Time for a Permanent Vacation from Sales Tax Holidays

July 31, 2014

Time for a Permanent Vacation from Sales Tax Holidays 

Temporary Rollbacks Are Poor Substitutes for Real Reform

Washington, DC (July 31, 2014)—Starting this weekend, many states will begin their annual sales tax holidays. However, these temporary rollbacks of sales taxes—despite being sold as a boon for consumers and businesses—actually impose significant costs on both groups without yielding significant benefits, according to a new report by the nonpartisan Tax Foundation. These holidays—whether school supplies, disaster readiness, or hunting supplies—are costly and misguided substitutes for substantive reform of a state’s sales tax structure.

This year, 16 states will offer the holidays, exempting selected goods from state (and sometimes local) sales taxes, down from a high of 19 states in 2010. Such holidays have become an annual event in many states, with exemptions for targeted products ranging from towels and bedding to firearms and ammunition.

“Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief.” said Tax Foundation Economist Liz Malm. “If a state has to offer a ‘holiday’ from its tax system, it’s a sign that there’s a problem with the system itself. If sales tax relief looks good for a few days and politicians want to save consumers money, then why not offer the needed relief all year long?”

The key takeaways from the report include:

  • 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.
  • 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 sale 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 between 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 give a large amount of savings to higher income groups as well.
  • Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.

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

Media Contact:
Richard Borean
Manager of Communications
Tax Foundation
202-464-5120
borean@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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