By Scott Drenkard and Joseph Henchman
Sales tax holidays are periods of time when selected goods are exempted from state (and sometimes local) sales taxes. Such holidays have become an annual event in many states, with exemptions for such targeted products as back-to-school supplies, clothing, computers, hurricane preparedness supplies, products bearing the U.S. government’s Energy Star label, and even guns.
In 2016, 17 states will conduct sales tax holidays, down from a peak of 19 states in 2010. Georgia’s back-to-school sales tax holiday takes place July 30-31; the two-day holiday is expected to “save” Georgians up to $74.5 million. The list of tax-exempt items is here. It includes clothing and footwear costing $100 or less, school supplies costing $20 or less, and computers, computer components and software costing $1,000 or less. The state follows up with an EnergyStar and WaterSense Sales Tax Holiday Sept. 30-Oct. 2, when certain items up to $1,500 will be tax-exempt.
While sales tax holidays are often defended on grounds of economic benefits, in reality, a key motivation has been attempting to stop cross-border shopping, and perhaps even lure shoppers from other states.
At first glance, sales tax holidays seem like great policy. They enjoy broad political support, with backers arguing that holidays are a highly visible form of tax cut and provide benefits to low-income consumers. Politicians and other supporters routinely claim that sales tax holidays improve sales for retailers, create jobs and promote economic growth.
They argue that, first, individuals will purchase more of the exempted goods than they would have in the absence of a holiday, and second, consumers will increase their consumption of non-exempt goods through “impulse” purchases, paying taxes that would otherwise not have been collected.
Rather than stimulating new sales, however, sales tax holidays simply shift the timing of sales. In 1997, the New York Department of Taxation and Finance studied its clothing sales tax holiday and found that while sales of exempt goods rose during the holiday, overall retail sales for the year did not increase. On the contrary, shoppers waited until the holiday to purchase exempted goods, thereby slowing down sales in the weeks prior to and following the holiday.
Some supporters claim that sales tax holidays provide tax relief to the working poor. However, sales tax holidays are an inefficient way to achieve that goal. Low-income consumers who may not be able to shop during the designated time for cost, mobility, or timing reasons cannot enjoy the benefits of the holiday.
If the purpose of sales tax holidays is to make school supplies and clothes cheaper for low-income individuals, then a 4-7 percent price reduction for all consumers, but only for a brief period, is an odd and ineffective way of achieving that. It’s an example of politicians using a fire hose when a garden hose will do a better job.
Sales tax holidays have enjoyed political success, but recently, policymakers are reevaluating them. Rather than providing a valuable tax cut or a boost to the economy, sales tax holidays impose serious costs on consumers and businesses without providing offsetting benefits.
Taxes should raise revenue, not micromanage a complex economy by picking winners and losers in the market. Lawmakers should aim to raise the necessary revenue in the least economically distortionary and destructive way. To achieve this goal, sales taxes should be neutral toward products and timing decisions: All end-user goods and services should consistently be subject to the same sales tax. Narrowing the tax base, by contrast, is likely to lead to higher and more damaging taxes elsewhere.
Sales tax holidays neither promote economic growth nor increase purchases. Despite their political popularity, they are based on poor tax policy and distract policymakers and taxpayers from real, permanent and economically beneficial tax reform. They create complexities for all involved, while inserting the political process into consumer decisions.
By distracting high-tax states from addressing real problems with their tax systems, holidays undermine efforts to provide legitimate relief to consumers in general and low-income individuals in particular. Sales tax holidays are no part of sound tax policy.
To access the full report by the Tax Foundation, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2016,” click here.
This commentary by Scott Drenkard and Joseph Henchman of the Tax Foundation is adapted from, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2016,” and is published with permission by the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the view of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (July 29, 2016). Permission to reprint in whole or in part is hereby granted, provided the authors and their affiliations are cited.