Odd tax holiday in Colorado today

Several states have "sales tax holidays" where for a day or a few days specified during the year, there is no sales tax on specified items.  For example, it might be on children's clothes or school supplies close to the time when school begins. Some states have them for guns and emergency preparedness items. The Federation of Tax Administrators maintains a list of these holidays in the states.

Today, September 16, 2015, Colorado has a holiday on marijuana - but just the special 10% and 15% taxes (there are a lot of taxes on marijuana in Colorado). The reason is complicated and ties to the fact that when recreational sales became legal in Colorado and new taxes added, they raised more than allowed. HB15-1367 explains some of this (in 33 pages!).

All of this is odd and bad tax policy. For Colorado, too bad no one thought of a law modification earlier that if too much marijuana taxes were raised, it would be used to reduce other taxes or for backlog infrastructure projects, or something other than a one-day tax holiday. I'll get back to the tax issues next, but also want to note that this is also odd - isn't the state now encouraging more people to buy marijuana today due to the greatly reduced cost?  What is the purpose of that?

Tax problems include the inequity of making somethings tax exempt, but not other things. Also, everyone, regardless of need gets the tax break. For example, someone making $200,000 per year who buys school supplies for their child during a state sales tax holiday period for these items saves a few dollars of tax. Why?  If the holidays are to help low income individuals, it would be better for the state to give them gift cards for stores that sell these items (or some other way to give money for them). 

Some might be too broad. For example, what all falls under school supplies or emergency preparedness?  Time is needed by the tax agency to define the terms, if possible.  And how, for example, does the store know if someone buying paper during the holiday is doing so for school?

The compliance and administrative burdens are also high. A vendor needs to be sure it handles the holiday correctly and the state needs some way to verify that it did. 

And the effect to vendors is odd.  The holidays will cause many people to wait to buy items then causing operational challenges for stores and theirs suppliers.

What do you think?

More data on sales tax holidays

I think that one of the "oddities" of the tax law are sales tax holidays used in some states. The holiday typically makes some specific item, such as children's clothing, tax-exempt for one weekend or week (such as before the start of the school year).

They are odd because they are an odd and ineffective way to provide a benefit to low income individuals. They end up providing a greater benefit to higher income buyers because they can afford to spend more during the holiday and perhaps better plan their purchases to make them during the holiday. A better approach would be to provide low-income individuals with a refundable income tax credit. Or state welfare agencies could sell qualified taxpayers special gift cards that are priced to eliminate sales tax. So, for example, in a state with a 6% sales tax, a $50 gift card only costs the low-income buyer $47.17 so the state pays the sales tax.

A preliminary study released in July 2010 by the Federal Reserve Bank of Chicago - The Effect of Sales Tax Holidays on Household Consumption Patterns by Marwell and McGranahan, evaluated the holidays to see if they were meeting their commonly cited benefits. These benefits were helping low-inocme families, helping retailers who compete with nearby retailers across state lines, and encouraging certain purchases deemed beneficial such as computers. The report notes that the first sales tax holiday was in 1997 in New York.

The researchers found that certain sales tax holidays did lead to higher sales of children's clothing. Yet, they found that there was no " statistically significant change in consumption for the lowest-income households" (page 17). The authors conclude: "As tool for providing economic relief to certain households, STH has fared quite poorly."

Sales Tax Holidays - more on this tax "oddity"

In my list of "tax oddities" I include sales tax holidays (particularly ones for gun purchases). There is an article in today's Baltimore Sun on the costs to the state and low-income taxpayers of their holiday which lasts for one week. The tagline of the article - "It drains state coffers of needed revenues while providing little benefit to consumers" says it all ("The hidden costs of 'tax-free' week" by Neil Bergsman, 7/22/10).

Maryland's 1-week sales tax holiday allows consumers to avoid the 6% sales tax on clothes costing under $100. While consumers save a total of $9 million, that represents a loss of revenue to the state. The holiday is for everyone regardless of how well they can afford to pay the sales tax. Thus, it is a poorly targeted tax relief measure.

As the author notes, the lost $9 million is money not available to fund programs that help low-income taxpayers. He also correctly notes that the holiday makes it more difficult to address the state's budget shortfall, it is complex, and it offers no relief to low-income consumers the other 51 weeks of the year.

This is an odd way to design a tax system!

Tax Oddities - Sales Tax Holidays

Several states have sales tax holidays where for some period of time - perhaps a weekend or a full week, there is no sales tax owed on particular items. For example, there might be a one week sales tax holiday on children's clothing or school supplies before school begins in the fall.

The Federation of Tax Administrators (FTA) has a list of most of these holidays. California has no sales tax holidays which is a good thing. [Well, that really isn't true because there are some goods that should have sales tax applied, such as digital goods purchased by individual consumers, entertainment and personal services, that enjoy a year round sales tax holiday.]

There is a news story today that caught my eye because it is just odd - the West Virginia House of Delegates passed a bill (HB 4521) calling for a sales tax holiday on guns purchased during the first weekend in October. The story from The State Journal ("Delegates approve gun sales tax holiday," 3/4/10) notes that the state might make up the lost revenue from the increased sale of ammunition and other items sold by gun stores!

The article and FTA list note that a few states already have a gun sales tax holiday.

Observations:

1. This is just odd - why single out guns and exempt them from tax for two days?
2. Isolated and short-term exemptions are poorly targeted to provide relief to taxpayers who need it. Even a very wealthy person who can easily afford to pay sales tax on his/her gun purchase gets the exemption.
3. It is complicated for vendors to deal with due to extra recordkeeping.
4. A tax break for one group of taxpayers means that others will pay more, assuming revenue neutrality.
5. Where will it stop? Other groups will step forward seeking a holiday for items purchased by their members.
6. Vendors of goods subject to the sales tax holiday surely enjoy high sales during the holiday. What happens to them for the rest of the year?

The Tax Foundation has a great report explaining sales tax holidays "as politically expedient, but poor tax policy" (8/09) - here.