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Will sales tax holidays boost your region’s economy?

Tax Free HolidayWe’ve had cash for clunkers, appliance rebates, homebuyers’ credits and other stimuli.  Coming in the next few weeks, sales tax holidays will take place in 16 states, aimed at luring families out for the crucial back-to-school shopping season.

Giving consumers what amounts to a discount equal to your state’s sales tax rate is a tactic that has burgeoned nationwide over the past decade.  Skeptics wonder if it really works, and critics say that it robs state coffers just when governments can least afford another hit.  (Here’s a National Conference of State Legislatures mid-year update on state budget crises for easy reference; credentialed media members may request a free copy by e-mailing Press Room, NCSL.org.)

Merchants, of course, are all for anything that cuts prices without picking their pockets, as this recent blog post from the National Retail Federation indicates.

Sales Tax Holiday

Greater Killeen Chamber of Commerce

Here’s a state-by-state listing of tax holiday dates and conditions from tax information giant CCH Inc. Note that some states limit the break to clothing and shoes while others include school supplies, dorm furnishings like bed linens and shower curtains and even computer software.  Talk with your state’s retail trade group  about any behind-the-scenes lobbying that went on to determine what was included and excluded locally.  (Also, mark your calendars for energy and hunting-related tax breaks coming up later in the year.)

Note that Georgia was a hold-out this year; its legislature decided to skip the tax break despite this 28-page report from the merchants’ trade group that claims a net positive economic impact from the back-to-school tax hiatus.  The report is detailed and well worth a read as you develop questions for your regional retailers, shoppers and economists.

One thing I’m wondering:  How far are shoppers willing to travel to get the break, and how are communities near state borders leveraging the tax hiatus — or lack thereof?   Will the cuts siphon business from one state to another, and what are the implications there?  And do shoppers misjudge the ability of the discount to offset extra costs in time, fuel, credit-card interest and other expenses?

More pros and cons about sales tax holidays are outlined in this excellent recent piece on Stateline.org, the news service of the Pew Center for the States.  Note a variety of good sources mentioned in the article.  The point which caught my eye, especially in light of our clunkers and homebuyers experiences, is the notion that tax holidays merely pull demand from one period to another.  In other words, will consumers shop up over the next few weeks, only to sit on the sidelines in September and October?

This is a great opportunity to form a reader panel, or develop a personal finance piece by shadowing consumers, analyzing their receipts and comparing their spending to last year’s, especially in states that are implementing the holiday for the first time.  (Be sure to get a look at last year’s credit card statements and checkbook registers; don’t just take shoppers’ word for it.  Memories are faulty.)

Here’s an American Journal of Business feature about shoppers’ perceptions of sales tax holidays and a historical report by University of Michigan economist Adam Cole.

It’s a valid concern and from a merchandising standpoint, retailers must be strategizing ways to defeat it.  Are they holding back certain fashions or functional items to make sure fresh needs arise in the fall?  Will they make the most of tax-break traffic by pushing loyalty programs, getting new shoppers on e-mail lists for future come-ons, and other means of insuring return visits?

In Economy, Featured, Personal finance, Retail | Lifestyle, Story ideas.

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