Taxation Issues - The American Consumer Institute

Seventeen states are offering a temporary exemption from sales tax on student’s classroom items. If local news doesn’t cover it promptly, it’s too late because the tax holiday is usually just for 3 days. The tax exempted is normally the combined local and state sales tax. The duration, scope and retail value limits narrow the savings available from the program and conversely the impact on state and local revenues.

Most of the 17 school equipment tax holidays are held in southern states and 11 are south of Virginia.  The reason for this southern bias is unclear.

Families typically spend $630 on back to school apparel, shoes, supplies and electronics, although computers and software are included in it can vary a lot. At a typical state and local sales tax rate of 7%, the average family with school age children could save $44. In some areas, businesses and nonprofits offer children classroom supplies for free. For example, The Cellular Connection (a Verizon affiliate) offers 100,000 free backpacks containing school supplies.

Merchants predictably welcome these tax holidays. Local media coverage promotes the sale, drawing consumers into the stores at no cost to the merchant. A few households may have a school shopping list they adhere to. However, many will buy other items the merchant offers, even if they do not qualify for the temporary tax exemption. To a large extent, the tax holiday merely shifts planned purchasing into a narrow, tax-exempt time window.

In the first half of the year, Virginia, Louisiana and Alabama also offer tax exemptions on hurricane preparedness items such as generators. Louisiana and Mississippi offer a separate exemption on firearms and other hunting equipment as autumn draws near.

For hurricane preparedness, sales tax is exempt on sales of portable generators worth up to $1,000, plus $60 in related supplies. That means about $74 savings on a generator that will be used infrequently.   Many more taxpayers would experience hurricane preparedness benefits if government set storm insurance rates at actuarial cost – without subsidy. That would avoid extracting avoidable and predictable repair subsidies from ordinary taxpayers.   Homeowners who insist on rebuilding waters-edge houses in areas prone to storm damage should not be subsidized by ordinary taxpayers.

Politicians who draw attention to these special purpose tax holidays often mention how they benefit poor families. Opportunities to kiss babies or posture as helpers of poor families and children may be irresistible to some public figures. The school sales tax holiday is slightly regressive but the limited sales total to which it can apply means that no family gets a large benefit. In the scheme of things, the school item tax exemption is small potatoes.

There are so many other tax policies that legislators should embrace that could help rich and poor families significantly. For example, avoiding the knee-jerk temptation to class independent contractors as “employees” would leave a lot more of independents’ earnings in their pockets – hundreds of times more for each independent than the $44 in school item tax exemptions. A sane tax solution to US corporations’ foreign profits held abroad could liberate two trillion dollars in stimulus money to help the US economy – no need to pretend there are shovel ready projects. Then there is the federal corporate tax system – too high in rates and too replete with loopholes and exemptions. Avoiding intemperate threats such as 90% income tax and 55% estate tax rates and doubling capital gains taxes will suppress the self-protective inclination to move to a foreign tax home.

There are plentiful ways to seriously improve taxes.