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Zap That Tax Holiday

posted in: Weekly Commentary 0
By Lowell L. Kalapa

Now that the holiday shopping season is in full swing some law makers will no doubt make another call for a sales tax holiday.
This is an idea that has been tried in several states where for a limited period of time, a day or a week, the sales of certain items do not incur the state and local sales tax. In Hawaii, that would be the 4% general excise tax. Proponents argue that not only would such a tax holiday provide relief to consumers, but it would also stimulate sales and therefore the economy.
Appealing as the idea may be, the sales tax holiday provides neither meaningful tax relief not does it provide substantive stimulation of the local economy. In the case of the measures that have been introduced in the state legislature and the holidays undertaken in other states, the exemption of the sales tax or general excise tax applies to clothing purchases where the cost of the item is under $100. The hiatus usually runs for a week but in some cases it is a few days once a year.
One of the problems with the holiday is the definition of what qualifies for the exemption from the sales tax. Broadly defined, clothing can mean anything that is worn as apparel. Seemingly it should be obvious as to what qualifies, but as experience tells us, that is sometimes not as easy as it seems. For example, in one state questions cropped up around the issue of apparel accessories, like a scarf or gloves, or perhaps a belt, or the belt buckle which some consider to be akin to jewelry because belt buckles in that state happen to be sold as fancy jewelry. The question also arose as to whether or not neckties, hats or sports equipment, like football shoulder pads, should qualify.
And while we now have the technology to scan the price of an item into the cash register, someone has to program all of those items which qualify for the exemption as opposed to those which do not. Imagine also the compliance by the store, if say a manger has to make a call as to whether or not the item qualifies for the exemption. So what if the store does not collect the tax believing the item to be exempt, but finds out later by a tax department audit that it was not? Does the retailer then pay the tax even though he has not passed the cost of the tax onto the customer?
For the customer, the sales tax holiday sounds like a great deal. Hey, we can buy this pair of pants without having to pay the 4% general excise tax — what a great savings! In many states where the tax holidays occur, retailers didn’t lower prices or if they did, they didn’t lower them as much as they might have if there was no sales tax holiday. In other words, retailers captured some of the savings that the tax holiday would have provided to the customer.
More importantly, in order to get the “tax savings” the sales tax holiday is supposed to provide a customer, that customer has to have the money to make the purchase. If customers are laid-off workers or a household that has been living from paycheck to paycheck, it is doubtful that they will run out and make purchases for: (1) which they don’t have the money, or (2) for which there is no immediate need to make that purchase.
In other words, you have to have the money in order to participate in the tax holiday in order to receive the benefit of the tax holiday. And what are we talking about in tax relief? For every $100 in purchases, the savings is $4. For every $1,000, the tax savings is $40. Big deal when one thinks that an alternative is to lower income tax rates even more so that we all can have more money in our pocket books every day of the year.
Finally, proponents argue that such a tax holiday will stimulate the economy and create jobs. Well, if the idea is that it will create jobs to handle the increased retail traffic, one has to ask the question, what happens to those employees after the tax holiday ends? And if people buy all that they need for the rest of the year during the sales tax holiday, who will be shopping after the sales tax holiday ends?
Thus, instead of ensuring consistent traffic in retail outlets and a constant workforce, the sales tax holiday will provide a spike in sales during the sales tax holiday period and doldrums for the periods before and after. Certainly the sales tax holiday changes household and customer behavior. It hands out paltry tax relief for the investment of hundreds of customer dollars — which in many cases those customers may not have in this down economy.

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