Tax-Free Weakend

This weekend in Massachusetts, there was a state-wide sale: 5% off everything in the store! Except clothes, cars, and anything over $2,500. It's an event known as the Tax-Free weekend, and it seems to be quite a big deal. But I'm not sure why.

Five percent off is hardly enough to get today's shoppers off their duffs, so why would so many people get so excited about temporary relief from MA's 5% sales tax? There's a cap of $2500, cars are not eligible, and clothing isn't subject to the sales tax in the first place. A friend suggested - and the Globe agrees - that some people are so irrationally averse to taxes that they get off by sticking it to the government, even in a small way. "Many acknowledged a certain frisson at the idea of saving 5 percent from the state -- shopping as civil disobedience." says the Globe. Wow. Frisson for 5%.

My second question about this is, what's in it for Massachusetts? Why would they do this? Why make more paperwork for yourself and give up tax revenue to encourage some mid-summer commerce? I guess my indifference to a 5% discount is not so widely shared, as the Globe says that retail receipts this weekend will be $500 million, instead of he mid-August average of $150 million.

I'm sure that some portion of the $150 or $500 million is for sales of items not subject to sales tax or items over the limit for the exemption, but let's leave that out for now. Let's also assume for the moment that the entire $350 million extra is new business, not business moved from some other time period to get the discount.

So, by doing this, the state loses the 5% sales tax on the $150 million in retail sales that would have happened anyway. That's $7.5 million not collected. What does the state get for this? Good PR? Happy shoppers? Campaign contributions from the retail industry? What about extra corporate income tax on the extra profits? If there were $350 million in additional sales, 5% state income tax on 2% profits is only $350,000 in extra corporate income taxes. I'm having trouble understanding why Mass would bother.

Let's reverse the second assumption completely - let's say that all of the additional sales were going to happen anyway, but were transacted this weekend due to the tax break. In this case, the state gave up sales tax on the whole $500 million, for a loss of $25 million, and didn't generate any additional net business for corporate profits. That's even worse. The truth probably lies somewhere in between.

The Institute on Taxation and Economic Policy takes a pretty dim view of sales taxes across the board, noting that they are highly regressive, but ultimately doesn't find much material benefit to anybody in a brief repeal of sales tax. Read the whole story in the ITEP policy brief, "Sales Tax Holidays: Boon or Boondoggle?"

So what's going on here? Is it just some feel-good consumerist propaganda? A small but well-intentioned transfer of tax burden from the not so rich to the somewhat richer? An elbow to the face of neighboring New Hampshire (where there is no sales tax ever)? I just don't get it.

1 Response

  1. Charlie
    I think it'd be pretty easy to calculate if the revenue were time shifted or if it was additional revenue from the tax incentive. One might wonder whether a person buying a 40-inch LCD HDTV this weekend bought it a month late or a month early because of the incentive. Since they announce the tax holiday just a week or two before it happens, playing coy with the public, people who were close to buying their big item probably just got them. For other people who pushed up their buying for the holiday, that's done now and the question becomes does that leave them sated for electronics or whatever for a while, or does the next item in their Netflix like buying queue just come to the top sooner? And then the people who were on the fence but decided to use the tax holiday to treat themselves to say, an XBox? Definitely a win for the businesses. In the absence of sales tax, a 5% holiday makes no sense. In the presence of mob buying indulgence, it is probably a win.

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