Viewpoint: Sales tax may not mean happy holidays

When we hear the word "addiction," most people instantly think of someone with a dependency on drugs, gambling or even shopping. However, there is a new epidemic sweeping legislatures across the country and that is the addiction to sales tax holidays. Legislatures on both sides of the party fence support the holidays. Republicans like them because the concept fits their agenda of cutting taxes. Democrats use them to show their support for the working class.

But when city officials begin the decision making process on whether or not to participate in the holiday, the issue with the most impact on the final decision is the financial cost to the municipality. During the last legislative session, two separate studies were published regarding the impact of sales tax holidays on state and local revenues, with two very different conclusions.

State Rep. Jason Crowell wrote in the accompanying piece about the Missouri Chamber of Commerce's study, which declared the 2004 sales tax holiday an obvious success for everyone involved. Their study found that the holiday did no harm to state tax revenues and, even more significantly, it stated that local governments actually gained in sales tax revenues due to the holiday. They assume the sales of taxable items increased enough during the holiday to eliminate any losses.

The idea of providing sales tax relief to the constituents without a loss in tax revenue invokes the old cliché "if it's too good to be true ..." The Missouri Municipal League along with the Missouri Association of Counties, commissioned a study by faculty of the Harry S. Truman School of Public Affairs at the University of Missouri-Columbia, that concluded that the idea was, in fact, too good to be true. According to the research report, the August 2004 sales tax holiday resulted in a loss of state and local sales tax revenues of about $18.5 million. Of the $18.5 million in revenue loss, local governments participating in the tax holiday saw a total revenue loss of $8 million.

In addition to the impact on state and local revenues, the research report also included the following findings:

* Retail sales are most responsive to general economic impact conditions with a small response to the tax holiday;

* Studies in other states indicate that consumers shift purchases to the tax holiday. Consumer purchases that normally would spread over a long period are made during the holiday;

* Missouri data indicates that some sales shifted to jurisdictions that participated in the holiday;

* A Florida study indicates that retailers did not offer the same markdowns during the holiday period as before and after. As a result, consumers only received about 80 percent of the tax savings; and

* A family purchasing $250 in tax exempt items during the holiday saw a $15 savings in taxes.

The Missouri Municipal League does not hold a position on whether or not a municipality should participate in the tax holiday. But it does support the ability of local political subdivisions to make the decision that is best for their community. And, the decision is not an easy one. Local elected officials will have to decide if the holiday is a way to alleviate the tax burden on working families, as well as a means of jump-starting their local economy, or if it is just a gimmick for retailers, and less helpful to the consumer as some claim.

But more importantly, the elected officials will have to decide whether their municipalities can afford the sales tax holiday.

Tracy Weddle is the legislative staff associate for the Missouri Municipal League.