(The Center Square) – While thousands of Iowans are anticipating the coming sales tax-free weekend on clothing and footwear, state politicians and retail merchants may be the ones who benefit the most.
Seventeen states are holding a sales tax holiday this year. The peak year for such tax breaks was 19 in 2010.
In Iowa, the tax holiday is the first Friday and Saturday of August, this year falling on the 6th and 7th.
On those days, Iowa consumers will not pay the six percent state tax or the one percent tax in certain localities. Purchased items of $100 or more pay the regular tax.
Janelle Cammenga, a policy analyst for the Tax Foundation in Washington, DC, says the actual economic benefit to the state is minimal.
“In the end, sales tax holidays are political gimmicks that distract from genuine, permanent tax relief. If a state must offer a ‘holiday’ from its tax system, it is an implicit recognition that the tax system is uncompetitive” with other states, Cammenga explained in an online analysis.
John Hendrickson, a policy analyst for the Tax Education Foundation in Des Moines, told The Center Square the tax break is not bad per se – just a “distraction.” He says it would be “better to lower the sales tax rate rather than these one-time measures.”
What are the actual savings estimates for Iowans?
If the state follows national trends, each Iowa household with children under 18 will spend $235 for clothing and an additional $161 for shoes. Those numbers come from the National Retail Federation’s 2021 survey.
Such families would save about $25 on average in Iowa sales tax. Last year consumers saved an estimated $4.6 million during the sales tax holiday, the Department of Revenue told Radio Iowa.
That loss to state coffers is also minimal compared to annual per household “sales/use tax” collected for the most recent fiscal year (July 1, 2020 to June 30, 2021).
Sales/use tax receipts were $3.5 billion for Iowa’s 304,500 households. The government tax intake amounts to $11,500 for each family, based on calculations using official state statistics.
Hendrickson and Cammenga say this does not mean consumers should not take advantage of the savings. They say paying less tax on needed items is a good thing.
Consumers may also enjoy additional savings from retailers offering discounts. In-store savings and corporate coupons could enable them to pocket more dollars.
Those benefits could reduce the cost of an item below $100 and thereby qualify for the tax relief. For instance, a winter jacket costing $120 would not get the tax discount. But with a 25 percent store coupon, the outerwear would cost $90 and the tax savings would apply.
But the overall benefits could remain minimal. Without retail discounts, consumers who routinely look for special sales of 10 percent to 50 percent off will only receive six percent to seven percent from the tax savings. And some consumers may purchase items they do not really need.
Cammenga finds tax-free weekends discriminatory. The reductions only apply to select items of clothing and footwear, which she said plays favorites with businesses. The tax holiday in Massachusetts applies to the complete range of personal property for school or any other purpose.
Iowa’s tax holiday has a long list of items still taxable though commonly thought of as apparel or shoes. The exclusions include hoodies, clothing repair items (thread, buttons, zippers), sweat bands, golf shirts and pants, protective and sports gloves, helmets, ice skates, bowling shoes, and shoes with cleats or spikes.
Hendrickson says parents of school-age children in his office are perturbed with the lack of tax discounts on so many sports items. They complain those common purchases should get a break as well.
There is also “time discrimination,” Cammenga said. Those who are out of town, on vacation, uninformed on the tax break, or working extended shifts cannot take advantage of the two-day windfall.
Where Iowa falls down beyond the sales tax, according to Cammenga, is on corporate taxes that impact business success. Overall the Tax Foundation ranks Iowa #40 in its 2021 State Business Tax Climate Index. Iowa has moved up slightly after languishing for years in the mid-40s.
Hendrickson argues that Iowa should “broaden its tax base.” That would mean eliminating some of the hundreds of exemptions to tax liability in Iowa’s laws.
Implementing that, he adds, could help Gov. Kim Reynolds fulfill her promise of significant reform in the tax code during the 2022 legislative sessions.