Are State Sales Tax Holidays on Vacation? (On First Reading).

New York was the first state to have a sales tax holiday when the Legislature instituted a tax-free week on all clothing and footwear priced under $500 in 1997.

The idea was to provide tax relief at a time when children were preparing to return to school and families purchased school supplies and clothing. The program was so popular that it led to a year round, permanent extension on all clothing under $110.

The week of tax-free shopping really did not cost the state that much revenue and became a politically popular initiative that caught on in other states. Florida followed in 1998, Texas in 1999. Last year, Connecticut, Iowa, Maryland, Pennsylvania and South Carolina joined the action.

But only North Carolina created a new sales tax holiday in 2001. Proposals in other states were rejected.

Why did the trend slow so dramatically? The most likely explanation is the state of the economy. State finances are deteriorating. Revenue growth has slowed dramatically compared with recent years, aggregate state balances are falling, and, for the first time in a decade, a large number of states are grappling with budget shortfalls.

Although popular when states are flush with cash, sales tax holidays may be a luxury some can no longer afford. The amount of revenue states forgo varies, depending on the number of days the holiday is in effect and on the goods eligible for exemption.

Florida exempts clothing and footwear for nine days in late July and early August. State officials estimate revenue loss at $27.9 million. The state will sacrifice $23.2 million and local governments, $4.7 million.

North Carolina's new law limits its holiday to three days (over the first weekend of August) and allows exemptions on clothing, footwear, school supplies, and computers, printers and educational software. The state's fiscal analysis estimates a loss of between $8.5 million and $10 million. Local loss is estimated at between $5 million and $6 million annually.

Legislation to establish sales tax holidays was introduced this year, but failed to pass, in Arkansas, Indiana, Massachusetts, Missouri) Tennessee and West Virginia. In four of the seven states that already have established sales tax holidays, proposals to extend tax-free status to additional items or to extend the number of days of the holiday failed.

Florida limited its exemption to purchases valued at less than $50 whereas last year it stood at $100. In Connecticut, the governor's proposal to add an additional week for December holiday shopping failed. Similarly, a plan to extend tax-free shopping to Easter weekend failed in South Carolina. In Texas, several different ways to broaden the holiday were suggested, but none received enough support to succeed.

Despite the lack of action on sales tax holidays in 2001, few are predicting an end to the policy because they remain popular with citizens and legislators alike. Texas, Iowa, Connecticut and South Carolina have made the holidays annual events. But they must be reauthorized each year in Florida, Maryland and Pennsylvania. With state finances faltering, reauthorization in these three states may be difficult this year.

At press time, the federal government was considering sponsoring a sales tax holiday of its own to help jump-start the economy during the holiday season. Senator Patty Murray of Washington offered an amendment to the federal economic stimulus package that allowed states to opt-in to a 10-day sales tax holiday and be reimbursed by the federal government for lost revenues. States were to receive reimbursement by the end of December, based on sales figures of previous years, and would have to reconcile the difference with the U.S. Treasury once the 2001 sales figures are available.