Are retailers raising prices for MA’s tax holidays?

Both the Tax Foundation and syndicated columnist Steve Chapman think state sales tax holidays are useless gimmicks that mask poor overall state tax policy.

The seminal argument against tax holidays is that the simply shift purchases that would have taken place at other periods in the month or year. There is no net gain in sales activity.

More damning appears to be the fact that retailers don’t leave anything on the table. Chapman suggests retailers in Florida raised their prices, although evidence for this in Massachusetts is scant.

In reality, the exemption doesn’t increase overall economic activity. It merely induces people to delay or accelerate purchases to fit into the time window. When New York had a sales tax holiday for clothing in 1997, sales jumped during the week it was in effect-but for the full quarter, it was a wash.

Nor is this alleged favor necessarily of much benefit to the ordinary family. A 2003 study found that Florida retailers responded to the incentive by setting prices higher during the tax holiday than after. In other words, they grabbed the “savings” for themselves.

All the claims about boosting revenue amount to castles in the air. Massachusetts canceled its holiday after feeling remorse about squandering nearly $15 million in sales taxes in 2008. The offsetting increase in income and corporate tax collections, by contrast, added up to less than $1.8 million.

Massachusetts didn’t enact a sales tax holiday last year because state revenues were hurting. This year proponents are arguing that the holiday will serve as a stimulus even though revenue is still down.

The best policy will be to return the sales tax rate to 5%.

Anyone have any insight on whether prices are higher in Massachusetts during sales tax holidays? Does the consumer lose in the long-run?

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About Karl Marx

Left wing libertarian conservative.
  • I read this thing once on lewrockwell.com that attacked the idea that “corporations don’t pay taxes, people do.”  Tried searching for the link, but I can’t find it.  It was a sole blog post, so I doubt it represented a widely held belief.

    The argument went something like this.  Corporations don’t set prices, the market sets prices.  So when a corporation is taxed they can’t pass on the tax to consumers because they would price themselves out of the market.

    Now I guess a similar thing could be said for the sales tax.  The price we see with the sales tax is actually the price that the market will bear.  So when the tax is on holiday the price minus the tax is less than the market will bear.  So why wouldn’t a business then raise to a new price during the holiday equal to what the market will bear (which is the same as the old price plus tax)?

    Also, I think it’s bad politically to allow one-off events that allow the voters/taxpayers to let off some steam.  Everyone buys their stuff tax free and is content, and then they are less likely to be outraged at the sales tax in general.  So they don’t vote for change and we end up with the same or worse system.

  • My small family business collects sales tax, and we practically close down to avoid selling anything on such a holiday.  The bookkeeping is a nightmare.  To recalibrate the price as well is crazy.  We’re talking $13 on $200, after all.

    The big stores with computerized cash registers can do it, but if they have those kind of machines, they’re big enough to get caught.

    What I’ve noticed is a jump in ‘free delivery’ type stuff, or sales for a specific purpose.  for example, a furniture store that’s going bankrupt in Hyannis is being careful to begin its going out of business sale this weekend so they can unload as quickly as possible – right now, it’s 50-60 percent off, as opposed to the 90 percent it will be when they have to close out at the end of the month, so they’ll actually do better by trying to exploit the holiday.  People will always spend $50 to save $4.50…

  • Vote3rdpartynow

    I can say without doubt that a sales tax holidays simply don’t add to the retailer’s coffers.  They end up being a wash as shoppers wait a few days and shop when the sales tax is not applied.

    On the other hand, it makes a big difference for the state.  I believe it truly hurts the state and its revenue collection.

    What is sad is that the Governor and the legislature will use this year’s tax holiday as a campaign tool to show how they are working to help the ‘small people’.

    The best policy is to return the sales tax to 5% at the very minimum, and much lower at best.

    As for ‘raising’ prices, I have never heard or seen any indication that retailers are doing it.  Customers are out in force, and temporarily elevated prices would be noticed.  Generally, shoppers will target a particular item and store days ahead of time, looking for a major purchase.  

  • I’ve worked at Walmart in Dartmouth for a little over 14 years now and in my experience our particular store has NOT raised prices ahead of a tax free weekend.  

    Yes, some people may wait a week or two if they just discovered the quasi-annual tradition (and boy, did we hear it loud & clear when the legislature refused to hold one last year!).

    I happened to go shopping at my store yesterday.  I originally wanted to buy Rome, Seasons 1 & 2 via Amazon.com for $60.  Instead, I didn’t have to pay any possible taxes (and I received an associates discount) so I purchased the shows at Wally World.  While I was there, I also made a semi-impulse purchase of a Garmin Nuvi 1450t GPS.  I had my eye on it (actually, it’s earlier model the 1350t) and it was still the same $199 that it had been for quite awhile.  Of course, yesterday I not only got that aforementioned associate discount but I saved sales tax ($12) and now I’m playing around with it today.

    Had we not had a Salex Tax Free Weekend, I probably wouldn’t have made the impulse purchase.  I can attest that the electronics department was packed with people buying TVs, computers, etc.  

  • politicalmadman

    I wish I had the time to get deep into it, but you folks have it nailed for the most part. It’s only speeds up what people were going to buy anyway, especially in ths economy. You will get some impulse buys but they wash out as those folks spend less later after they realized they spent money they didn’t have.

    I always laughed when people would drive 10 miles to save a penny on a gallon of gas. Ask Christy about that one- he knows it better than anyone. One woman on Fox said ” It;s an experience”, as she stood in lin e for an hour -huh ? hat kind of life do you have lady ?

    Society is getting dumber-but you folks already know that !