When it comes to money, two things are certain: shoppers like saving it and business owners like making it. Anything that makes it easier to reach those goals simultaneously is good to go — at least according to consumers and retailers.
In the days leading up to the state’s tax-free shopping week, which runs Aug. 14-20 and exempts purchases of apparel, including shoes, under $100 from the 6 percent sales tax, both shoppers and store managers lauded the program for its potential to tackle the recession’s lingering effects in Maryland.
But behind the scenes, experts disagree over whether a sales tax holiday effectively does the job proponents say it does — stimulating spending by increasing consumer confidence and providing relief, however modest, to financially burdened shoppers.
Many business owners do report spikes in sales during tax-free weeks, typically about 20 to 30 percent, some have said, and many shoppers said this week it is indeed an incentive to hit the racks after months of penny-pinching. Some economists, however, argue those benefits are less significant than they seem.
Influencing market patterns
Economist Mark Robyn and his colleagues at the Tax Foundation, a nonprofit research institute based in Washington, D.C., argue that tax-free weeks allow the government to unduly influence market patterns while generating short-term excitement without real relief. Additionally, the state will forgo an estimated $10 million to $15 million in revenue, but Comptroller Peter Franchot said that’s “a very small percentage” of overall sales tax revenue, which is several billion dollars a year, though hard data for Fiscal 2011 is not yet available.
And as far as consumers are concerned, a discount is a discount, and retailers say any increase in business is fine by them.
“I like to save money,” said Rachel Cox, 45, as she entered Kohl’s in Lutherville Station on Wednesday — before the exemption took effect. “I think [tax-free week] is great. I wish we had it all the time. … I’m just coming in to use my Kohl’s Cash right now for something I need, but I’ll probably come here next week, too.”
Leeba Berger, 34, of Baltimore, was browsing the Old Navy in the same shopping center, but said she too had her eye on the opportunity just around the corner.
“I’m just kind of looking this week, and checking out what’s here, and buying next week,” she said. “[Tax-free week] will get people to actually spend more money and hopefully help the economy. Any amount of money that people save is worth it.”
Old Navy is gearing up for plenty more customers to pour in with the same idea, store manager Tracy Berger said. Though she couldn’t give concrete figures, Berger said she saw a “pretty noticeable” increase in sales from previous tax holidays, so she schedules more employees to accommodate the expected influx of shoppers.
That need for more workers on the clock is one illustration of what Maryland Retailers Association President Patrick Donoho said is the goal of the tax holiday. Extra retail activity fuels economic growth — such as additional jobs — when profits are passed along throughout the supply chain, he explained.
“Retailers are the largest private-sector employer in the state of Maryland,” he said. “We’re the backbone of the economy. … With consumption making up 70 percent of our economy, if people aren’t consuming, how is anybody else benefitting? When retailers benefit, manufacturing benefits, import/export benefits, distributors, everybody.”
That’s especially crucial in Maryland, which posted the worst job growth in the country over the past year, according to the U.S. Department of Labor.
“That lack of success is because we spend way too much time on stabilizing the state revenue picture through taxes than we do in promoting and encouraging the genius of the private sector to produce jobs,” Franchot said.
A different perspective
But the Tax Foundation’s Robyn has a different perspective.
“Businesses support it because it’s basically free advertising for a sale that they don’t have to cut prices for,” he said. “The point is to get traffic, to turn over inventory, so if you can get that effect without actually cutting prices, well then, hey, that’s at least a win.
“But my point is that’s not a net benefit for the economy. It’s basically shifting the net cost of a sale from the business to the government, which obviously is funded by taxpayers.”
A manager at Payless ShoeSource in The Gallery at Harborplace, who declined to be named because of company policy, estimated her store sees a 20 to 30 percent boost in sales. But some economists worry the increase is simply displaced profits from fewer people choosing to go shopping right before the tax-free week. Berger, however, said there hasn’t been a pre-holiday decline at Old Navy. While Donoho sees that as good news, it sends up another red flag for Robyn.
“You have to think that at least some portion of [sales during the tax holiday] is shifted from other time periods, and if that’s not the case … then you’ve got a situation where the government has somehow tricked people into buying something they wouldn’t have otherwise,” Robyn said. “I’m not sure that’s a good goal for the government to be promoting.”
The tax-free week is purposely scheduled in August to target families, a tactic that hits home for consumers like Berger, who has three children and is expecting her fourth.
“I think it’s great that they’re doing it next week because people have to spend a lot of money getting their kids ready for school, whether it’s school supplies or clothing or shoes, it’ll somehow help them,” she said.
Nationally, consumer spending in June grew only 0.2 percent, and according to a report last month by the comptroller’s office, sales tax revenue growth in Maryland has been lower than the projected rate of 5 percent, lagging at 3.4 percent.
“If the sales tax finishes the year at the current year-to-date growth rate, it will fall approximately $57 million short of the forecast,” the report reads. “… Our sagging sales tax receipts are yet further confirmation that Marylanders have yet to regain their purchasing power and consumer confidence.”
The comptroller’s office had forecast sales tax revenue of $3.8 billion for fiscal 2012.
Even though the tax holiday results in lost revenue, Donoho and Franchot said they believe the event will make up for it by tackling the root of the problem.
“It helps consumer confidence to be able to say, ‘I’m going to go out and save money on back-to-school clothing,’” Donoho said. “And my belief is that consumer confidence is what really drives sales, and in today’s market, especially the last few days, I think consumer confidence has been shaken and that doesn’t bode well.”
Donoho said tax holidays also allow Maryland to compete with neighboring states, particularly Delaware, which has no sales tax, and Pennsylvania, which does not tax clothing. During a special session in 2007, the Maryland General Assembly increased the sales tax rate from 5 to 6 percent and established two annual tax holidays, beginning in 2010 and recurring unless legislators vote to repeal them. The first, in February, is applicable to Energy Star-rated appliances.
Maryland held sales tax holidays in 2001 and 2006, and this year, 17 other states are having them. Still, many shoppers this week said they were unfamiliar with the offer.
Sandy Collison, 70, of Parkton, who was browsing in Kohl’s with her daughter-in-law and two grandchildren, said she thought the offer included school supplies and applied only to children’s clothes. After learning the details, however, they said they might wait to make their purchases.
Unaware of deal
Many others weren’t aware of the tax-free deal at all. Some gave blank stares and continued browsing, but others were intrigued and wanted to know more, like 29-year-old Cindy Molen of Timonium.
Molen was perusing the Old Navy racks for an outfit for a concert this weekend, but said now she’ll shop again once the promotion begins, possibly for a new pair of running shoes from the athletic shoe store Charm City Run, which has four Maryland locations.
“At Charm City Run they’re a little more expensive than at Dick’s [Sporting Goods] and stuff,” she said. “So I’ll probably do a little bit of both — go to cheaper stores where I could get a lot of stuff and then the stores where I wouldn’t go in all the time, but where if I save a little money, I could go.”
Robyn said the savings would seem less substantial if delivered through a tax-rate decrease of the same amount, just spread over the year and without the associated complexities of a tax holiday, which he called a political gimmick to win over voters.
But “that’s nonsense,” Franchot said. “People and businesses like the proposal. It’s a great idea and it works. A small number of academic critics disagree.”
The event excites consumers who like the idea of stiffing Uncle Sam, Donoho added. Collison’s daughter-in-law, who preferred not to be named, said 6 percent off could be worth it, but like other shoppers, she said’ll look for even better discounts on pricey items like school uniforms.
“I actually shop sales throughout the year,” she said. “So if you can get the sale, it’s almost better to look for that.”