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Was Maryland's $10 million sales tax holiday worth it?

The early results of Maryland's sales tax holiday are in: Retailers liked it. So did their customers.

But tax policy wonks? Not so much.

It will be a couple of months before the state finds out just how much it lost in sales tax revenue during its third annual back-to-school tax holiday. The state had estimated that it would forfeit about $10 million by waiving the 6 percent sales tax on clothing and shoes of up to $100.

Is this good fiscal policy? Probably not. Is this money that could be better spent elsewhere by the state? Probably. But the tax holiday, at least from what appeared in interviews published in The Baltimore Sun, created something you don't see often these days — a happy consumer. And given all the dismal economic news and unemployment inching higher in Maryland, maybe a little happiness is worth the price.

The Tax Foundation, however, suggests otherwise. The Washington-based group reported last month that sales tax holidays in Maryland and 16 other states are "poor tax policy." And it raises some persuasive arguments.

These holidays, for example, don't stimulate economic growth because consumers are making purchases they would have largely done anyway at another time of the year.

More troubling, the foundation contends that some retailers raise their prices during the tax holiday because the demand for their goods increases with the jump in shoppers. There go customers' savings.

The tax holidays also favor some products — such as school supplies, clothing or sports equipment — over others, and that can discriminate against certain consumers, the foundation says. The elderly, for instance, likely have no need for school supplies, yet they deserve a tax break, too.

And if states really wanted to help residents, the foundation concludes, they would lower the sales tax that customers pay year-round.

On that last point at least, Patrick Donoho, president of the Maryland Retailers Association, agrees. But, given that the sales tax is Maryland's second-largest revenue producer, that's not likely to happen, he adds.

Donoho also counters that the Tax Foundation doesn't take into account Maryland's location. Pennsylvania next door doesn't charge a sales tax on most clothing, while neighboring Delaware doesn't have a sales tax at all.

"This tax-free week kind of jolts people or gets them back into their local store after the summer vacations," Donoho says. Otherwise, they "go to the beach and then go to Delaware."

The tax holiday also puts Maryland retailers on a level playing field — one week out of the year — with out-of-state online retailers that don't charge sales tax, Donoho says.

(Marylanders shopping online are supposed to pay the sales tax to the state if the retailer doesn't collect it, but many don't. The state estimates it lost $198.4 million in revenue in 2010 from online shopping.)

Donoho says he will be surveying his members soon to find out how they fared during the tax holiday, but early indications are that the week was a success.

Susannah Siger, owner of Ma Petite Shoe in Hampden, estimated late last week that her August sales were up 16 percent from a comparable period a year ago. Her store promoted the tax holiday on its website and through social media.

"If people didn't know about it beforehand, they're excited about it once in the store," Siger says.

"It's perfect timing for us. We do our summer clearance this time of year," Siger adds. Shoes that once might have been $200 were marked down below the $100 tax holiday threshold, she says.

Wee Chic, a children's clothing store at Green Spring Station, also reported a busier week than usual. Owner Bridget Quinn Stickline says many of her customers came in last week to specifically take advantage of the tax holiday.

"People appreciate it," she says.

Asked about the Tax Foundation's assertion that some retailers raise prices during tax holidays, Quinn Stickline says she doubts it. Shoppers, particularly her regular customers, are well aware of prices and would notice if a store tried that.

She adds that it's almost physically impossible to change price tags on thousands of items for one week only.

"No way can I raise my prices for one week," she says. "It doesn't even make sense."

Richard Clinch, director of economic research at the University of Baltimore's Jacob France Institute, says a tax holiday succeeds in getting consumers into the stores, including some of his family members.

"It's not creating new retail purchases. It's simply shifting things and saving people money," he says.

A good fiscal policy, Clinch says, should have consistent taxes applied uniformly, without favoring one thing over another.

But, the economist adds, a tax holiday is good public relations, especially in a high-tax state like Maryland.

"It's a gift to taxpayers at a time they need it," Clinch says. "I would say this is the best $10 million Maryland probably spent."

On what else could the state spend that money, he asks, and make a couple of hundred thousand people happy?

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