Commentary

Sales tax holidays: After the break is over

MCT Information ServicesAugust 12, 2012 

Ask any group of shoppers if they know about their state’s back-to-school sales tax holiday and you’re likely to get a lot of excited nods. Ask that same group of shoppers whether they’ve heard about their state’s special income tax break for capital gains, though, and you’ll be lucky if you get much more than blank stares.

This is a real problem.

Tax-free shopping weekends are heavily publicized, and politicians brag about them endlessly as evidence they really care about average, working-class folks. But the state tax systems over which these same lawmakers preside are overwhelmingly stacked against the poor and middle-class, and in favor of the rich.

Virtually every state requires more of its poorest citizens than of its wealthiest, in terms of the share of household budgets being devoted to paying taxes. This Robin-Hood-in-reverse effect is due in large part to a slew of special tax breaks that most people are not eligible for, and whose benefits flow overwhelmingly to any given state’s best-off residents. Moreover, the size of these obscure tax breaks dwarfs the so-called tax relief provided through sales tax holidays.

Let’s start with an example of one tax break offered in Wal-Mart’s home state of Arkansas that the retail giant’s executives enjoy, but that most of its shoppers probably haven’t heard of. The Arkansas state government is expected to forgo a little over $2 million in revenue this year during the state’s tax-free weekend. The state’s special tax break for capital gains, however, costs more than 20 times that much. Because Arkansas taxes the profits from selling stocks, bonds and even art at a lower rate than wage and salary income, of the $53 million the state doles out in tax breaks every year, more than nine out of every ten of those dollars go to the richest 5 percent of taxpayers.

New Mexico and South Carolina are similar – while each state spends about $3 million on its much ballyhooed annual sales tax holidays, their special tax breaks for investors weigh-in at a cost of $48 million and $115 million, respectively.

Alabama, Iowa, Louisiana and Missouri offer a different – and even more obscure – type of tax break to their best-off residents. Three of these states give away about $3 million to $4 million in sales tax revenue during tax-free weekends each year while Missouri’s $15 million holiday is somewhat more generous. But each of these states also lavishes $400 million, or more, on its very best off taxpayers in the form of a special deduction for federal income taxes paid.

Louisiana’s $643 million federal income tax deduction is the largest of the bunch, coming in at 173 times more expensive than its sales tax holiday. And much like the capital gains breaks, more than four out of every five dollars in tax cuts distributed by the deduction flow to the wealthiest 20 percent of Louisiana residents.

These are just a few examples of states whose sales tax holidays their residents surely know of, but whose big dollar tax giveaways for the rich would be news to most people. North Carolina has a complicated and enormously costly tax break for certain “pass-through” business income that’s heavily tilted in favor of the highest earners – law firm partners, hedge fund managers and investors.

Georgia, Louisiana, and Oklahoma have unusual deductions for state income tax payments that funnel tens of millions into the pockets of their wealthiest residents every year while other taxpayers get no such tax break for paying their state taxes. And Florida recently decided to pile over $1 billion in tax breaks for large businesses on top of existing breaks for wealthy heirs and major stockholders. Compared to these massive giveaways, the state’s $25 million sales tax holiday for ordinary Floridians looks downright puny.

Sales tax holidays are a bad deal for taxpayers. They offer too little relief to the families that need it most and they require you to shop when the state says so. On top of that, there’s evidence that retailers sometimes jack up their prices during the high traffic shopping holiday so the deals consumers think they’re getting aren’t always as good as advertised.

Politicians support these side-shows hoping to distract their constituents from tax systems that were designed with the interests of much wealthier taxpayers in mind. But we should not accept tax-free weekends as a replacement for the types of real reforms that clean out unnecessary breaks at the top and solve the problems that will still be there, long after this year’s sales tax holidays have passed.

MCT Information Services

Carl Davis is senior analyst at the Institute on Taxation and Economic Policy (www.itep.org).

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