Shoppers and S.C. politicians certainly love the state’s annual back-to-school sales-tax holiday during which a long list of items – some school-related and most not – are exempt from state and local sales taxes.
The first group loves it because everyone loves a bargain. And the second loves it because, well, their voters love it.
This year’s holiday is anticipated to result in about a $3 million lost in revenue for state government. That’s not much of a hole in the state’s $7 billion general fund budget.
Sorry to distract everyone from those great bargains on mattress pads, hunting vests and the occasional school supply, but this is one holiday that isn’t worth celebrating.
As the Tax Foundation, a think tank that advocates for lower taxes, has repeatedly pointed out, tax holidays distort the market without providing any offsetting economic benefit or producing any economic growth. Thus, they’re just political pandering that makes no economic sense. And most of the discounted items are not even school related.
The holidays, held in 16 states primarily in the Southeast, do not significantly increase consumer purchases, according to the foundation. After all, it’s only 6 to 8.5 percent off, depending on the local taxes in your area.
What it does do is shift the timing of those purchases, creating long lines at the cash register that wouldn’t be there otherwise. And there’s no guarantee that retailers don’t raise prices before the holiday begins, giving shoppers a false sense that they’re getting a bargain. (A Charlotte, N.C. reporter found in 2009 that the best deals were the week before that state’s tax-free weekend.)
The holiday also lowers tax collections in states that need the proceeds. In South Carolina, state government needs an extra $1 billion to $1.5 billion each year for the next 20 years to ensure its roads and bridges are safe. It’s a tax holiday in a state where the Department of Social Services is short of caseworkers and vulnerable children have died on the state’s watch.
Of course, that $3 million won’t fix any of these state problems. But what the holiday does do is lull taxpayers into a false sense of tax-code comfort. It diminishes the very real need for permanent tax reform in a state that has a piecemeal, outdated tax code that a room full of tax experts would have a hard time explaining and would refuse to defend.
The state offers one weekend of sales tax-exempt shopping versus doing the hard work of tax reform and lowering the sales tax year-round.
It’s not that lawmakers haven’t discussed overhauling the system. Various committees have studied the issue and suggested changes, most recently in 2010 when the legislature appointed a committee of tax and finance experts to tackle the problem.
It’s just that attempting to make the changes would be met with such resistance that it’s a political land mine for lawmakers. For example, the group in 2010 recommended making the tax base broader and the rate lower. Among its recommendations: Applying a 2.5 percent state sales tax to some items that are currently tax exempt – including water, electricity, groceries and prescription drugs – and lowering the sales tax rate on all other items to 4.96 percent, down from the current 6 percent state rate.
You can imagine how well those recommendations went over with lawmakers during a re-election year and a recession.
Today, no serious effort is underway to tackle the problem. And it’s unlikely to happen anytime soon.
But if anyone is in the market for a discounted handbag or ski mask, the popular holiday will be rolling around this time next year.
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