Taxation Sales Taxes on Clothing

Taxation

Sales taxes on clothing as regressive measures:

Are state sales tax holidays 'the emperor's new clothes' in terms of tax relief and economic stimulation?

A sales tax is often defined by economists as a regressive tax, simply by virtue of the fact that it taxes every person equally who buys a particular good or service, regardless of that individual's income. This is one reason that some states have no sales tax at all, although for other states such a tax creates a critical if controversial source of revenue. As a compromise, other states offer sales tax exemptions on necessary goods. In one recent example, in New York State, there was a sales tax, a prohibitively high sales tax according to some legislators, upon clothing. Calls to eliminate the sales tax occurred in 2006 when Democratic lawmakers in Albany called for a permanent tax holiday. "The New York State tax rate [on clothing] of 4.375% (including the Metropolitan Commuter Transportation District rate) was repealed effective April 1, 2006, and the New York City tax rate of 4% was eliminated effective September 1, 2005 for items under $110"("Sales and use taxes," 2008, NYC Finance).

New York State, the argument goes, lost money because shoppers fled to cheaper nearby states to purchase clothing when there was a sales tax on the items, even though clothing retailers, particularly in New York City, were so important to the state's economy. Historically, retailers experienced a 'bump' in clothing sales during periodic sales tax holiday periods, created by the 'lose it or use it' mentality fostered by the temporary exemption. However, economists such as Richard Chamberlain have criticized these holiday periods, although they are still observed by the city and state. Chamberlain's article "New York Democrats call for permanent sales tax holiday" published by the non-partisan Tax Foundation. Chamberlain calls holding tax holidays "dubious tax policy" because they actually add to retailers' tax compliance costs, increase uncertainty about tax law, and "are non-neutral both across products and over time" (Chamberlain 2006). In other words, the impact of the taxation relief upon retailers in terms of fairness is unequal for consumers, and does not help retailers and the local economy.

Tax holidays can be prohibitively costly to states in desperate need of revenue, according to Vanessa De La Torre, a business correspondent for the Hartford Courant. Last year, during its tax holiday, specifically scheduled during the typical back-to-school clothing buying period, the state of Connecticut lost an estimated "$3.8 million to $4 million in revenue for the week"(De La Torre 2008). The argument that parents would not have bought such clothing for their children falls flat, critics of the holiday allege, since there is no tax on clothing or shoes under $75, and the typical price point for most middle-income families for new shoes is $50 ("Exemptions from sales and use taxes," 2008, the State of Connecticut; De La Torre 2008). The tax holiday was more likely to benefit families that had "the disposable income to buy an $80 sweater for their teen"(De La Torre 2008). To extend this argument, the effect upon equilibrium price and quantity demanded by such non-price sensitive consumers was negligible, resulting in no net benefit to the state's retailers or middle-class consumers. The sales tax holiday on clothing was as equally regressive as a sales tax on clothing -- someone buying a $500 pair of Prada boots gets the same exemption as a poor woman buying her child a much-needed new school uniform, during the holiday period, in contrast to the periods of time when the sales tax was imposed on goods over $75.