- Associated Press - Thursday, August 5, 2010

RICHMOND, Va. (AP) — Five percent off clothing prices isn’t exactly a doorbuster sale, but Virginia retailers will see a boom from a weekend waiver of sales taxes as state and local governments feel a pinch.

For three days starting Friday, clothing items of $100 or less and school supplies of $20 or less are exempt from Virginia sales taxes in the run-up to the 2010-11 school year.

Sales spike by as much as 75 percent for the weekend because of advertising supercharged by hoopla over the state’s sales tax holiday, now in its fifth year, said Laurie Peterson Aldrich of the Virginia Retail Merchants Association.

“People feel good about getting something over on the government, and that’s what that feels like they’re getting,” said Ms. Aldrich, the organization’s president.

A study by the Tax Foundation, however, found that not only do states lose revenue at a time when many are in deep fiscal stress, it suggests that tax holidays define and compress buying times rather than generate new sales.

“It’s basically a big political gimmick,” said Mark Robyn, a staff economist for the nonpartisan and nonprofit organization that advocates for simplicity, transparency and broad-based low rates in state and federal taxes.

“Policymakers and lawmakers like to say there’s a big economic benefit from sales tax holidays, that they boost sales and are a great boom for business, … but it’s mostly just an illusion,” Mr. Robyn said. “Studies have shown that sales tax holidays really just shift the timing of purchases.”

Mr. Robyn said the holidays add complexity to tax collections, distort individual buying decisions and amount to government meddling in the market to benefit a segment of consumers — policies enacted more for winning elections than tax equity.

“It benefits individuals who are in the market for things like clothing and school supplies,” he said. “Why is a family with school children deserving of a tax cut and not an elderly couple who aren’t shopping for school supplies but maybe needs other things?”

Ms. Aldrich disputes the suggestion that the tax holiday generates no new sales. Compared with years before the first tax-free back-to-school weekend in 2006, August sales are up by about one-third except for 2009 when a dismal economy hurt all business, she said.

“That’s all new money coming into the economy,” she said.

Not all retailers welcome the weekend. Some small- to middle-sized merchants have trouble adjusting their complicated cash register systems for the change, Aldrich said.

“It’s complicated and it’s not as easy for them as just pressing a button,” she said.

Virginia is among 19 states that now have some sort of sales tax holiday. This weekend’s pre-school year tax moratorium is among three in the state. One each May exempts hurricane preparedness items and generators from taxes. Another each October waives taxes on energy-efficient home appliances and heating or cooling systems up to $2,500 in value.

Every Virginia neighbor, except for Kentucky and the District of Columbia, offers sales tax holidays.

Those in North Carolina and Tennessee cover the same days as Virginia, Friday through Sunday. Unlike Virginia, those states exempt computer purchases from sales taxes.

Maryland’s tax hiatus runs from Aug. 8-14 and exempts only clothing. West Virginia exempts energy-efficient systems and appliances of up to $5,000 in value from September through November, but has no academic year incentive.

Washington, D.C., discontinued its sales tax holiday last year.

One state, South Carolina, offers a two-day tax exemption in November solely on gun sales.

For years, Davidson said, there was alarm in Virginia about people shopping in North Carolina during that state’s sales tax holiday.

There, the 2009 revenue loss was $12.3 million, and the projected hit to that state’s budget this year is $15 million, the Raleigh News & Observer reported Sunday.

There is no accounting, however, for how much in sales taxes that state, city and county governments in Virginia forfeit during the 72-hour back-to-school moratorium.

Joel Davidson of the Virginia Department of Taxation said gathering that data is not mandated because it puts a costly burden on both business and government.

One estimate — a fiscal impact statement tied to the 2006 legislation that established the back-to-school tax waiver — projected a loss of about $4 million for this year.

Jim Regimbal, a private fiscal policy consultant who advises the Virginia Municipal League, said the combined losses to localities statewide for the weekend could be about $1 million. The amount is negligible, but it comes as the state cut nearly $1 billion in support for local governments from the $77.7 billion budget that took effect July 1.

Neal Menkes, VML’s fiscal policy director, said that of localities were allowed to keep some of this weekend’s sales tax receipts, maybe some of the fees cities and counties imposed on some services this spring could have been avoided.

“You’re going to pay it one way or the other,” Mr. Menkes said.


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