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Why Ohio's sales tax holiday isn't such a deal

August 05, 2015

Why Ohio's sales tax holiday isn't such a deal

August 05, 2015

The upcoming Ohio sales tax holiday might seem like a good opportunity to stock up on clothing or school supplies: from August 7 to 9, purchases of clothing priced $75 or less and school supplies and instructional materials priced $20 or less will be tax-free. Some of the distinctions between what is and isn’t covered under the holiday, though, are strange. A belt is tax-free during the holiday, but a belt buckle is not. You can buy an athletic uniform tax-free during the holiday, but not sports equipment like cleated shoes or gloves. If you want to get an early start on Halloween shopping, you can buy costumes tax-free, but costume masks sold separately don’t qualify.

But aside from such oddities, the reasoning behind this new law is fundamentally flawed. The sales tax holiday is unlikely to do much to help Ohio’s economy or low-income families who could most use a tax break.

Reducing sales taxes for working families is a worthwhile goal: Sales taxes are regressive, with lower-income households paying a relatively higher share of income in tax. But a sales tax holiday is difficult for low-income households to benefit from significantly — and it doesn’t lessen their taxes for the rest of the year.

The Institute on Taxation and Economic Policy explains that sales tax holidays are by nature poorly targeted toward working families, even though tax holidays are often presented as a way to help families save money. A tax holiday’s benefits are only available for a brief time, so families can benefit the most from the holiday if they can shift the timing of their purchases to coincide with it. As ITEP explains, low-income families who could most use the benefit of the tax holiday are also the least equipped to take advantage of it: “Many low-income taxpayers spend most or all of their income just getting by, which means that they have less disposable income than wealthier taxpayers to spend when the holiday arrives.”

Furthermore, sales tax holidays do not provide the economic stimulus they are purported to. Though sales tax holidays are often promoted for increasing retail spending, ITEP notes “this has not been demonstrated. Rather, increased sales during sales tax holidays have been shown to be primarily the result of consumers’ shifting the timing of their planned purchases.” For example, New York — which no longer offers a tax holiday — found that its 1997 tax holiday did not significantly increase clothing sales. Instead, the large increase in sales during the holiday appeared to mostly consist of sales that would have happened anyway in the weeks before or after the sale. While not every study shows the same result, the evidence that sales tax holidays increase overall sales is thin.

Other elements of Ohio’s tax holiday seem ill conceived. Over the weekend, for example, shoppers can return eligible items purchased before the holiday, when they paid sales tax, for credit to purchase eligible items tax-free. These transactions won’t increase overall sales; instead, they’ll simply reduce sales tax collections.

A sales tax credit, as explained in this Policy Matters Ohio brief, would be a better method of reducing families’ sales taxes, since it would target sales tax relief specifically where it would be most beneficial. The Legislative Service Commission estimated that the holiday would cost up to $17.2 million in this year’s state and local sales tax receipts. That seems like a steep price to pay for a policy of questionable benefit to Ohio’s working families and to the overall state economy.

-- Andrew Slivka

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Andrew is a Policy Matters intern.





2015Revenue & BudgetTax Policy

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