Policy Documents

The Fiscal Impact of Sales Tax Holidays

Adam J. Cole –
May 16, 2009

The sales tax holiday, a brief period of time during which state or local sales taxes are not levied on a set of goods has become politically popular over the past decade. Lawmakers' two chief policy aims in creating such a holiday are to reduce the tax burden on families with children and to stimulate the economy. Because tax holidays last for such a short period of time, lawmakers should be concerned that the response of purchases in the face of the lower tax rate is primarily a shifting of purchases that were already going to occur from one period to another instead of generating purchases that would otherwise not have occurred absent the lower tax rate. This generates some tension between the two policy goals. This paper investigates the effect of sales tax holidays onstage sales tax collections and estimates what portion of the revenue loss can be attributed to consumers' timing their purchases to take advantage of the transitory reduction in the state's sales tax base.