Ohio needs to take a permanent break from the sales tax holiday
Posted July 19, 2024 in Op-Eds
This piece was previously published on Cleveland.com and is reprinted here with permission.
At the end of July, Ohioans will be bombarded with ads promoting a newly-expanded tax gimmick that has been panned by experts across the political spectrum. Both the Tax Foundation, a conservative research group, and the Institute on Taxation and Economic Policy, a progressive think tank, have called sales tax holidays ineffective, poorly targeted, and another drain on public resources already squeezed by anti-government legislators.
Policy Matters Ohio has proposed a better-targeted, more effective, and less expensive sales tax credit that would help Ohioans who need it and balance their need for tax relief against our collective need for the wealthy to pay what they truly owe. A version of that policy is already working in at least seven states. The legislature should replace the sales tax holiday with a targeted credit — and implement the three other tax code changes proposed by Policy Matters this spring.
Recently, legislators have instead more than doubled down on the sales tax holiday sham, dramatically expanding its length and reach—and the resulting hole in the state budget. Originally, the sales tax was suspended for just three days, and limited to clothing valued under $75, and school supplies and instruction materials valued under $20. This year they stretched it to 10 days, and applied it to most goods (with exceptions including alcohol, tobacco, and marijuana) valued under $500. Those changes mean the price tag of the holiday will balloon from just over $20 million in Fiscal Year 2023 to up to $740 million this year.
Progressives correctly point out that sales taxes are regressive, consuming a larger share of income for low- and moderate-income households than wealthy ones. That is why a sales tax credit — targeted to those who need it and phasing out as income increases — is a good idea: It would make the sales tax more equitable.
Such a credit would also give families more flexibility, so they don’t have to concentrate their spending during a 10-day window to get the most benefits, as they do with a holiday. That kind of financial flexibility is rare in households with limited discretionary income, and more likely in high-income households. That means wealthy Ohioans, who have disproportionately benefited from two decades of cuts to Ohio’s personal income tax, stand to disproportionately benefit yet again.
Research shows even more reasons regular Ohioans shouldn’t buy into the tax holiday myth: Retailers could capture some of the savings meant for consumers by artificially inflating their prices, as corporations have done in recent years to capitalize on the economic crisis. And a study found that in Ohio, the holiday didn’t stimulate new economic activity, since much of it would have occurred anyway: Consumers who could afford to do so just changed the timing of purchases they had already planned.
If our lawmakers want to provide tax relief to Ohioans who truly need it, the refundable sales tax credit is one good option. So is expanding the state Earned Income Tax Credit and making it partially refundable, a policy adopted in 27 other states plus Washington D.C. and Puerto Rico. Either of these options would provide targeted tax relief to those who need it, at a fraction of the cost of the $740 million sales tax holiday.
Bailey Williams is Policy Matters Ohio’s Tax Policy Researcher.