Exemptions Proliferate in ‘Back-to-School’ Tax Holiday

August 5, 2011

Investigative Reports

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The NerveIt’s that back-to-school time of year.

Yes, it’s that time, once again, when fresh-faced students open their minds to new knowledge; when cash-strapped parents open their wallets for new supplies – and when state coffers are closed to one of their main revenue sources because of a politically popular tax holiday.

Yes, as of 12:01 a.m. today, South Carolina’s 12th annual “back-to-school” sales-tax holiday began.

The consumer-friendly event runs through midnight Sunday, and it is big business as the state suspends its 6 percent sales tax along with all local option sales levies on countless items for the entire weekend.

“The popularity of the sales tax holiday weekend has made it the third busiest shopping period of the year, surpassed only by the weekend after Thanksgiving and the weekend before Christmas,” says a S.C. Department of Revenue news release.

Indeed, people shop ‘til they drop to the tune of $2.5 million in tax savings during this yearly affair, according to a state Board of Economic Advisors estimate.

Another way of looking at that impact, however, is that the tax holiday costs the state treasury $2.5 million it sorely needs on the heels of steep general fund budget reductions.

Oh, come on, don’t be such a contrarian, you might say. After all, it’s an ugly economic stew out there: high unemployment; flat or falling wages and incomes; crushing, ever-increasing tuition costs; rising gasoline and food prices.

That’s all sadly true, to be sure.

In fact, providing some pocketbook relief for traditional back-to-school expenses like book bags and writing pens was the idea behind this sales-tax holiday in the first place.

But a funny thing happened on that road of good intentions – it veered way off course.

Over the years, a list of products exempt from sales tax during this weekend has expanded like the calorie count of school cafeteria offerings.

“The list is too broad,” Republican Rep. Chip Limehouse of Charleston, who helped draft legislation instituting the tax holiday 12 years ago, told The State newspaper recently. “We’ve seen everything under the sun be added to it.”

No doubt, get a load of these “back-to-school” items that are tax exempt during this holiday: antique clothing; bibs, diapers and other baby products; costumes; earmuffs; furs; girdles; hunting vests; ice skates; lingerie; ponchos; riding pants; ski boots; skin-diving suits; and tuxedos.

If some of those seem questionable, consider certain goods that are not tax exempt: cell phones, clocks, cookware, glasses, bathroom accessories and watches.

(Scores of things are, and dozens are not, tax exempt. See the list for yourself at the Department of Revenue website.)

Now, if you’re wondering how lingerie has been deemed a legitimate back-to-school item, but glasses have not (don’t many students need them to see the chalkboard?), then you’re starting to see how this sales-tax holiday has strayed from its original purpose.

For further evidence, ponder these paradoxes:

Pillows and other bedding accompaniments are tax exempt, but mattresses are not.

Similarly, printers are tax free, but replacement parts for them aren’t.

In South Carolina’s academic world, two professors offer differing perspectives on the back-to-school tax-free weekend.

Marianne Bickle, chairwoman of the Department of Retailing in the College of Hospitality, Retail and Sport Management at the University of South Carolina, says she thinks the event neither helps nor hurts state government.

But it does help consumers, Bickle says. “The budget situation with consumers is so bad they’ll do anything to save money,” she says.

College of Charleston economics professor Pete Calcagno, by contrast, sees the tax holiday as more of a political rather than economic animal.

“There’s no economic reason to pick just those (back-to-school) items,” Calcagno says. “So there’s clearly political motivation here.”

Such a driving force, though, is not limited to the back-to-school holiday, as legislators have loaded up the state tax code with all manner of special interest sales-tax exemptions.

Examples include baskets made by Palmetto State craftspeople using locally grown sweet grass; vacation timeshare leasing plans; and “materials necessary to assemble missiles used by the U.S. armed forces.”

Those cases are cited in a report issued by a special panel the General Assembly created to scrutinize most of the state tax code and recommend ways to overhaul it.

The 11-member S.C. Taxation Realignment Commission (TRAC) released the 240-page report in December.

Burnie Maybank, a Columbia attorney and former two-time director of the Department of Revenue (DOR), served as chairman of the commission. Maybank also was the genesis behind a more than 250-page publication by the Revenue agency titled Tax Incentives for Economic Development.

In short, he is to the state tax code what the key maker is to The Matrix.

Maybank cites one fact that illustrates the excessiveness of sales-tax exemptions perhaps more than any other: “The value of the exemptions exceed the amount collected,” he told The Nerve in a phone interview.

In its report, the TRAC group noted problems with many sales-tax carve-outs, including a $300 cap on automobile sales.

The limit was implemented in 1984 but has since been broadened to include aircraft, motorcycles, boats, trailers, RVs and “self-propelled light construction equipment with compatible attachments limited to a maximum of one hundred sixty net engine horsepower.”

Says Maybank, “Obviously the state DOR didn’t come up with that idea. That clearly was done with a lobbyist’s touch.”

Regarding the back-to-school holiday, the TRAC report says:

“Under current law, items such as wedding dresses and electronics that could be used for non-educational purposes are exempt. In addition, office supplies were given a blanket exemption that allowed businesses to take advantage of the holiday despite the fact that purchases were not related to education.”

To return the tax-free weekend to its original intent, the Taxation Realignment Commission recommended that it be changed to apply only to “school supplies and outerwear garments,” such as pants and shirts, purchased for students in grades K-12.

But while that reform, and many others to South Carolina’s tax code, might sound like a good idea, Bickle says it is a daunting challenge to try to take away a tax perk once it has been granted.

“I mean it would be really difficult,” she says, “especially in this economic climate.”

Given that reality, then, maybe we should just assign this whole issue to File 13 and be done with it.

Oh wait – wastebaskets are not among the tax-exempt items. Argh …

Reach Ward at (803) 254-4411 or eric@thenerve.org