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Sales Tax Holidays on the Planet of the Apes

Posted on August 5, 2013 by David Brunori

Some aficionados of the genre may remember this from the 2001 remake of Planet of the Apes: After the climactic battle, former underwear model Mark Wahlberg and the always alluring (even when dressed as a gorilla) Helena Bonham Carter convince man and ape to make peace and work together for the common good. The idea of man and ape together shocks those who followed the seven Planet of the Apes movies. Man and ape don't reconcile. I experience that same shock when organizations on opposite ends of the political spectrum agree. But it is happening more often, and I plan to highlight it when it occurs.

This week's example is sales tax holidays. I've been criticizing those political gimmicks for more than a decade and have pointed out that as policy choices, they are dumber than a bag of hammers. Why? First, the government should never be in the business of encouraging people to shop or buy. By definition, that is what sales tax holidays do. More importantly, they don't work. Touted as a tax break for hardworking, middle-income families, the holidays only encourage retailers to raise prices. Because sales tax holidays merely change the timing of shopping (rather than the amount spent), consumers pay more, the government loses revenue, and the retailers get a small windfall. That's why retailers lobby hard for the holidays.

The Tax Foundation recently released a report slamming sales tax holidays in 17 states. Joseph Henchman, the report's author, concluded:


    Sales tax holidays neither promote economic growth nor increase purchases. They create complexities for all involved, while inserting the political process into consumer decisions. By distracting high-tax states from addressing real problems with their tax system, holidays undermine efforts to provide legitimate relief to consumers in general and the poor in particular. Sales tax holidays are no part of sound tax policy.

The Tax Foundation has a reputation as a conservative (although I prefer libertarian) organization. It is terrific on tax policy principles. But everyone knows it favors low tax burdens and is critical of progressive tax policy.

On the opposite end of the political spectrum is the Institute on Taxation and Economic Policy (ITEP), which I believe does earnest, thoughtful research. This fairly liberal group is part of Citizens for Tax Justice and favors highly progressive tax systems.

But ITEP agrees with the Tax Foundation on sales tax holidays. ITEP also recently released a report criticizing the holidays, saying they provide a windfall to retailers, cost the states money, create administrative problems, and don't help consumers. In other words, sales tax holidays are a bad policy choice.

I am heartened that the Tax Foundation and ITEP agree, and I hope their constituencies will heed their advice and help end horrible sales tax holidays. I also hope we find more instances of opposing organizations finding common ground.


ALEC Is Right

My liberal friends hate the American Legislative Exchange Council (ALEC), seeing it as part of some grand Koch brothers-inspired conspiracy to make the rich richer and the poor poorer. I don't hate ALEC, especially since it no longer focuses on social issues. And I think it's correct on the tax and economics topics.

Recently, it featured a piece denouncing the unfair tax treatment among business groups. Some companies and industries get tax breaks, and some don't. It all depends on who you know and whose palm you grease. Liberals and conservatives are both guilty of picking winners and losers in the marketplace. ALEC stated:


    Fair marketplace competition requires neutral treatment of businesses irrespective of their product or service, production methods, various financial features (i.e. capital intensity of production, labor intensity of production, use of shipping, use of subsidiary locations, etc.), or business organization. A simple test for sound tax policy in this regard is the following query: are entrepreneurs and business leaders making business decisions for tax purposes? If the answer for a state is "yes," that state's tax code is creating market distortions and an unfair competitive balance in affected marketplaces.

ALEC is absolutely right. Its solution is to move away from income taxation and toward consumption taxation. You may or may not agree. But building a tax system that is as neutral as possible when it comes to business taxation is critical to sound tax policy.

'Devastating'

That is how the National Association of Theatre Owners of North and South Carolina described the effect of tax reform in North Carolina on moviegoers and movie theaters -- devastating.

How will tax reform end in utter devastation? The law increases the sales tax on movie tickets from 1 percent to 4.75 percent. Theater owners are mad. And they are couching their anger in terms of the devastation wrought on the public. Americans love movies, and the darn government is going to make it more expensive to go. Theaters that charge $8 for a bag of popcorn that costs them 60 cents to produce are worried about the customers? The theaters that charge -- in relatively inexpensive North Carolina -- $7 for a large soda (which probably costs like a nickel to produce) are worried about their customers? I won't even get into the ridiculous amount they charge for a bag of Sour Patch Kids.

In any event, folks like theater owners shouldn't be hyping their argument up with words like "devastation" to describe what amounts to a 10-cent tax increase. Devastation is best left to describe events like the bombing at the Boston Marathon or the aftermath of Hurricane Katrina.


Pro Wrestling Is a Sport, Apparently

When I was a kid, Killer Kowalski, Chief Jay Strongbow, Professor Toru Tanaka, and the Polish Hammer competed before sold-out arenas in Scranton, Pa. (I never went, but now I wish I had).

Nowadays there is a dispute in Pennsylvania over whether professional wrestling should be subject to a special tax. The state hosts more pro wrestling bouts than any other. The Pennsylvania Wrestling Act imposes a 5 percent tax on the face value of all tickets sold to a wrestling performance, which is then turned over to the Pennsylvania State Athletic Commission. But the commission doesn't regulate pro wrestling. It doesn't license wrestlers, conduct physicals, or anything else. Actually, its sole regulatory function is to make sure all wrestlers are at least 18 years old. Besides that, it just collects money.


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The Politics of State Taxation is written by Tax Analysts Deputy Publisher David Brunori, who welcomes comments at dbrunori@tax.org.