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Tax Foundation blasts tax holiday

Shoppers might save 6 cents on every dollar if they purchase certain clothing and shoes during this week’s sales tax holiday in Maryland.

Shoppers, such as these at Towson Town Center, can make purchases without paying the state sales tax on certain clothing and footwear through Saturday.

But a recent report released by the Washington, D.C.-based Tax Foundation calls Maryland’s tax-free shopping week and similar holidays promoted by 16 other states a poor substitute for meaningful tax reform, casting doubt on the benefit of the annual weeklong break.

The Comptroller of Maryland — which, in part, collects taxes for the state — estimates $5 million in taxes are lost during the holiday, which began Sunday and will run through Saturday. But Comptroller Peter Franchot and others have heralded the break as a way to help consumers and retailers during a time of summer when shopping takes a back seat to vacations.

“I watch the sales tax collection reports like a hawk,” said Patrick Donoho, president of the Maryland Retailers Association. “This will be the fourth year and what we’ve seen is it actually is more like priming a pump (for the fall shopping season), and that you see more increased economic activity because of it.”

The Tax Foundation argues in its report, however, that tax holidays do not increase sales — they just change when those sales are made. The report also suggests that retailers, who generally support the holidays, have in some cases raised prices to take advantage of making a few extra dollars under the guise of a state-sponsored discount.

“Sales tax holidays neither promote economic growth nor increase purchases. They create complexities for all involved, while inserting the political process into consumer decisions,” the report says. “By distracting high-tax states from addressing real problems with their tax system, holidays undermine efforts to provide legitimate relief to consumers in general and the poor in particular. Sales tax holidays are no part of sound tax policy.”

Though many politicians in Annapolis favor the break, which has been in effect every year since 2010, at least one candidate for Maryland governor joined doubters last week, making many of the same points detailed by the Tax Foundation.

Harford County Executive David R. Craig, who is seeking the Republican gubernatorial nomination, called the sales tax break a “sorry pittance considering this regressive, harmful tax hits working people the hardest.”

“Anything that gives Marylanders some tax relief is better than nothing, and it’s a recognition from a stubborn political monopoly about the need to spur the economy,” Craig said in a statement. “But the need for a so-called tax free week raises a broader issue. Why is it just for a week, and why do politicians decide what items qualify?”

The state comptroller’s office did not immediately respond to a request for comment on the Tax Foundation report, but Franchot promoted the holiday at an event in Towson on Thursday and the agency has advertised the break on its website.

In Maryland, clothing and footwear under $100 will be sold tax-free this week. Donoho said he’d like to see the General Assembly expand the exempt items to include school supplies such as backpacks and pencils, but he said consumers were still being helped by the current tax break because clothing and shoes are among the most expensive back-to-school purchases.

But even Donoho could not say for sure that consumers were not just shifting their purchases from one week in August to another, potentially negating the overall benefit to retailers while depriving the state of revenue.

“I don’t see data specifically that says ‘Pat Donoho postponed his purchase of a pair of sneakers or a pair of shoes for one week so he could save 6 percent,’” he said. “But what we see is increased activity.”