Tax-free Shopping Week is a Bad Investment for Maryland

Photo by Mimzy
Creative Commons

When Maryland parents head to stores this sales-tax-free shopping week to restock the school essentials their kids need, they won’t be getting quite the bargain they might think.

As good as they sound, these short-term tax-free shopping promotions do little to help families make ends meet or boost the economy – and they come at a big cost to the public investment that helps Maryland communities thrive.

Temporary sales tax holidays provide the greatest amount of savings for wealthier families. Households with higher earnings can afford to shift the time of their spending to when the tax holidays occur. For low- and middle-income households who live paycheck to paycheck, this type of spending is far more difficult to pull off, causing the benefit of the tax holiday to be quite small.

The sales tax holiday is also poorly targeted to those who actually need the help. Wealthy people, tourists, and people who live close to Maryland borders in neighboring states can all receive the sales tax break, which is a huge loss to Maryland’s sales tax revenues. This tax holiday could cost the state and local governments in Maryland nearly $12 million this year. Students might be better off if the state collected this revenue and invested it in schools to better equip them with school supplies and technology.

Everyone pays the same 6 percent sales tax in Maryland but as a share of income the tax hits hardest on those who makes the least.  Sales taxes amount to a higher percentage of their annual income because the less you make the more likely you are to spend almost all of it. Those who already struggle to make ends meet in Maryland overall pay a greater share of their incomes in taxes than the wealthiest residents.  The sales tax holiday does little to truly help low- and middle-income families.

Those earning below $24,000 per year pay on average 9.7 percent of their incomes in state and local taxes; the wealthiest 1 percent of Marylanders — those earning more than $481,000 — pay only 6.7 percent of their incomes in state and local taxes. This particularly affects people of color. African-American Marylanders are twice as likely as white Marylanders to have incomes below $24,000 per year. In contrast, white Marylanders are twice as likely as African Americans to be in the richest 20 percent, those earning more than $111,000 annually. The result is a racially inequitable tax structure.

While the sales tax is a major factor in creating this inequity, a short-term sales tax holiday that applies to all Marylanders does nothing to correct the imbalance. It would be better to focus state resources on tax policies that truly help those in need, such as the Earned Income Tax Credit (EITC).  The EITC offers a common-sense tax break to working people struggling to support their families with low wages. Strengthening the EITC could open up the credit to additional people or provide a more meaningful benefit to those receiving the credit now. It would also inject money into the economy, as those receiving the credit would have more disposable income to spend.

Sales tax holidays do little to focus on those who truly need help and don’t consider that low-income families may not have extra money to spend during that time. Maryland also loses valuable tax revenue that could be used to better equip schools or make other investments in things that benefit all Marylanders. Making sure that Maryland creates and expands equitable tax policies will help support a stronger economy.