Sales tax holiday: A mixed shopping bag

Tax-free back-to-school items are available in 15 states this month. But three states have canceled their tax holidays because of budget concerns.

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By Ben Rooney, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Shoppers in several states will be able to save money on back-to-school items this month during "sales tax holidays" -- but the temporary windfall comes at a hefty price for cash-strapped state governments.

Over the next few weeks, 13 states will offer sales-tax waivers on everything from clothing and shoes to school supplies and computers. The bulk of these holidays, which typically last for three days, began Friday.

Two other states -- Georgia and Mississippi -- completed tax holidays last weekend.

But tax holidays have been canceled this year in Massachusetts, Florida, Maryland and the District of Columbia. In Illinois, plans to hold a tax holiday this year were put on hold.

"States are canceling their tax holidays now because they realize it's going to cost the government money, and they've decided they can't afford it," said Mark Robyn, staff economist at the Tax Foundation, a nonpartisan educational organization.

The recession has strained state budgets across the nation as tax revenues dwindle and citizens become more reliant on social services, driving costs up.

State legislators and governors had to contend with deficits totaling $142.6 billion as they closed out fiscal 2009, which ended on June 30 for 46 states, according to the National Conference of State Legislatures.

That makes tax holidays unpalatable for many states. Massachusetts, for example, would have lost $15 million in tax revenue as a result of the holiday, Robyn said.

Proponents argue that tax holidays can help revive dismal retail sales and give struggling households a break during a time of economic recession.

At least one state, Mississippi, held its first tax holiday this year, according to tax-information firm CCH.

Daniel Schibley, senior state tax analyst at CCH, points out that some states view tax holidays as a way to overcome their budget problems.

"Although states are facing serious budget issues, generally they seem to be reluctant to cancel their tax holidays as a way to increase revenue," Schibley said.

"In fact, hard times may be seen as a justification for these holidays, both as 'relief' for hard-pressed consumers and 'stimulus' for hard-pressed retailers," he added.

But critics say tax holidays don't give consumers any incentive to keep spending once the holiday ends, and provide only a temporary boost for retailers.

"Politicians claim [tax holidays] are a boost for the economy, but it's just a windfall for people who would have made those purchases anyway," Robyn said. "Generally, sales tax holidays are a pretty horrible policy." To top of page

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