Pre-school sales tax break: A holiday from fiscal reality?

Are state lawmakers feeling buyer’s remorse for the $4 million the state will “spend” on the back-to-school sales tax holiday beginning Sunday?

With a $3.4 billion deficit on the horizon and having borrowed money for the current year’s budget, officials are divided on the revenue reduction, or “tax expenditure,” behind the annual event.

“One question I get each year is can the state afford to do this?… We believe we can make it up in so many different ways,” said Republican Gov. M. Jodi Rell, who says she hopes the week-long tax break will generate sales to help the economy.

rell at the mall 8-13-10

Gov. M. Jodi Rell at Westfarms Mall to promote next week’s sales tax holiday (Jacqueline Rabe)

But not everyone is convinced that it does help, including the co-chairs of the state’s tax-writing committee.

“The question is whether there is even an economic gain or if it’s just us spending money. My opinion is there is no tangible gain for us to continue this,” said Rep. Cameron Staples, D-New Haven, who has been co-chairman of the Finance, Revenue and Bonding committee for the last five years.

“We have to look at every nickel and dime,” said Sen. Eileen Daily, D-Westbrook, co-chair of the tax-writing committee. “We were certainly willing to help shoppers when we could afford to. Right now might not be that time.”

This is not the first time officials have raised doubts about the tax holiday.

Despite Rell’s presence Thursday at a Westfarms Mall event promoting the 6 percent sales tax break, she proposed getting rid of it in February 2009. At the time, she said repealing the break would bring in $8.6 million over two years.

During the last recession in 2003, state lawmakers also threw out the tax holiday. But before the repeal came took effect in August 2004, lawmakers reinstated it.

Connecticut is one of 16 states to offer back-to-school tax holidays, reports the Federation of Tax Administrators. Georgia and District of Columbia lawmakers this year decided they couldn’t afford the tax break. Meanwhile, Illinois had its first ever tax holiday this year despite a looming deficits in the billions of dollars.

A new report from the Tax Foundation says the tax holidays may be politically popular, but they merely encourage shoppers to shift the timing of their purchases rather than provide a big economic boost.

“Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. … If policymakers want to save money for consumers, then they should cut the sales tax rate year-round,” the report says.

Susan Kniep president of the Connecticut Federation of Taxpayer Associations, a coalition of 30 community-based groups, said she also doubts whether the tax holiday spurs sales. And, she said, it deepens the deficit.

“You have to couple this tax break with cutting expenses,” Kneip said. “Otherwise you are just burdening the budget even further.”

But Rell and Department of Revenue Services Commissioner Richard Nicholson are confident it will increase sales, thus helping out retailers.

“This is a win for our retailers. … There will be an uptick,” said Nicholson.

Westfarms General Manager Kevin Keenan said he believes the tax holiday launched a decade ago contributes to the 20 percent increase in sales his retailers experience in August.

“Consumers know about this. And especially in these tough economic times, that six percent become that much more important,” he said.

Rep. Vincent J. Candelora of North Branford, ranking Republican on the revenue committee, said he’s comfortable with state government providing the one-week sales tax break, despite the cost and the big deficit looming.

Set against this year’s overall budget of $19 billion, a revenue loss of $4 million estimated by the Office of Fiscal Analysis is relatively small, Candelora said, adding it provides an important consumer boost to many small businesses.

“It gets people out into the stores,” he said, adding that mall shoppers visiting a clothing store to take advantage of the break also might stop into two or three unrelated shops on the same day. “There is the potential for several ancillary pick-ups. It gets people out on the street and consuming, and that’s important.”