Tax Holiday Costs State $2.1 Million

Tax Holiday Costs State $2.1 Million
Shoppers enjoyed the tax holiday, but no extra sales were detected to offset lost revenue for the state.

While county and municipal governments across Arkansas were advocating tax hikes to their citizens, the state government took a plunge into unfamiliar territory with its first-ever sales tax holiday timed for back-to-school shoppers.

Tim Leathers, deputy director of the state Department of Finance & Administration, was concerned about how the new fiscal phenomenon might constrain the Arkansas budget.

The benefits for consumers were undeniable - an instant savings of 6 percent or more on clothing and certain other items - but the bounce in extra purchases some hoped would accompany the tax holiday and offset the lost revenue didn't show.

The results didn't surprise Leathers.

"We did have a better than expected sales tax month [in August], but it was due to business sales," he said. "We couldn't detect any increase in consumers spending more money while they were in there buying school supplies."

Introduced as House Bill 1369 by Rep. Matthew Shepherd, R-El Dorado, the two-day tax holiday proposal became Act 757 of 2011. Set for the first weekend of August, the annual exemption on a laundry list of needful things associated with the start of a new school year debuted Aug. 6-7.

DF&A estimated the new law would result in a revenue loss to the state of $2.1 million in fiscal 2012 and a $710,000 loss to cities and counties that collect a local-option sales tax.

Tax-exempt items covered under the Arkansas sales tax holiday include clothing priced less than $100, accessories priced less than $50 and school and art supplies.

Don Zimmerman, executive director of the Arkansas Municipal League, said the inaugural tax holiday generated retail buzz in communities throughout the state.

"I know there was a lot of activity around the stores that weekend," Zimmerman said. "It was pretty well along the lines of what they forecast in terms of lost revenue."

State number-crunchers are awaiting September totals to fully analyze the before-and-after impact of the sales tax holiday.

"If it did shift consumption from month to month, we'll have to see," said John Shelnutt, economist for DF&A. "The before was weak, mixed with some special factors with business spending.

"Even then, it's not a clear story. We were below forecast for the first two months of the fiscal year, which begins July 1."

One of the considerations that pushed the creation of Act 757 was concern that Arkansas shoppers were taking advantage of tax holidays in neighboring states. In that light, the move amounted to a defensive revenue countermeasure with the possibility of attracting out-of-state money.

The second part of the scenario didn't play out, according to Shelnutt.

"The results did not produce such a growth rate to suggest there was a cross-border rush to take advantage of the holiday," he said. "It is a common point in the debate, this cross-state pull."

Attempts to support or refute an increase in consumer spending to offset the loss in revenue from the holiday are at best inclusive based on experiences in other states.

"We saw conflicting reports," Shelnutt said. "It's a cloudy picture on that. Frankly, the studies aren't very good. The quality of the debate from the data side isn't very good."

Joining the Party

Until this year, Arkansas was an island surrounded by states offering a brief sales tax respite. Some border states found it hard to stop at just one such holiday, too.

Texas was the first neighbor to enact a sales tax holiday in 1999 for clothing, backpacks and school supply items priced less than $100. The Lone Star State added another three-day holiday in 2008 for energy-efficient air conditioners priced less than $6,000 and other green products priced less than $2,000.

In 2007, Louisiana enacted a two-day holiday for tangible personal property items priced less than $2,500 except for vehicles and on-site meals. Two more sales tax holidays followed: in 2008 a two-day break for hurricane preparedness items priced less than $1,500, and in 2009 a three-day break for firearms, ammo and hunting supplies.

In 2004, Missouri launched its tax holiday for school supplies priced up to $50, clothing items priced less than $100 and computers priced less than $3,500. In 2009, a seven-day holiday was added for energy products priced less than $1,500.

The three-day tax holiday in Tennessee began in 2006 on school supplies and clothing items priced less than $100, and computers priced less than $1,500.

Rounding out the list of tax holidays in adjoining states are Oklahoma (three days in 2007) and Mississippi (two days in 2009) for clothing and footwear items priced less than $100.

Ten other states with sales tax holidays are South Carolina and Iowa (2000), Connecticut and North Carolina (2001), New Mexico (2005), Alabama and Virginia (2006), Massachusetts (2008) and Florida and Maryland (2010).

While the debate on the merits of tax holidays continues, Shelnutt is content that DF&A had a good read on this new twist to budget forecasting that has become an annual event.

"We look at it as a cost to revenue," he said. "The fact that it didn't produce a negative surprise was a good result for us."