Since 1980, state and local governments have used sales tax holidays as a popular tool to encourage certain types of consumer activity. Sales tax holidays temporarily exempt or lower state and/or local sales taxes 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.
A total of 20 states have experimented with granting sales tax holidays. Michigan and Ohio were the first states to introduce a sales tax holiday. They eliminated the sales tax on automobiles beginning in 1980 in an effort to boost auto sales, which are important industries in both states.
The sales tax holiday trend peaked in 2010, when 19 states enacted sales tax holidays. Recently, after years of continued expansions of sales tax holidays amongst the states, the trend has begun to reverse. According to Elaine S. Povich of Stateline, several states have moved away from sales tax holidays to stabilize their tax revenue and help keep their budgets balanced.
Notable examples Povich examines are Florida, Louisiana, and Massachusetts. In Massachusetts, lawmakers ended a late-summer sales tax holiday that gave consumers a break from the state’s 6.25 percent sales tax on items with a price tag under $2,500. In Florida, legislators scaled back its state back-to-school tax holiday this year from 10 days to three, and they limited the tax break applied to clothing to sales under $60 and school supplies under $15. Louisiana legislators cut back their holiday tax break from 5 percent to 3 percent.
New proposals to enact sales tax holidays have failed to gain any momentum in several states. Over the past year, legislators in Kansas, Maine, Nebraska, Rhode Island, and Wisconsin rejected proposals for new back-to-school tax holidays.
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. 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.
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.
Why You Don’t Care About Sales Tax Holidays
Jason Notte, writing for The Street, examines sales tax holidays and why they may be losing momentum in the states. “However, considering that these tax holidays are currently designed to give local businesses an edge over online competitors, they’re failing at their one task while draining local tax revenue in the process. A survey by Connexity’s Bizrate Insights found that half of online shoppers pay sales tax, but those who do don’t consider it an important factor in choosing a retailer,” wrote Notte.
Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2015
Scott Drenkard and Joseph Henchman of the Tax Foundation examine state sales tax holidays and how they impact the economy. Drenkard and Henchman argue sales tax holidays “do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.”
2016 State Sales Tax Holidays
This chart from the Federation of Tax Administrators outlines the sales tax holidays implemented in 2016.
Ten Principles of 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.”
Better for Politicians than 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
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
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
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”
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
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
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 the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute Director of Government Relations John Nothdurft at [email protected] or 312/377-4000.