HB12-1069: Sales & Use Tax Holiday For Back-to-School Items

HB12-1069

Testimony to the Senate Finance Committee

George Awuor, Policy Analyst

May 3, 2012

Thank you for the opportunity to address this committee. My name is George Awuor and I am a policy analyst with the Bell Policy Center. The Bell is a non-partisan, non-profit research and policy organization founded on progressive values and dedicated to expanding opportunity for all Coloradans.

I am here to oppose House Bill 12-1069, which creates a three-day sales tax holiday at an estimated cost of $4.5 million in FY 2014-2015.

The sales tax holiday is supported by policymakers mostly to provide tax relief to Coloradans who buy school supplies and to promote retail sales.

However, research shows that the sales tax holiday is not a good tax policy and rarely succeeds in providing tax savings and in stimulating retail sales and the economy at large. Retailers may gain increases in sales during the three days, but data also shows that in states with tax holidays, annual sales are rarely impacted by these tax holidays.[1]

What tax holiday laws actually do is artificially influence the timing of the consumer purchases. There is a reduction in sales in days leading up to the holidays and right after the holidays. Tax holidays influence consumer behavior and may shift spending on purchases that would have happened anyway.

What also happens is that when demand increases, most retailers hike prices to meet this demand. Additionally, implementing these laws requires expenditure in software and labor costs during the holidays. Steps have to be taken to change details in computers and cash registers and hire temporary workers to meet the additional traffic in stores. Retailers also have to figure out what items qualify for the tax holiday and which ones don't. For small businesses, this may be a cost that is not worth all the trouble.[2]

While it is argued that a back-to-school sales tax holiday will help parents pay for school supplies, it will also result in fewer tax dollars being available to invest in schools. In other words, the sales tax holiday to help parents pay for school supplies will come partly at the expense of school funding.

Economists from both the right and the left agree that there is little evidence to show that tax holidays increase economic activity or create jobs.* Some states are reconsidering these laws. Washington, D.C., for example, recently cancelled a back-to-school sales tax holiday after having it for eight years because it was losing over half a million dollars every year in revenue.[3]

Colorado cannot afford a tax holiday, particularly at a time when other critical services, including education, are facing major cuts.

Thank you for the opportunity to testify before this committee.

[1] Harper, R. et al (2003) Price Effects Around a Sales Tax Holiday: An Exploratory Study. Public Budgeting & Finance 23:108-113.

[2] Hawkins, R. and Mikesell,J. L. (2001) Six Reasons to Hate Your Sales Tax Holiday,State Tax Notes 10 : 801-804.

[3] Robyn, M., Cohen, M. and Henchman, J. (2011) Sales Tax Holidays: Politically Expedient but Poor Tax Policy Tax Foundation Special Report

No. 193

* Center on Budget and Policy Priorities and The Tax Foundation both oppose sales tax holidays