for an exemption that last only a few days.”

While advocates of the sales tax holidays contend that the exemptions are to help the poor purchase their children’s clothes and supplies for schools, we suspect the middle and upper classes benefit from the sales tax holiday more than the poor. While the poor certainly have to buy paper, pencils and other school supplies, most lower income children do not purchase new clothes for school. Instead, they wear what they already own to school.

Sales tax holidays may be good politics because they offer a small break from taxes, but the holidays are poor tax policy — particularly at a time when Kentucky and most other states are struggling to generate enough revenue to meet essential services. That makes this the wrong time for Kentucky to temporarily cut taxes in a way that has not proved effective in other states.