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Why Some States Are Expanding Tax-Free Periods

This year, the back-to-school tax “holidays” that many states offer each summer are being expanded with new types of tax-free periods that are aimed at giving beleaguered consumers a break on rising prices.

Some states have added or stretched periods when shoppers can make a variety of purchases, free of state (and sometimes local) sales taxes. And a few states have temporarily suspended, or plan to suspend, state gasoline taxes for weeks or longer, while others have paused their taxes on groceries.

What’s behind the renewed enthusiasm for offering a tax hiatus? A serious bout of inflation and large state budget surpluses, from both tax revenue and federal pandemic relief, have made such holidays feasible as well as politically attractive, said Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation, a think tank in Washington.

“States are sitting on surpluses at the same time many taxpayers are struggling under the burden of high inflation.” Walczak said.

At least 18 states have sales tax holidays on the calendar for 2022, up from 17 last year, according to the Federation of Tax Administrators, a group that provides services to state tax authorities. Some holidays last a few days, while others go for weeks, months or even longer.

Some states that already offered annual holidays added new ones, or expanded the categories of items temporarily exempt from tax. Connecticut added a tax-free week for clothing and footwear in April, in addition to its traditional tax holiday in August. Tennessee will hold its usual back-to-school sales-tax-free weekend in July. But it also added a new holiday, exempting food and “food ingredients” from tax during August, and extended through June 30, 2023, an exemption on the sales tax for gun safes and gun safety devices.

Florida stands out in its zeal for sales tax holidays. The state already had three, devoted to disaster preparedness equipment, back-to-school items and recreational activities. This year, it added a half dozen more, including a summer-long exemption on the tax on children’s books; yearlong exemptions on taxing diapers and baby and toddler clothing; a “tool time” week in the fall; and a two-year period for buying impact-resistant windows and doors to bolster homes against hurricanes. It will also pause the state gas tax for October.

Lucy Dadayan, a senior research associate at the Tax Policy Center, a joint venture of two Washington think tanks, noted that the holidays were often politically motivated: “It helps boost popularity.”

The governors of four states that have embraced the expanded tax holidays are running for re-election this fall: Ron DeSantis in Florida, JB Pritzker in Illinois, Bill Lee in Tennessee and Ned Lamont in Connecticut.

The popularity of sales tax holidays is dismaying to many tax policy experts, who say the events offer shoppers a modest break at best and are often not well targeted to consumers who most need the savings. “State tax holidays tend to be political gimmicks,” Mr. Walczak said.

Some research suggests the holidays may simply shift the timing of purchases and, therefore, have limited net economic impact. And a report from the Tax Foundation says retailers may sometimes raise prices during the events.

“What we’re seeing is a lack of imagination about what to do in trying times to help people,” said Dylan Grundman O’Neill, senior state tax policy analyst with the Institute on Taxation and Economic Policy.

Still, that does not mean an individual consumer may not benefit from buying specific items during tax holidays, he said, which helps explain why both politicians and consumers like them. “We all like to feel we’re getting a good deal.”

Here are some questions and answers about state tax holidays:

Most state revenue departments offer details online about how the sales work, including dates and lists of items covered.

It depends on the state and the item purchased. All but five states charge sales taxes, ranging from 4 percent of the sale to more than 7 percent, and some also have local sales taxes that can push the combined rate above 9 percent. Most states cap the amount of purchases exempt from tax during the holiday. Some require cities and towns to participate, while others make the tax holiday optional.

Yes. The tax exemption applies if the item is bought online during the tax holiday, even if it is delivered after the holiday ends, according to state websites. But items bought online and delivered out of state are generally subject to sales tax in the state where the item is received, said Scott Peterson, vice president of US tax policy and government relations at Avalara, a provider of tax compliance software.

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