Sales tax holidays have become a popular tool for state and local governments hoping to encourage certain types of consumer activity. During a sales tax holiday, state and/or local sales taxes are temporarily exempted or lowered for certain kinds of products. The most common sales tax holidays are applied to school supplies, children’s products, and energy-efficient products and appliances. According to the Tax Foundation, 17 states will hold a sales tax holiday in 2013, two fewer states than the peak number reached in 2010.
Despite their popularity with legislators and some consumers, sales tax holidays are not sound tax policy. Tax holidays attempt to mask the wider problems in a sales tax system by giving consumers temporary relief rather than fixing the actual problem. Proponents of temporary sales tax cuts claim the holiday promotes economic growth while spurring spending and providing relief for the poor. In reality, studies have shown these holidays shift existing spending to the time of the tax holiday, when retailers have been known to increase prices. In addition, although tax holidays often have been pitched as assistance for the poor, studies show the most significant increases in consumption come from the wealthiest households.
Many retailers have voiced their support for tax holidays, since they almost guarantee an increased consumer base during the holiday while providing free marketing for certain products and without giving up any revenue. Many political leaders support tax holidays because it allows them to selectively curry favor with producers of certain products and services. This is one of the major flaws with tax holidays: They are discriminatory and allow government to choose winners and losers in the economy. Sales taxes work best when applied at a low rate and to a broad base.
The sales tax holiday model distorts the market and consumer decisions. A good example is sales tax holidays on energy-efficient goods. Although there may be a social or economic benefit from using energy-efficient products, many consumers choose not to use these products for many reasons: they may be more expensive, require more maintenance, or are complicated to use. By creating a tax holiday for these products, the government in effect creates a subsidy for them. If these products had proven their value in the market, they would not need a sales tax holiday to spur sales.
In the end, a state that has a competitive sales tax system does not need sales tax holidays. State legislators should focus on creating a permanent, less-complicated sales tax system that benefits consumers with lower rates, instead of using a temporary tax gimmick that benefits only a small number of companies.
The following documents provide more information about sales taxes and tax policy.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Sales Tax Holidays: Politically Expedient but Poor Tax Policy
http://heartland.org/policy-documents/sales-tax-holidays-politically-expedient-poor-tax-policy-0
Joseph Henchman of the Tax Foundation argues sales tax holidays distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform: “Sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy. They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers.”
Better for Politicians than Consumers
http://news.heartland.org/newspaper-article/2008/07/01/better-politicians-consumers
Aleks Karnick speaks with Jonathan Williams, an economist and director of the Tax and Fiscal Policy Task Force of the American Legislative Exchange Council, about tax holidays in this Heartlander article. Williams argues tax holidays rarely confer the full value of the tax cut to consumers; prices tend to remain the same, while the suppliers tend to increase their profits.
Mark Robyn: Sales Tax Holidays Help Politicians, Not Shoppers
http://heartland.org/podcasts/2010/07/29/mark-robyn-sales-tax-holidays-help-politicians-not-shoppers
Sales tax holidays are annual events in many states. Politicians like them because they can boast about providing a highly visible, though short-term, tax cut. In this Heartland Institute podcast, however, Tax Foundation economist Mark Robyn says sales tax holidays do nothing to boost retail sales or economic growth, burden small retailers by adding complexity to tax collections, and can distort consumer behavior in ways that help sales of some items at the expense of others.
States’ Tax Holidays Are Irresponsible, Critics Say
http://www.npr.org/templates/story/story.php?storyId=128983150
In this article from NPR, Carolyn Beeler speaks with several critics of sales tax holidays: “Nicholas Johnson is with the Center on Budget and Policy Priorities, a research group that focuses on how fiscal policy affects low- and middle-income Americans. ‘What the evidence shows is that sales tax holidays cause people to shift their spending, not increase it,’ Johnson says. ‘So there’s no increase in retail sales consumption.'”
Critics: States Should Discontinue Tax Holidays
http://usatoday30.usatoday.com/money/perfi/taxes/2011-08-04-back-to-school-sales-tax-holidays_n.htm
Jayne O’Donnell and Oliver St. John of USA Today examine several tax holidays and speak with several people across the political spectrum who oppose the use of sales tax holidays.
Sales Tax Holidays: Popular Policy “Clunker”
http://blog.heritage.org/2009/08/07/sales-tax-holidays-popular-policy-%E2%80%9Cclunker%E2%80%9D/
Curtis Dubay of The Heritage Foundation discusses a sales tax holiday in Virginia and argues such policies do not increase demand for anything and discriminate between products covered by the exemption and those not covered.
Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform
http://itep.org/itep_reports/2013/07/sales-tax-holidays-an-ineffective-alternative-to-real-sales-tax-reform.php#.UnwJfPk3slo
The Institute on Taxation and Economic Policy examines the many deficiencies of sales tax holidays as a tax reduction device and concludes they have more political than policy benefits.
The Fiscal Impact of Sales Tax Holidays
http://heartland.org/policy-documents/fiscal-impact-sales-tax-holidays
Adam Cole investigates the effects of sales tax holidays on state sales tax collections. Estimates indicate tax collections decrease 0.52 percent to 7.83 percent during tax holiday months: “Up to half of the revenue reduction is due to consumers’ timing purchases within the month to exploit the tax holiday. There is no evidence of large substitutions of purchases across months.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit visit the Budget & Tax News Web site at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.