Another Sales Tax Holiday Blog Post

August 21, 2009
By 

Several states will be implementing their sales tax holidays in the coming weeks. Vermont's one-day holiday is tomorrow and Texas's starts today and runs through Sunday. Connecticut's week-long holiday ends after tomorrow. Georgia, Louisiana, South Carolina, Virginia and West Virginia all have holidays scheduled between now and November.

Sales tax holidays are popular with taxpayers, and therefore politicians, because of alleged benefits associated with the temporary suspension of sales taxes. But not only do sales tax holidays not deliver on their promises, they are bad tax policy.

  • They do not promote economic growth. The increase in purchases during the holiday largely represents a shift in the timing of purchases, not an increase in overall purchases.
  • Prices may not decrease as much as expected. Retailers may increase prices before and during a sales tax holiday to take advantage of the frenzy of activity, thereby absorbing some of the tax benefit meant to go to consumers.
  • Complexity and compliance costs: Businesses must spend time and money complying with a new set of tax laws for a temporary period, sometimes as short as one day.
  • Sales tax holidays arbitrarily discriminate between products. Sales tax holidays usually only apply to a specific list of products, such as school supplies, sports equipment, clothing, or computers.
  • Sales tax holidays arbitrarily discriminate across time. Some consumers may not be able to shop during a certain time period for various reasons (e.g. they are out of town or between paychecks).
  • Sales tax holidays are not an effective or efficient means of tax relief for the poor. Because they apply only to certain products and for short periods of time, low-income consumers can only see a small benefit. And to achieve this small amount of tax relief for low-income consumers, lawmakers give a large amount to middle- and high-income consumers.
  • Sales tax holidays are a bad form of tax relief in general. Because of time and product discrimination, only certain consumers benefit. If the sales tax is too burdensome for consumers then lawmakers should reduce the sales tax rate year-round for all products, thereby ensuring that all consumers can benefit. This approach also has real long-term economic benefits and makes the state more competitive nationally.

Taxes are meant to raise revenue, not micromanage a complex economy. Tax policy should not add unnecessary and discriminatory market distortions. In general, political efforts to manipulate the economy make markets less efficient by influencing consumers, retailers, and manufacturers to consume, sell, and produce more or less of a product than they otherwise would. While the economic costs of these distortions may be difficult to measure, they are real and economically damaging.

Sales tax holidays are a political gimmick and a distraction from real reform. They cost states in revenue without providing any real long-term benefits. Lawmakers should be focusing on real tax relief and reform.

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