2016 Sales Tax Holidays Are Here, but They’re Nothing to Celebrate

July 25, 2016

2016 Sales Tax Holidays Are Here, but They’re Nothing to Celebrate

Washington, DC (July 25, 2016)—Starting this weekend, many states will begin their annual “sales tax holidays,” where selected goods are exempt from state sales taxes. The products selected for exemption vary by state, and include everything from back-to-school supplies, to firearms, to energy efficient microwaves. Advocates for the holidays argue that the exemptions are a highly visible way of assisting low-income consumers and spurring consumption. But is that actually the case?

According to a new report from the nonpartisan Tax Foundation, sales tax holidays miss the mark in their intended effect and can actually do more harm than good. The report details the history of the holidays and explains why they are misleading, lead to unstable revenue, increase tax code complexity, and distract policymakers from real tax reform.

The report finds:

  • 17 states, primarily in the southeastern U.S., will hold a sales tax holiday in 2016, down from a peak of 19 states in 2010. (Map of State Sales Tax Holiday Dates)
  • 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 actually raise prices during the holiday, reducing consumer savings.
  • Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent discount leads many larger businesses to lobby for the holidays.
  • Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating among products and across time, and distorting consumer decisions.
  • While sales taxes are somewhat regressive, this does not make sales tax holidays an effective tool for providing relief to low-income individuals. In order to give a small amount of tax savings to those with lower incomes, holidays end up giving a large amount of savings to higher income groups as well.

“Sales taxes don’t promote economic growth or increase consumer purchases, nor do they effectively provide low-income tax relief,” said Tax Foundation Director of State Projects Scott Drenkard. “Instead, they weaken a sales tax system’s efficiency and impose serious costs on consumers and businesses without offsetting benefits. They’re misleading gimmicks, and are a waste of policymakers’ time that could be better spent crafting real reforms.”

Full report: Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2016

Media Contact:
Colby Pastre
Marketing Project Manager
Tax Foundation
202-661-8088
csp@taxfoundation.org

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.

 

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