In one week, Connecticut will offer back-to-school shoppers another opportunity to buy clothing and footwear sales-tax-free, savings millions of dollars in total.
But these sales tax holidays — available this year in 19 states — are too limited to provide any meaningful tax reform, with wealthier households generally benefitting the most, according to a new analysis from a progressive policy group.
While politicians often turn to these flashy promotions because of their popularity, the Washington, D.C.-based Institute on Taxation and Economic Policy says states could provide far more direct relief to low- and middle-income families through income tax credits.
“Sales tax holidays are poorly targeted and too temporary to meaningfully change the regressive nature of a state’s tax system,” wrote Marco Guzman, a senior policy analyst with ITEP. “Lawmakers must understand that they cannot resolve the unfairness of sales taxes simply by offering a short break from paying these taxes.”
Tax relief doesn’t always reach those most in need
Connecticut’s sales-tax-free week will run from Aug. 20 through Aug. 26, waiving the standard 6.35% sales tax charge on clothing and footwear items costing less than $100. It marks the 23rd promotion since the state first launched the program in 2000.
In recent years, these Connecticut holidays have saved consumers between $5 million and $6 million per year. And some of that savings goes to consumers from neighboring states who cross the border to take advantage of the Connecticut holiday.
And the ITEP analysis also noted that “Wealthier taxpayers are often best positioned to benefit from a temporary exemption since they have more flexibility to shift the timing of their purchases to take advantage of the tax break — an option that isn’t available to families living paycheck to paycheck.”
Guzman cited a 2010 study by the Federal Reserve Bank of Chicago that surveyed households in three income ranges: less than $30,000; $30,000 to $70,000; and greater than $70,000.
It found households across all ranges, on average, increased their clothing-item purchases by 49% during sales tax holidays, while those in the top group increased by 136%.
The sales tax rate in Connecticut — and in most states — is regressive, meaning the rate doesn’t rise or fall proportional to the purchaser’s income or wealth.
Not surprisingly, the ITEP analysis found, most of the relief goes to consumers who can afford to spend more.
And since the coronavirus pandemic and the 40-year-high in inflation reached in mid-2022, Guzman told the CT Mirror, it’s not just poor families that often aren’t financially ready to buy when the sales-tax-free week arrives.
“Middle income [households] can be living paycheck to paycheck,” he said.
Sales tax holidays are popular with politicians
A second problem, Guzman noted, is that the actual relief from a sales tax holiday is not substantial.
A family spending $300 on clothing and footwear in Connecticut later this month would save $19.05 thanks to the holiday.
That savings is paltry considering the gap between the federal poverty level and at least one assessment of Connecticut’s high cost of living.
While the FPL for a family of four is $30,000, the United Way of Connecticut’s ALICE methodology — an acronym for Asset Limited Income Constrained Employed households — says that same family needs to earn more than $90,000 annually to cover a basic “survival budget” here.
When Gov. Ned Lamont was in West Hartford last year promoting the sales tax holiday, he declared, “This is Christmas in August.”
But Senate Republican Leader Kevin Kelly, who was frustrated by the Democratic governor’s focus in 2022 on temporary relief — rather than larger, recurring tax cuts — countered that “If it’s ‘Christmas in August,’ they’re giving the people a lump of coal.”
But sales tax holidays are uncomplicated and relatively easy to understand, and Guzman said political leaders in many states like to hype them, despite the modest dollars involved.
“These are often times just really politically popular options for quote-unquote providing relief,” he said.
But Tim Phelan, president of the Connecticut Retail Merchants Association, said the holiday isn’t just good for the state’s consumers but gives the retail industry an important boost heading into the fall.
“When [customers] are out and shopping and doing stuff, there is some dynamic effect that takes place,” he said, adding that retailers count on the tax holiday every year. “It’s part of the retail marketing schedule.”
ITEP analysis: Income tax credits provide more substantial relief
States looking to ease tax burdens on poor and middle-income households would have far more impact, according to ITEP, by providing income tax credits.
While the sales tax holiday costs state government about $5 million to $6 million per year, the changes that tax reform advocates are seeking stretch into the tens and hundreds of millions of dollars.
Connecticut already has endorsed one of those recommendations, boosting its Earned Income Tax Credit’s value from 30.5% to 40% of the federal EITC. This move, which Lamont and the General Assembly approved in June, will add an average of $211, starting next spring, to the income tax refunds of working households that generally earn less than $60,000 per year.
Lamont and lawmakers also ordered the first income tax rate reduction since the mid-1990s, expected to send about $300 to $500 extra to middle-income filers with returns filed in the spring of 2025.
These two changes, coupled with a new expansion of exemptions for pension and annuity earnings, are expected to cost the state about $500 million per year.
“Connecticut’s overall tax structure is heavily weighted toward equity, with lower income earners paying a lower income tax rate than higher income earners,” added Chris Collibee, spokesman for Lamont’s budget office.
ITEP also recommended states embrace a concept Connecticut legislators have been debating heavily in recent years: an ongoing state income tax credit for low- and middle-income households with children.
State Comptroller Sean Scanlon, a Guilford Democrat, was serving in the legislature in 2021 when he spearheaded a push for an ongoing credit.
Scanlon pitched a $600 credit per child — up to $1,800 per household. He also recommended that 70% of the credit be refundable, meaning even the poorest working families, with no income tax liability, still could get up to $420 per child added to their refunds.
But while the Finance, Revenue and Bonding Committee, which Scanlon chaired, endorsed that plan two years ago — and its $300 million-per-year projected cost — Lamont and many of his fellow Democrats in the legislature’s majority wanted to start smaller.
They approved a one-time, $250-per-child income tax rebate in 2022, which Republicans called a partisan effort to buy votes in a state election year.
Lisa Tepper Bates, president and CEO of the United Way’s Connecticut chapter and a strong advocate for a permanent child tax credit, said many — inside and outside of government — don’t fully appreciate Connecticut’s poverty issues.
Nearly 40% of all households don’t earn enough to cover a basic survival budget calculated by an ALICE methodology that assesses many costs ignored in other poverty assessment formulas, such as housing, utility and child care expenses.
“ALICE describes in data based information why so many people are on the brink, every month, of running into a crisis,” Bates said, adding the need for substantial tax reform in Connecticut — even after the latest state tax cuts — is significant.
“There is no silver bullet,” she said.