Some studies note impact of tax holiday promote spending

One back-to-school ritual designed to boost consumption will occur this weekend starting Saturday (Aug. 3) and ending Sunday (Aug. 4), as consumers may take advantage of a statewide tax-free holiday.

Despite a growing number of states offering the break from sales taxes, there is data that suggests the holidays do not promote overall economic growth.

The National Retail Federal estimates families will spend an average $635 this year for clothing, shoes, supplies and equipment. In Rogers, state and local sales tax on a $635 purchase is roughly $60.32. In Fayetteville and Fort Smith the tax savings would be nearly $62, as those tax rates total 9.75%.

Those savings could go into a tank of gas, groceries or dinner out for the family. However, economists continue to ask if these holidays actually prompt shoppers to spend more or simply shift the timing of the purchases that would otherwise take place, to the detriment of pubic coffers.

A study conducted by the New York State Department of Taxation found the holiday prompted shoppers to delay purchases timed with the tax-free dates and did not foster impulse buying as once believed. Another study from the University of Michigan examined nine different sales tax holidays and found that the timed-purchases accounted for almost 90% of the sales recorded during the holiday period.

A 2010 study from the Federal Reserve in Chicago looked at how households responded to temporary tax manipulation. The study found that increased consumption was limited to children’s apparel, with spending on clothing and shoes rising 49% and 45%, respectively, and relative to what they normally buy.

The wealthier households (incomes over $70,000) increased their spending on children’s clothing purchased by 136%. Families with young children increased their spending on children’s clothing by 295%, according to the 2010 study.

POLITICAL GAME
Critics of the holiday have said tax manipulation allows the government to pick winners and losers.

Christopher Koopman, program manager at the Mercatus Center at George Mason University, recently noted in U.S. News & World Report that granting temporary tax-free status to particular items, provides favors to some firms and industries over others. He said these political efforts distort the market and influence consumers and retailers to make decisions for tax reasons, not economic ones.

Some states have expanded the scope of items allowed during the tax-free holiday. According to Pew Charitable Trusts, Louisiana has broadened the scope to $2,500 of exemptions for personal property per person, which includes guns, ammunition and other hunting supplies.

Lawmakers in Arkansas have kept the exemptions limited to clothing and footwear priced less than $100 per item, apparel accessories and equipment costing under $50 per item and school supplies and instructional materials. The holiday is limited to two days.

Two states bordering — Oklahoma and Missouri — allow the tax holiday to start on Aug. 2, a day sooner than Arkansas. Also in Missouri, the tax free savings is extended to computer software costing $350 or less and up to $3,500 spent on a computer system.

This year 17 states and Puerto Rico have declared a tax-hiatus for back-to-school. The issue is still being debated in the state of Massachusetts.

Pew reports the two-day tax holiday cost Massachusetts $20 million last year and a supplemental budget allocation was used to cover the loss. The state has held a tax-free weekend every year since 2004, with the exception of 2009 when it was halted because of the recession.

Matt Gardner, executive director of the Institute on Taxation and Economic Policy, a Washington, D.C., think tank, noted in the Pew report that the holidays don’t make economic sense. He said there is no clear evidence that sales tax holidays have a big impact on sales, and lawmakers are less inclined to highlight the loss of revenue to state treasuries. If the revenue is light, he said other charges will be raised or services reduced, so who really wins.


Sylvester Smith, state director of National Federation of Independent Business in Arkansas, takes a different stance.
 He said this weekend's sales-tax holiday will be a big help to small businesses struggling amid a soft economy.


“The sales-tax holiday is good for stores in general, but it really could make a big difference for small businesses,” Smith said. “The sales-tax holiday puts people in the mood to shop, and we’re hoping they buy at least some of their school clothes and supplies at small, locally-owned businesses, because when you support small business, you’re supporting your community.”

BACK TO COLLEGE

While economist and policy makers debate the potential impact from tax holidays, the National Retail Federation expects families will dole out $72.5 million for back-to-school and back-to-college items this year.


More than two-thirds of the spending is in the back-to-college category. The NRF said much like families with children in grades K-12, college students and their parents will trim their budgets this year as well, looking for ways to reuse what they have and spend only on what they need. 
They expect college students and their families will spend an average $837 on apparel, electronics, dorm furnishings and more, down from $907 last year. Total spending for back-to-college is expected to reach $45.8 billion.


“While spending on college is down from last year, it is still higher than what we saw in 2011, indicating that parents this year are simply purchasing only what their college-age children need,” said NRF President and CEO Matthew Shay.

“The back-to-college market continues to grow, with specialty, discount, department, office supply and even drug stores luring students and their parents with attractive deals on everything from microwavable food products to personal care items and of course, home furnishings. In such a competitive space, we expect the deals over the next few weeks to really turn some heads,” he said.

College Spending Breakdown 2013
$104.76, bedding, small refrigerators and microwaves
$104.44, food items
$203.28, electronics
$122.70, clothing
$65.60, shoes
$65.12, gift cards
$65.08, personal care items
$62.92, school supplies
$42.92, collegiate gear

Shopping Timeline 2013
29.8% began shopping at least two months before school.
34.5% begin three weeks to one month before school.
19.9% will begin one to two weeks before school.