Tax holiday: 'tis the season when many states waive sales taxes

Many states are implementing a tax holiday in the coming weeks, hoping to boost retail sales and let struggling families get more for their money in a down economy. Experts are divided as to whether the scheme actually drives more shoppers to make purchases

Back-to-school shoppers got busy at 6 a.m. Friday at the Woodfield Mall in Schaumburg, Ill., taking early advantage of the state’s new tax holiday.

For 10 days, Illinois is waiving its 5 percent state sales tax on certain purchases, including school backpacks, pens, notebooks, and most clothing items under $100. All the employees at the Woodfield J.C. Penney will have lists on hand to help shoppers understand which items qualify. (A 1.25 percent tax distributed to counties and towns will still be collected, plus any additional local taxes).

Illinois joins 18 other states, ranging from Florida to New Mexico, in offering a tax break to shoppers in 2010. That’s the highest number since New York first launched a tax holiday in 1997. Most of them start this weekend and are pegged to school shopping.

North Carolina’s back-to-school tax holiday this weekend is the nation’s most generous. The state's 5.75 percent sales tax is waived not only on clothing and school supplies under $100 per item, but also on computers under $3,500, computer equipment under $250, and instructional materials under $300.

School shopping is a popular impetus, but not the only one, for tax holidays. Several states also pick a time to drop taxes on energy-efficient appliances, hurricane-preparation supplies, or even firearms.

Retailers anecdotally report a net increase in sales because of these events, but “that’s secondary to helping families stretch their dollars farther, [especially] during the current economy,” says Craig Shearman, a spokesman for the National Retail Federation in Washington.

However, the overall effect on retail sales and state coffers is debatable.

“To a large extent, people are either delaying purchases until the holiday or speeding up purchases,” says Ronald Alt, senior research associate at the Federation of Tax Administrators, which maintains a list of tax holidays.

A 2009 doctoral dissertation at the University of Michigan found that computer purchases did go up with tax holidays, but between 37 and 90 percent of the rise resulted from consumers timing purchases they would have made anyway to coincide with the tax break.

That study also found that in the month of the holiday, state tax revenue decreased anywhere from .52 percent to 7.83 percent.

The Tax Foundation, a conservative research group, criticizes tax holidays as political “gimmicks” that don’t promote economic growth and instead complicate taxes and favor certain industries.

The Illinois Department of Revenue estimates that the state's families will save $40 million to $60 million in taxes if they do their school shopping during this 10-day period. But it hopes that won’t mean an equivalent loss in state revenue.

“Families who have maybe put off making purchases are going to go shopping and realize they have other things they need to buy,” which could give a boost to retailers and offset some of the tax breaks, says Susan Hofer, a spokeswoman for the department.

Georgia lawmakers decided to skip the state’s long-running tax holiday this year, saying it would cost about $12 million, something they couldn’t justify while running a $2 billion deficit.