With Tennessee removing its sales tax on school supplies and many clothing items this weekend, Natalie Cowart traveled to Chattanooga on Friday from her home in Northwest Georgia to take advantage of the annual back-to-school sales tax holiday for her two children.
“It saves me a lot of money, and I did the same thing last year,” Cowart said Friday while loading up her shopping cart with school supplies and lunch bags at the Target store on Gunbarrel Road. “I like this better than going to Atlanta to shop.”
Cowart was among many parents and other shoppers who began taking advantage of the state’s three-day sales tax holiday on most school-related items Friday to stock up on their back-to-school clothing and school supply needs. Over the weekend, shoppers are expected to save somewhere between $18 million and $20 million across Tennessee by not paying the 9.25% state and local sales tax on school supplies, clothing and most computer items through midnight Sunday.
Next Tuesday, even more Tennesseans will benefit from the start of a three-month moratorium on the state’s sales tax on grocery items, projected to collectively save consumers $273 million in state and local sales taxes.
Gov. Bill Lee, who pushed for the sales tax holidays, said the temporary tax relief measures “put dollars back in the pockets of hardworking Tennesseans.
“I encourage every Tennessee family to take advantage of back-to-school savings this weekend and thank the General Assembly for partnering to provide direct financial relief for taxpayers,” Lee said in a statement.
National Federation of Independent Business State Director Jim Brown said the two sales tax holidays in Tennessee will be a much-needed boost to small businesses and their customers.
“Both sales tax holidays come at an important time, giving locally-owned stores a timely shot in the arm and their customers a great chance to save money,” Brown said in a statement.
Tennessee is one of 18 states offering some type of sales tax holiday this year, according to the Tax Foundation. In 2022, 17 states had such holidays.
Tennessee has offered a tax-free, back-to-school weekend for shoppers for nearly a decade, but the three-month exemption on sales taxes for grocery items is the longest yet by the state and reflects Tennessee’s relatively strong financial condition and budget surplus coming out of the pandemic.
Such tax breaks have proven popular, but the Tax Foundation said they don’t help the overall economy and can contribute to inequities in who is able to take advantage of the tax breaks and those who can’t.
“These are well-intended policies that are popular, but not all well-intended attempts have positive outcomes,” Manish Bhatt, a senior policy analyst for the Tax Foundation, said in a telephone interview. “It’s a way for people to feel like they are getting some relief, but the ultimate reality is that if you live in a state that has to provide you with a holiday from the sales tax, it is an implicit recognition that the sales tax system is not competitive. It would be far better policy to reduce the sales tax rate year-round, rather than relying on an economically inefficient and ineffective holiday.”
Some people who have to work during the holiday or don’t have the money to stock up on tax-exempted items available this weekend may not benefit as much as those with the time and money to take advantage of the short-term, tax-free savings, Bhatt said. Federal Reserve studies indicate spending isn’t boosted by the sales tax holiday, just when items are purchased.
“Sales tax holidays are an inefficient response to inflation that encourage spending to be concentrated in a limited window at a time when supply chains are already strained,” the Tax Foundation reported in a study on such tax holidays in 2022.
Tennessee does not have a state income tax, but its combined state and local sales tax rate is one of the highest in the nation. Tennessee has reduced its sales tax rate on food, but it remains among only 13 states that impose a sales tax on groceries.
State Sen. Bo Watson, the Chattanooga Republican who chairs the Senate Finance Committee, said Friday the sales tax holidays are a way to give back to taxpayers extra state tax collections received in the past year without imposing a permanent tax rate cut that might not be viable during a spending slowdown and could jeopardize Tennessee’s strong fiscal ratings and condition.
“Since we don’t have a personal income tax in Tennessee, we have limited ways of refunding money back to citizens, so this is one way of doing that,” Watson said in a telephone interview. “Removing the sales tax on groceries was seen as the most reliable way to give back money to the most people.”
As part of the sales tax holiday, the state government is reimbursing local governments for the loss of their local share of sales tax revenues. In Hamilton County, the local options sales tax is 2.75% of all purchases.
Whether states offer a sales tax holiday or not at this time of year, the National Retail Federation projects back-to-school spending will total $41.5 billion this year, up from $36.9 billion in 2022 and the previous high of $37.1 billion in 2021. Families with children in elementary through high school plan to spend an average of $890 on back-to-school items this year, about $25 more than a year ago, according to the retail group.