Government has opened Pandora's Box

By ANN ZIMMERMAN

The country's largest retail trade association asked President-elect Barack Obama Tuesday to add a series of sales tax-exempt shopping days to a coming economic stimulus package in an effort to revive consumer confidence and spur spending.

The National Retail Federation called for three periods of sales tax-free shopping that would last 10 days each in March, July and October 2009. The trade group estimates that it would save consumers about $20 billion, or $175 per family.

Under the industry group's proposal, which would exclude alcohol and tobacco sales, the federal government would reimburse states for the lost tax revenue. State sales tax rates range from 2.9% to 7.25%, the group said. The five states without a sales tax -- Alaska, Delaware, Montana, New Hampshire and Oregon -- would also receive monies.

In a letter signed by the chief executives of retail chains, including J.C. Penney Co., Saks Inc. and Petsmart Inc., the NRF warned the situation was "critical," with consumer confidence in October falling to the lowest level in the 41 years data has been collected.

"Without swift, additional Congressional measures, the current economic weakness could worsen, creating a more rapid downward spiral -- beyond what economists are predicting for 2009 -- in the years ahead," the NRF said.

The group said it supports Mr. Obama's efforts to create a long-term stimulus plan to generate jobs by rebuilding the country's infrastructure and investing in public schools and alternative energy. However, the NRF said short-term incentives are also needed to encourage consumer spending, which accounts for 70% of the U.S. economy.

In the third quarter, spending by consumers fell 3.7%, the biggest drop in 25 years. The fourth quarter's results are expected to fall even more.

Rachel Bernstein, vice president and tax counsel for the NRF, said in crafting the proposal the group considered an incentive that would directly and immediately benefit the economy, as opposed to the tax rebate checks sent to consumers last summer, some of which weren't spent.

But Tom Gallagher, a Washington, D.C.-based economist with ISI Group Inc., an broker-dealer and investment advisory firm, questions whether the NRF proposal would do much to boost consumer spending. "People might just shift the spending they would do anyway to those days designated tax-free," he said.

With hundreds of billions in stimulus dollars up for grabs shortly after the holidays, Congress is being deluged with wish lists for tax breaks for specific industries.

Obama administration officials are expected to send their proposal to Congress soon for the stimulus package. Congressional leaders have said they want to pass legislation before Jan. 20, the day Mr. Obama will take office.

Many details of the package are yet to be decided, including how much of it will be targeted to individuals, how much to businesses through the tax code, and how much through direct appropriation for infrastructure spending, state aid, and other priorities.

The Obama transition team didn't respond to queries.

The retailers' group wants a tax-free program to apply to all goods subject to state sales tax, including apparel, home furnishings, restaurant dining and automobiles.

About 17 states already have designated days when sales tax on certain items isn't charged, primarily during the back-to-school shopping season. Some states more recently have lifted taxes a few days a year on certain energy-efficient products. But as the recession has wreaked havoc on government budgets, some states are considering doing away with the program. The Florida legislature failed to approve a "sales tax holiday" in 2008 because of budgetary pressures.

An NRF survey conducted when a national sales tax holiday was considered by Congress in 2001 found 82% of consumers favored a tax holiday, 83% would take advantage by making purchases and 69% would make purchases they otherwise wouldn't have made.

The NRF proposal comes amid one of the most dismal holiday shopping seasons in decades and a rash of store closings and liquidations that are expected to continue into next year. Retailers have resorted to drastic price cuts to spur sales, but the efforts haven't helped as much as hoped.

Despite a pickup in sales last week, which included the final Saturday before Christmas, the results still fell an estimated 0.6% from the comparable week a year earlier, according to the International Council of Shopping Centers. For the first 51 days of the holiday shopping season, Internet sales are tracking about 1% below last year, according to comScore Inc.

Sales estimates for the holiday season range from an increase of 2.2% to a drop of 1%. Last year, sales rose a meager 2.4%, according to the NRF.

Write to Ann Zimmerman at ann.zimmerman@wsj