May 21, 2004
The sales tax holiday has no clothes
Meaningless feel-good election year tripe:
The governor signed into law Thursday legislation that will cut the gasoline tax by 8 cents a gallon for the entire month of August.The law also restores a popular one-week holiday on sales taxes for books and clothes valued at less than $50 and other school supplies under $10. The tax holiday, the first since 2001, runs July 24-Aug 1.
"I have always believed it's the right thing to do to help Florida shoppers, readers and drivers keep more of their hard-earned money," Bush said in a prepared statement. He thanked lawmakers for adding books to the holiday for the first time.
The sales tax holiday is expected to save shoppers an estimated $35.5-million. Retailers say the state won't lose tax revenue because people will shop more that week and pay just as much sales tax on other items that aren't exempt.
The gas tax cut, pushed by Democrats in the Republican-run House, is expected to save drivers $59.7-million. Gas stations must pass the savings on to consumers or they can be charged with third-degree felony and lose their state fuel-dealer's license.
Advocates of sales tax holidays have their heart in the right place. Sales taxes are regressive, requiring low- and middle- income taxpayers to pay a larger share of their income in tax than the wealthiest taxpayers. Virtually any sales tax cut will therefore provide larger benefits, as a share of income, to low-income taxpayers than to the wealthy. But sales tax holidays are a problematic way of achieving low-income tax relief, for several reasons:* A one-week sales tax holiday for selected items still forces taxpayers to pay sales tax on these items in the other fifty-one weeks of the year. In the long run, sales tax holidays leave a regressive tax system basically unchanged.
......* Sales tax holidays are poorly targeted, providing tax breaks to even the wealthiest taxpayers. The benefits of sales tax holidays are not limited to state residents, but also extend to consumers visiting from other states.
* Many low-income taxpayers spend essentially all of their income just getting by—which means that they have less disposable income than wealthier taxpayers. These poor taxpayers may not have the luxury of shifting the timing of their consumption to coincide with weeklong sales tax holidays. By contrast, wealthier taxpayers are more likely to be able to time their purchases to coincide with the holiday without throwing their finances out of kilter.
* Retailers know that consumers will shift their spending toward sales tax holidays to take advantage of the temporary tax exemption. Savvy retailers can take advantage of this shift by increasing their prices during the holiday. There is some evidence that Florida retailers did exactly that during a recent sales tax holiday there: one study found that up to 20 percent of the potential benefits from that state’s sales tax holiday were reclaimed by retailers in the form of higher prices.
Sales tax holidays do have advantages, of course. As previously noted, the biggest beneficiaries from a sales tax cut are the low- and middle-income families for who these taxes are most burdensome. And the heavily-publicized manner in which sales tax holidays are typically administered means that taxpayers will be very aware of the tax cut they receive—and will know that state lawmakers are responsible for it.
But in the long run, sales tax holidays are simply too insignificant (and too temporary) to change the regressive nature of a state’s tax system—and may lull lawmakers into believing that they have resolved the unfairness of sales taxes. Policymakers seeking to achieve greater tax equity would do better to shift the overall tax burden to wealthier taxpayers by scaling back sales taxes permanently, or by providing a permanent low-income tax credit.
So, in Florida, lawmakers have specifically threatened to prosecute any gas stations that do not pass on the savings from this bill, but they have done nothing about the gouging by other retailers mentioned above. This means that SUV owners will be sure to get their breaks, but that the poor are likely to see little or no savings.
A permanent fix to Florida’s highly regressive tax system is sorely needed.
Florida taxes its poorest people nearly five times as hard as the very wealthiest (those whose incomes average $946,000) and more than twice as hard as the upper middle class. In Alabama, contrastingly, the bottom-to-top ratio is just over two to one.Posted by Norwood at May 21, 2004 07:41 AMThese statistics were compiled by the Institute on Taxation and Economic Policy, a Washington-based public interest organization, which rates the 10 most regressive state tax systems according to the differences between tax burdens on the poorest and richest citizens. The 10, in descending order of unfairness, are Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada and Alabama.
