Why some states are extending tax-free periods

This year, the back-to-school tax “holidays” that many states offer each summer are being extended with new types of tax-free periods intended to give troubled consumers a break from rising prices.

Some states have added or expanded periods when shoppers can make a variety of purchases, free of state (and sometimes local) taxes. And some states have temporarily suspended, or plan to suspend, state gas taxes for weeks or longer, while others have halted their taxes on groceries.

What’s behind the renewed enthusiasm for offering a tax break? A severe bout of inflation and large state budget surpluses, both from tax revenues and from federal pandemic relief, have made such a vacation feasible and politically attractive, said Jared Walczak, vice president for state projects at the Center for State Fiscal Policy in the Tax Foundation, a Washington think tank.

“States are running surpluses at the same time many taxpayers are struggling under the burden of high inflation,” Walczak said.

At least 18 states have sales tax holidays on the calendar for 2022, up from 17 last year, according to the Federation of Tax Administrators, a group that provides services to state tax authorities. Some vacations last a few days, while others last weeks, months, or even longer.

Some states that already offered annual vacations have added new ones or expanded the categories of items temporarily exempt from tax. Connecticut added a tax-free week for clothing and shoes in April, in addition to its traditional tax holiday in August. Tennessee will hold its usual back-to-school sales tax-free weekend in July. But it also added a new holiday, exempting food and “food ingredients” from taxes during August, and extended a sales tax exemption for gun safes and security devices to June 30, 2023.

Florida stands out in its zeal for sales tax exemptions. The state already had three, dedicated to disaster preparedness kits, back-to-school supplies and recreational activities. This year, it added a half-dozen more, including a summer-long exemption on the children’s book tax; one-year exemptions to tax diapers and clothing for infants and toddlers; a week of “tool time” in the fall; and a two-year period to purchase impact-resistant windows and doors to strengthen homes against hurricanes. It will also pause the state gas tax for October.

Lucy Dadayan, a senior research associate at the Tax Policy Center, a joint venture of two Washington think tanks, noted that the festivities were often politically motivated: “It helps increase popularity.”

The governors of four states that have adopted extended tax holidays are running for re-election this fall: Ron DeSantis in Florida, JB Pritzker in Illinois, Bill Lee in Tennessee and Ned Lamont in Connecticut.

The popularity of sales tax breaks is discouraging to many tax policy experts, who say the events offer shoppers a modest break at best and are often poorly targeted at consumers who they need the savings the most. “State tax holidays tend to be political tricks,” Walczak said.

Some research suggests that the holidays may simply change the timing of purchases and thus have limited net economic impact. And a Tax Foundation report says retailers can sometimes jack up prices during events.

“What we’re seeing is a lack of imagination about what to do in tough times to help people,” said Dylan Grundman O’Neill, senior analyst for state fiscal policy at the Tax and Economic Policy Institute.

Still, that doesn’t mean an individual consumer can’t benefit from buying specific items during the tax holidays, he said, which helps explain why politicians and consumers alike like them. “We all like to feel like we’re getting a good deal.”

Here are some questions and answers about state tax holidays:

Most state revenue departments offer details online about how the sales work, including dates and lists of covered items.

It depends on the state and the item purchased. All but five states charge sales tax, ranging from 4 percent of the sale to more than 7 percent, and some also have local sales taxes that can raise the combined rate above 9 percent. hundred. Most states limit the number of tax-exempt purchases during the holiday. Some require cities and towns to participate, while others make tax exemption optional.

Yes. The tax exemption applies if the item is purchased online during the tax holiday, even if it is delivered after the holiday ends, according to state websites. But items purchased online and delivered out of state are generally subject to sales tax in the state where the item is received, said Scott Peterson, US vice president of tax policy and government relations. at Avalara, a provider of tax compliance software.

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