August 1, 2014
Common-Sense Policy Takes a Holiday
At first glance, “sales tax holidays” seem like a great idea: consumers get to save money, and more shopping activity boosts the economy. It turns out, though, that sales tax holidays don’t actually do much of what supporters claim. And there are better ways to help the people who need it the most.
While the back-to-school sales tax holiday that starts today in Virginia is billed as a way to save consumers money, much of the benefit goes to businesses instead. A study of retailers during a sales tax holiday in Florida showed that 20 percent of the benefit that shoppers expected to get actually went to retailers, because retailers did not need to provide their own discounts to draw in shoppers.
For big retailers, this can mean big bucks, but for ordinary Virginians the savings are quite small. For example, by not being charged the sales tax, someone that spends $100 on eligible goods only saves five or six dollars.
And what benefits there are for consumers are spread very unequally. For example, a millionaire saves money that he or she could easily have afforded to pay. Meanwhile, low-income families that often live paycheck-to-paycheck can’t afford to increase the amount they buy during a “holiday.” Families making under $30,000 a year are unlikely to shift the timing of their purchases to coincide with the sales tax holiday so they save very little, a recent study found.
That brings up another issue. The sales tax holiday isn’t effective in spurring economic growth because a lot of the increase in sales that occurs is simply people shifting when they make a purchase rather than buying more.
But this questionable tool for boosting the economy and saving hard-pressed families money does have one clear impact: It costs Virginia $6.4 million in lost revenue.
There is a better way to help Virginians who need it most: strengthen the state’s earned income credit (EIC).
The EIC is a tax credit that low-paid, working families can use to reduce their state income tax, with the amount depending on their earnings and the size of their family. Today families only get the credit if they owe state income tax. Reforming the system by making the credit refundable would mean they could get the EIC even if their income is so low they owe no income tax.
The EIC helps families pay for necessities, and because they are very likely to spend the money close to home it’s a boost for their community’s economy too. And that helps businesses grow and prosper. Unlike the sales tax holiday, earned income tax credits have been shown to actually increase economic activity, not just shift it around on the calendar.
Virginia should pursue policies that spur economic growth and do so responsibly, not just the ones that look good in advertisements.
–Asasi Francois, Research Intern