‘Business-boosting gimmick under the guise of a tax cut’

The first Friday and Saturday of every August marks a special “holiday” in Iowa: a weekend of sales tax-free clothes shopping. Yet to some experts, the benefits of such holiday are uncertain.

“The idea is to reduce their taxes and thereby increasing their purchasing power of the eligible items,” said Dave Swenson, research scientist for the Iowa State University Department of Economics.

Existing in its current form since 2012, the exemption provides relief from the 6% sales tax and local taxes for items of clothing, including footwear, that have a purchase price less than $100, a price limit that has been in place for nearly two decades now.

“That means that the value of the exemption has decline because of inflation,” said Swenson. “What might have cost $99 in 2000 now might cost $125 and therefore not be exempt.”

This type of holiday is said to be beneficial to families, particularly those preparing for the academic year, as well as the businesses providing the items. This can be particularly important for local businesses and rural communities.

“We have a lot of great stores in our area, and when you save the tax on it, it’s well worth your time,” said Ellen Gerharz, director of the Creston Chamber of Commerce. “We’re hoping people will remember that it’s important to support our local merchants, and we hope they take advantage of it.”

However, Swenson said the overall savings may not be as cut and dry as it sounds.

“Sales taxes are regressive: they take a higher share of low income householders’ incomes than they do of middle and upper income householders’ incomes,” said Swenson.

Swenson said eliminating those taxes has more short-term value to low-income buyers, but it is more likely that middle and upper income shoppers will purchase a larger quantity during the tax holiday, thus having a more recognizable amount in savings.

“Remember, the money spent would all have likely been spent over the course of the year by households, so there is only a minor increase in sales during that weekend, and the increase is negligible given a year’s worth of economic activity,” said Swenson. “A sale made that weekend will not be made at another time during that month or year. It is mostly an economic zero-sum gain. Clothing and footwear sellers realize a minor boost in sales that weekend, but they must of necessity than have lower sales all other weekends as that money has all been spent.”

Additionally, due to the nature of the holiday, there is a shift in tax liability away from those who shop during the holiday and puts the burden on those who didn’t.

“It is mostly a business-boosting gimmick by legislators designed to infer family friendliness under the guise of a tax cut,” said Swenson. “For any family, however, it is a minuscule reduction in the total amount of sales taxes they pay over the course of a year. Similarly, the boost to business sales is questionable. With the reduction of the tax, there is less impetus among competitors to reduce item prices.”

In all, there are minor consumer gains, somewhat smaller retailer gains, with some research suggesting that the holiday sees an increase in sales tax collections.

“Consumers use the shopping expedition to buy items that are not tax exempt, as well,” said Swenson. “Maybe so, but again, taxes collected on sales that day cannot be collected on any other day that year. Those taxes reflect a zero-sum transfer to the holiday weekend.”

However, with the current state of the American economy, partnered with tight finances due to the ongoing COVID-19 pandemic, Gerharz said the savings brought on by the holiday may matter now more than ever.

“Especially now, in our economic situation with the pandemic and all, I think people are always looking for a great bargain,” said Gerharz. “Not only will there be bargains available, I’m sure, it will also add onto that by not having to spend sales tax on it.”