Last sales tax holiday cost state up to $38M
Businesses and consumers in Massachusetts are gearing up for the annual sales tax holiday that arrives this weekend, when the state will forego millions of dollars in revenue in an effort to drive economic activity.
The two-day tax suspension, set for Aug. 17 and 18, will allow shoppers to avoid paying the 6.25 percent sales tax on most retail items — excluding food and drink at restaurants — less than $2,500.
National Federation of Independent Business State Director Christopher Carlozzi described the upcoming event, the latest in a Massachusetts tradition, as "an excellent opportunity to support the small businesses that support our communities every year."
"With families focused on back to school shopping, holding the sales tax holiday in the traditionally slower retail month of August is perfect for small businesses," Carlozzi said in a statement. "By shopping at businesses on Main Street, consumers are supporting their local communities and bolstering local entrepreneurs while saving tax dollars and taking advantage of additional promotions."
Carlozzi encouraged shoppers in particular to visit businesses on Cape Cod that were affected by tornadoes last month or in the Merrimack Valley that are recovering from a series of gas explosions last year.
Massachusetts has long offered a sales tax holiday during a summer weekend as a way to boost local businesses, though it did not have one in place in 2016 or 2017.
However, while advocates tout the benefits for both retailers and for customers, the tax pause carries a significant price tag with it. The Department of Revenue estimated that the state forewent between $16.7 million and $37.7 million in tax revenue over the two-day holiday last year.
As a result, based on the midpoint between those figures of $27.2 million, DOR Commissioner Christopher Harding said the MBTA and School Modernization and Reconstruction Trust Fund — which receive a dedicated portion of the state's sales-tax revenue each year — each missed out on about $4.3 million in potential funding in 2018.
The Institute on Taxation and Economic Policy said in a July report that the benefits from sales tax holidays are "minimal," saying the benefits disproportionately benefit already-wealthy taxpayers and cost crucial revenue that will need to be made up elsewhere.
"In the long run, sales tax holidays leave a regressive tax system unchanged, and the benefits of these holidays for working families are minimal," the ITEP wrote. "Sales tax holidays also fall short because they are poorly targeted, cost revenue, can easily be exploited, and create administrative difficulties."
In May 2018, the Democrat-led Senate voted against a sales tax holiday, with some members saying the lost revenue could be used for important needs such as education and roadway maintenance.
Later that summer, facing a potential ballot question that would have reduced the sales tax to 5 percent and likely cutting revenue by more than $1 billion, legislative and administration leaders agreed in the so-called "grand bargain" not to lower the sales tax but to suspend it for one August weekend every year.
The Legislature has the power under the agreement to set a date by June 15, and if not, DOR then chooses when it will take place. This year's suspension will be the first under that new process.
Originally, DOR told restaurants that meals would be included in the sales-tax suspension for the first time ever, but Gov. Charlie Baker could not find agreement with Democratic leaders to include alcohol as well.
Industry leaders raised concerns about the feasibility of taxing alcohol but not food, and in response, the Legislature quickly approved a Baker budget amendment earlier this month that will require all restaurant sales be taxed fully.
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