Adding Another Hole to the GRT’s Swiss Cheese

The Tax Foundation has released its annual review of sales-tax holidays — and New Mexico got a special mention.

This year, 17 states “will hold a sales tax holiday … down from a peak of 19 states in 2010, and up from 16 states last year.” As the map above indicates, holidays occur in states blue (Connecticut, Maryland), purple (Florida, Ohio), and red (Texas, Alabama).

A tax break? Sounds great, right? Not exactly. Analysts Joseph Bishop-Henchman and Scott Drenkard skillfully skewer the false assumptions politicians employ to promote sales-tax holidays:

* Sales-tax holidays promote economic growth. Nope — they merely “shift the timing of sales.” Job-creation is “modest and temporary,” with short-term hires being “costly for businesses.”

* Sales-tax holidays are targeted toward consumer needs. Exemptions are granted for school supplies, sports equipment, clothing, computers, hurricane-preparedness gear, and “even firearms.” But picking the “right” products to reward is the result of “political forces,” not objective assessment. “[A] low-income elderly or childless couple may not have a need for school supplies, a computer, or sports equipment, but presumably they are as deserving of tax cuts as a consumer purchasing any of the exempt products.” Even worse, the complexity of determining what individual items qualify for any class of exemption is dizzying. “For example, the New Mexico sales tax holiday exempts computer microphones but not headsets, blank painting canvases but not dry erase boards, and backpacks but not duffel bags.”

* Sales-tax holidays save consumers money. Research has shown that it is often retailers, not customers, who benefit. “There is … evidence that the prices consumers pay during holidays may exceed the prices during other times of the year, even after accounting for the tax savings. … Indeed, this seems to be a perverse effect of sales tax holidays: the more consumers they turn out, the more demand goes up, and the more prices rise.”

This year, New Mexico will have two GRT holidays. Three days in early August will offer the standard, back-to-school grace period. But on November 24, there will be something new. Purchases of “tangible personal property … if the sales price of the property is less than five hundred dollars,” provided they are made at stores that “employed no more than ten employees at any one time during the previous fiscal year,” get a GRT exemption.

The idea is to boost sales on “Small Business Saturday,” the post-Thanksgiving holiday invented by American Express in 2010. Unsurprisingly, the “right” kind of purchases must be made on November 24 — a list that includes “books, journals, paper, writing instruments, art supplies, greeting cards and postcards,” “tools used for home improvement, gardening and automotive maintenance and repair,” “musical instruments,” “cookware and small home appliances for residential use,” “bedding, towels and bath accessories,” “furniture,” “floral arrangements and indoor plants,” “cosmetics and personal grooming items,” and “a toy or game that is a physical item, product or object clearly intended and designed to be used by children or families in play.”

Governor Martinez signed the Small Business Saturday perk’s legislation in March, despite the Legislative Finance Committee’s finding that the new GRT holiday did “not appear to meet any of [its] five core … tax policy principles” of adequacy, efficiency, equity, simplicity, and accountability. (Strong Democratic support, signed by a Republican governor — Bob Perls, call your office.)

So instead of broadening the GRT base and lowering its rate — i.e., adopting effective, pro-growth tax reform — Santa Fe is continuing its policy of creating fresh carve-outs. The problem is so bad, New Mexico is now a pioneer. It was the first state to make Small Business Saturday tax-free. (Fortunately, no laboratory of democracy has yet to follow suit.)

We’ll leave the final word to the Tax Foundation:

Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is an implicit recognition that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.

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