DCFPI Testimony on Sales Tax Holiday Amendment Act of 2003

PDF of testimony

Chairman Evans and other members of the Committee, thank you for the opportunity to speak today.   My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute.  DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low‑ and moderate‑income residents.

The primary goals of sales tax holidays are to help residents save money on purchases of essentials during back-to-school and other periods and to provide a boost to the economy by luring more people to shop.  These are worthwhile goals.  Unfortunately, the available evidence suggests that sales tax holidays are not particularly effective at meeting either of these purposes.  For these and other reasons, several leading experts on sales taxation, such as John Mikesell and Richard Hawkins, generally do not support the creation of sales tax holidays.

The CFO projects that the costs of the two sales tax holidays proposed in this bill are relatively small ‘ about $600,000 each.  I find it surprising that the revenue loss from a sales tax holiday in the 10 days after Thanksgiving would be the same as the revenue loss from an August holiday.  I would expect the post-Thanksgiving holiday to result in a much larger loss of revenues since it is a much busier shopping time.   It is worth noting that this bill would make DC the only jurisdiction (or one of very few states) to offer a sales tax holiday during the Christmas shopping season.  Yet even if the costs are small, the principles are important.

First, it is not clear that sales tax holidays provide an economic stimulus.  Given the high profile that sales tax holidays receive, the volume of sales typically increases substantially during the holiday period.  But research suggests that much of that represents a shift in the timing of purchases rather than an increase.  Consumer purchases that normally would spread over a long period are instead made during the holiday.   In New York, sales increased during their holiday, but retail sales for the entire quarter that included the holiday were not noticeably higher than in the previous period in the prior year.

The District’s situation is somewhat different in that a sales tax holiday could induce some metro area residents to shop in the city who otherwise would shop outside, leading to a net increase in sales activity.  No such analysis has been done, however, making it impossible to conclude whether the increase is sizable or minimal.  I suggest that such research is needed before a decision is make to establish sales tax holidays permanently and particularly to offer one after Thanksgiving during the busiest shopping period of the year.

Even if there is a boost in economic activity, it is unlikely to result in a net increase in tax revenues for the District.  The sales tax holiday would generate some new tax revenues ‘ from new customers who buy clothing items above $100 per item and who make other purchases, such as on food and parking.  But this is unlikely to offset the loss of sales taxes on purchases by the substantial customer base that would shop in DC even in the absence of a holiday.

The notion that sales tax holidays provide substantial savings to DC residents ‘ and particularly to low-income residents ‘ also appears to be overstated, for several reasons.  First, because the holidays create a temporary increase in demand, retailers are able to offer smaller-than-normal discounts during the sales tax holiday.  Thus, some of the savings from the sales tax exemption could be lost through higher-than-normal (pre-tax) prices.  Second, the cost estimate of the bill ‘ $1.2 million ‘ suggests that the savings for the typical family will be small.   A family with $400 in purchases ‘ a fairly significant amount ‘ would save just $23 in taxes.  Finally, lower-income residents may not benefit from a sales tax holiday as much as higher-income families who would be more able to concentrate their buying during the holiday.

A recent report by the DC Fiscal Policy Institute notes that lower-income families ‘ those with incomes between $15,000 and $42,000 ‘ pay a higher share of their income in DC taxes than any other income group.  (See http://dcfpi.org/?p=75.)  Targeting tax relief on this population thus makes a great deal of sense.  Yet there may be more effective methods of doing this other than a sales tax holiday.  The District could enact a sales tax credit for low-income families.  It could  address other aspects of the tax code that affect low-income residents, such as a high gross receipts tax on utilities or the District’s small standard deduction in the income tax.  If a primary purpose of the sales tax holiday is to help low-income families meet back-to-school costs, the District could provide one-time annual assistance to TANF or other families to help them buy school clothes and supplies, as many states have done.

Thank you again for the opportunity to speak on this issue.  I am happy to answer any questions you may have.