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Why Some States Are Expanding Tax-Free Periods

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This yr, the back-to-school tax “holidays” that many states offer each summer are being expanded with latest sorts of tax-free periods which might be geared toward giving beleaguered consumers a break on rising prices.

Some states have added or stretched periods when shoppers could make a wide range of purchases, freed from state (and sometimes local) sales taxes. And just 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 huge state budget surpluses, from each tax revenue and federal pandemic relief, have made such holidays feasible in addition to politically attractive, said Jared Walczak, vice chairman of state projects with the Center for State Tax Policy on the Tax Foundation, a think tank in Washington.

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

A minimum of 18 states have sales tax holidays on the calendar for 2022, up from 17 last yr, in line with the Federation of Tax Administrators, a bunch that gives services to state tax authorities. Some holidays last just a few days, while others go for weeks, months and even longer.

Some states that already offered annual holidays added latest ones, or expanded the categories of things temporarily exempt from tax. Connecticut added a tax-free week for clothing and footwear in April, along with its traditional tax holiday in August. Tennessee will hold its usual back-to-school sales-tax-free weekend in July. But it surely also added a latest holiday, exempting food and “food ingredients” from tax during August, and prolonged 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, dedicated to disaster preparedness equipment, back-to-school items and recreational activities. This yr, 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 autumn; and a two-year period for purchasing impact-resistant windows and doors to bolster homes against hurricanes. It should also pause the state gas tax for October.

Lucy Dadayan, a senior research associate on the Tax Policy Center, a three way partnership of two Washington think tanks, noted that the vacations were often politically motivated: “It helps boost popularity.”

The governors of 4 states which have embraced the expanded tax holidays are running for re-election this fall: Ron DeSantis in Florida, J.B. Pritzker in Illinois, Bill Lee in Tennessee and Ned Lamont in Connecticut.

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

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

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

Still, that doesn’t mean a person consumer may not profit from buying specific items during tax holidays, he said, which helps explain why each politicians and consumers like them. “All of us prefer to feel we’re getting a great deal.”

Listed below 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 things covered.

It is dependent upon the state and the item purchased. All but five states charge sales taxes, starting from 4 percent of the sale to greater than 7 percent, and a few even have local sales taxes that may push the combined rate above 9 percent. Most states cap the quantity of purchases exempt from tax in the course of 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 in the course of the tax holiday, even whether it is delivered after the vacation ends, in line with state web sites. But items bought online and delivered out of state are generally subject to sales tax within the state where the item is received, said Scott Peterson, vice chairman of U.S. tax policy and government relations at Avalara, a provider of tax compliance software.

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