New Jersey’s back-to-school sales tax holiday starts. Experts aren’t thrilled

New Jersey’s 10-day sales tax holiday begins Saturday, but tax policy experts aren’t celebrating.

They say the state’s decision to waive sales tax collections for a slew of school supplies over the next week and a half is a political stunt, one that could exacerbate supply issues that have helped send prices soaring and may leave low-income residents with little relief. Democratic lawmakers have said the sales tax holiday will give consumers a break from rising prices.

Marco Guzman, a state policy analyst at the Institute on Taxation and Economic Policy, said his research finds tax holidays are little more than “politically expedient.”

“They’re a bit gimmicky in that they don’t really provide the benefits that many people think that they do,” Guzman said. “They leave people open to be potentially exploited by retailers, and then there are administrative hurdles that can impact businesses and create issues for consumers as well.”

New Jersey’s sales tax holiday is expected to cost the state $70 million in foregone revenues, though officials have signaled uncertainty over that estimate, and it could cost the state more or less depending on how consumers react during the 10-day period. New Jersey’s sales tax rate is 6.625%.

Despite Democrats’ promise that the move is a direct attack on inflation, it’s not clear that exempting some items from sales tax will help.

If a sales tax holiday increases temporary demand for tax-exempt products, those products could fall victim to supply-chain constraints that push prices upward or leave shelves empty, said Janelle Fritts, a policy analyst for the Tax Foundation’s state tax policy center.

“Businesses will not be able to increase their supply just because of a temporary sales tax holiday, which means the root of the price problem is still present,” Fritts said.

This may not drive up prices, given the short lifetime of New Jersey’s holiday, but retailers could also temporarily raise prices to account for the lack of sales tax, Guzman said, effectively wiping out any savings.

Research has shown some big-box retailers regularly mark up prices in advance of large sales, like those on Black Friday.

Gov. Phil Murphy’s administration stood by the plan on Thursday, pointing to a general need for affordability in a perennially high-cost state like New Jersey.

“Governor Murphy believes that we must take action where possible to make life more affordable for New Jersey residents,” said Alyana Alfaro Post, a spokesperson for the governor. “The back-to-school sales tax holiday will cut costs for essential items needed for educational success, and savings will be particularly significant for high-cost items like computers.”

Items that will not include sales tax until Sept. 5 include computers with a sales price of less than $3,000, school computer supplies priced at less than $1,000, school supplies, school art supplies, sports or recreational equipment, and school instructional materials.

Who benefits?

Fritts and Guzman both raised concerns about who would be able to take advantage of the tax holiday, noting that low-income residents, especially those living paycheck to paycheck, might be unable to adjust their purchasing to take advantage of it.

While existing sales tax exemptions for food and clothing do help low-income families, Guzman said, “We see that these sales tax holidays are poorly targeted and allow wealthy families to time their purchases. They’re just simply better positioned and more flexible.”

Fritts also questioned the holiday’s focus on specific items, saying it could leave broad swaths of New Jerseyans with nothing to gain from the sales tax reprieve.

“In New Jersey’s case, someone who does not have children or does not need school supplies will not be able to take advantage of the holiday, even though they are just as deserving of tax relief as someone who does need those products,” Fritts said.

The state’s inclusion of computers as a tax-exempt item could broaden the number of residents who stand to benefit from the holiday, but the benefit is unlikely to help residents who can’t afford to suddenly purchase a computer.

Fritts said the money the state is losing from the sales tax holiday might be better spent expanding the state’s earned income or child tax credits, or directing funds to residents who file with an individual taxpayer identification number instead of a Social Security number. Such residents, many of whom are undocumented immigrants, did not receive federal stimulus payments made since the start of the pandemic but could apply for state aid through the Excluded New Jerseyans Fund.

If the goal is to help low-income residents afford back-to-school purchases, a more targeted program of vouchers or rebates would have been more efficient than a time-limited sales tax holiday, Fritts said.

“It’s an example of politicians using a fire hose when a garden hose will do a better job,” Fritts wrote in a policy brief released earlier this month.