BUSINESS
07/30/2010 08:44 pm ET | Updated May 25, 2011

Tax Holidays: States Gamble On Back-to-School Shopping Deals To Stimulate Consumer Spending

Today kicks off the first tax holiday for the back-to-school shopping season, but low consumer morale may end up causing a further drain on state governments instead of stimulating the retail industry.

With the lure of 7-percent savings on clothing and footwear, Mississippians will head to the malls today and tomorrow to stock up on fall clothes and new shoes, but several municipalities opted out of the holiday this year due to economic concerns over lost sales tax revenue.

According to Kathy Waterbury, spokesperson at the Mississippi Department of Revenue, the holiday is intended to "give a break to consumers" right before the start of the school year, but the waived tax may not be enough to rev up shopping.

"I think consumers are still being very cautious," said Lynn Franco, Director of Consumer Research Center at the Conference Board. "They will weigh those spending decisions very carefully."

The Conference Board's Consumer Confidence Index had been increasing since a low in February, but confidence in the economy started to slip due to low job growth. The index dropped from 54.3 to 50.4 in July, which is only a slight improvement over last July's level of consumer confidence. When asked whether the back-to-school tax break would spur shopping, Franco replied, "while it will definitely help sales, I don't think, in of itself, it will be sufficient."

About a decade ago, states began to suspend taxes on school-related items at the end of the summer to help residents out with school expenses, and now more than ever consumers need all of the help that they can get.

In fact, Maryland and Illinois have hopped on the bandwagon this year by designating tax-free days in August, and Florida is reviving their event after a two-year lapse.

"Illinois has a high unemployment rate, and people have lost wages because their hours have been cut," said Susan Hofer, Communications Manager for Governor Quinn. "We've seen retail stores throughout the summer really suffering with low traffic."

Governor Quinn coordinated with the Illinois Retail Merchants Association to encourage retailers to offer additional discounts during the tax break to incentivize consumers to spend even more during the holiday.

Though offering discounts may lure reluctant shoppers to the mall, there is concern among state governments that the loss of tax revenue may hurt their ailing budgets.

After several years of hosting a back-to-school tax break holiday, the Georgia legislature opted not to renew it. According to Bert Brantley, spokesperson for Governor Perdue, the state "loses" approximately $13 million in tax revenue during the holiday.

"There is a decent argument to be made that people do all of their shopping in that one weekend," said Brantly. "I don't know that they really spend any more. People may even spend less to get the same."

Some analysts, however, are more optimistic about the back-to-school shopping season in the wake of last year's massive spending cutback. The National Retail Federation's annual Consumer Intentions and Actions Back to School survey predicts that each American household will spend on average $606.40 on back-to-school items, compared to the estimated $548.72 spent last year.

"Most parents just 'made do' with the supplies that they had last year," said Ellen Davis, Vice President and Spokesperson at the NRF. "Parents can't make do with everything again this year. There is more of a pent-up demand situation."

Regardless of the level of success of the back-to-school shopping this coming month, even minimal increases in spending will be a positive sign of recovery and improvement in the retail industry; after all, "we are not looking to break any retail records this year," added Davis.