Proposed Sales Tax Holiday Aims to Spur Spending

With holiday spending likely to take another dip following the Nov. 12 airline disaster in New York, retailers are pinning their hopes on proposed congressional legislation halting sales tax in the coming weeks, which they say can save consumers as much as $6.5 billion, representing $100 billion in sales.

Initial hopes for a 10-day nationwide sales tax holiday beginning the day after Thanksgiving, Nov. 23—known as “Black Friday” and considered the biggest shopping day of the year—have faded, but the retail community and legislators are still pressing ahead for some immediate relief.

“Nov. 23 isn’t happening, but we’re still optimistic that something will happen for the holidays,” said J. Craig Shearman, senior director of media relations for the National Retail Federation (NRF), the retail trade association that has participated in the development of the sales tax bill.

Under the bill, S.1643, proposed Nov. 7 by Sens. Patty Murray, D-Wash., and Olympia Snowe, R-Maine, states and cities that collect a sales tax would temporarily cease the tax from Nov. 23 through Dec. 2 on both hard and soft goods, including apparel, electronics, sporting goods, automobiles and groceries. Congress would reimburse the sales tax revenue lost during the period should the 45 states that collect taxes participate. (Delaware, New Hampshire, Montana, Alaska and Oregon do not collect taxes.)

“There’s concern that people won’t be shopping and there will be a shortfall this holiday season,” said Bill Dombrowski, president of the California Retailers Association.

The Senate bill parallels a measure introduced Oct. 25 in the House of Representatives by Reps. Lindsey O. Graham, R-S.C., and Rod R. Blagojevich, D-Ill. According to Shearman, the Senate bill streamlines the process of reimbursement to the states. Through fast-track legislation, the bill would most likely piggyback on other legislative measures, he said.

A nationwide sales tax holiday would be a first for the country. Over the past three years, six states—Florida, Texas, Pennsylvania, South Carolina, Iowa, Connecticut and Maryland—and Washington, D.C., have suspended sales tax, usually during the back-to-school shopping season for two- to 10-day stretches. Most retailers say sales tax moratoriums have met with marked success in the past. According to the NRF, Texas doubled its sales from the prior year to $400 million during its three-day sales tax break in August.

“Sales tax holidays create tremendous excitement and greatly increase sales,” said St. Louis, Mo.-based May Dept. Stores Co. spokesperson Sharon Bateman. “We know that they are incremental sales and not simply sales shifted from another period.”

The model also draws support from those retailers in New York who have benefited from a sales tax exemption on clothing and footwear costing less than $110 per item. In effect since March 2000, the moratorium developed when New York shoppers—fed up with the city’s 8.25 percent sales tax—were willing to cross the state line to New Jersey so they could shop for tax-free apparel.

What concerns some analysts, though, is the potential swing in consumer buying patterns should the bill pass.

“Consumers will wait to do their shopping in that period and will be reluctant to do shopping afterwards,” said Bill Dreher, senior analyst at Robertson Stephens. “That will create the negative effect of a consolidated sales periodhellip;and cause retailers to hit the promotional panic button mid-December.”

Most retailers argue that any sales boost is welcome, especially during the do-or-die fourth quarter. “You want this for your holiday sales. There’s no ceiling, no limits, so that could be very significant in driving sales,” said Carol Sanger, spokesperson for Cincinnati-based Federated Dept. Stores, parent of Macy’s and Bloomingdale’s.

If the measure passes Congress, its next step is adoption by the individual state legislatures, many of which are not currently in session, including that of California