July 25, 2008
Sales Tax Holidays: Politically Expedient but Poor Tax Policy
We've discussed before why sales tax holidays are bad ideas from a sound tax policy perspective. The narrow list of what is exempt and what is not often misleads consumers, while imposing a heavy administrative and complexity burden on business owners. Many states exempt rewrite whole parts of the tax code for the duration of the holiday, resulting in instability in the tax code (for instance, many states prohibit advertising that a store will pay the sales tax for consumers, except during the holiday when such advertising is required). They also reduce neutrality in the tax code by discriminating against products based mainly on political whims; products are singled out and dollar limits set with little research or reasoning.
More philosophically, the holidays give the mistaken impression that government can control prices, and they shift the power to decide when things are purchased from free decisions by individuals to government. Finally, they divert political attention from longer-term tax reforms, by allowing officials to take credit for cutting taxes when they really haven't.
Sales tax holidays do cause a surge of purchases, but many are shifted from other times because shoppers wait for the sale. The retailers who primarily sell items that qualify for the tax exemption tend to like the tax holidays since it involves free marketing from the state. Each state sets its own rules on which products qualify.
(See more here and here and here and here and here.)
A better option for consumers would be to take the money not collected by the state during the holiday, and use it for a broad-based sales tax cut. Consumers will save the same amount of money, without the distortions associated with limiting it to a certain period of time. Or, if the regressivity of sales taxes are considered sufficiently bad (holidays are often justified, at least at first, as easing the tax burden on the poor), a state could junk the tax altogether. Delaware gleefully advertises that it has a sales tax holiday on all products 365 days a year. New Hampshire has put up similar signs, saying it beats its neighbor Massachusetts 365-2 in days with no sales tax.
Despite tax holidays being one of the least desirable forms of tax relief, many states are now doing them. Below is a list of holidays compiled by the friendly people at the Commerce Clearing House (CCH), with some slight updates by us:
Alabama: August 1-3, 2008:
- Clothing costing $100 or less per article
- A single purchase costing $750 or less of computers, software, and school computer supplies
- Noncommercial purchases of school supplies and instructional materials up to a sales price of $50 per item
- Noncommercial purchases of books up to $30 each.
Connecticut: August 17-23, 2008:
- Clothing and footwear sold for less than $300
- (On all other days, clothing and footwear costing less than $50 are exempt, and does not apply to athletic or protective clothing and footwear, jewelry, handbags, luggage, umbrellas, wallets, and watches)
District of Columbia: August 2-10, 2008 (and in November):
- Sales of school supplies, clothing, accessory items, and shoes for $100
Georgia: July 31-August 3, 2008:
- Certain school supplies (up to $20 per item)
- Clothing and footwear (priced at $100 or less per article)
- Computers and computer-related accessories (for a single purchase of $1,500 or less).
Iowa: August 1-2, 2008:
- Clothing or footwear that have a selling price of less than $100 per item.
- (Sales tax holiday includes local sales taxes. Certain accessories are excluded from the tax holiday.)
Louisiana: August 1-2, 2008:
- The first $2,500 of the price of most items of tangible personal property
- (Does not apply to transactions involving vehicles, meals, taxable services, or leases or rentals of tangible personal property.)
Massachusetts: August 16-17, 2008:
(Note: The holiday has been approved by the Legislature, and the Governor has pledged to sign the bill.)
- The first $2,500 of the price of most items of tangible personal property
- (Does not apply to transactions involving telecommunications services, tobacco, gasoline, utility bills, motor vehicles, meals, motorboats, prior sales, and layaways.)
- (On all other days, the first $175 of an article of clothing is exempt.)
Missouri: August 1-3, 2008:
- Clothing and footwear (excluding certain accessories) costing $100 or less
- School supplies costing $50 or less
- Computer software with a taxable value of $350 or less
- Personal computers and computer peripheral devices sold for $3,500 or less.
- (The tax holiday may not apply to a retailer if less than 2% of its merchandise qualifies for the holiday; however, the retailer must offer a tax refund if the customer requests one.)
New Mexico: August 1-3, 2008:
- Clothing or shoes sold for less than $100 (excluding items primarily for athletic or protective use)
- Computers (but not handheld computers) sold for no more than $1,000, and any associated monitor, speakers, printer, or related items sold for no more than $500
- Notebooks, paper, writing instruments, crayons, art supplies, paper clips, staples, staplers, scissors, and rulers priced under $15
- Bookbags, backpacks, handheld calculators, maps, and globes priced under $100.
- (Retailers are not required to participate.)
North Carolina: August 1-3, 2008:
- Clothing and school supplies with a sales price of $100 or less
- School instructional materials of $300 or less; sports and recreation equipment with a sales price of $50 or less; computers with a sales price of $3,500 or less; and computer supplies costing $250 or less. Clothing accessories, protective equipment, furniture, and rentals are not exempt during the holiday.
Oklahoma: August 1-3, 2008:
- Clothing and footwear costing less than $100.
South Carolina: August 1-3, 2008:
- Clothing, clothing accessories, footwear, school supplies, computers, printers, printer supplies, computer software, and linens for the bed and bath.
- (Certain items, including, but not limited to, jewelry, cosmetics, furniture, and items for use in a business are not exempt during the holiday.)
- (Sales tax holiday includes exemption from local sales tax.)
Tennessee: August 1-3, 2008:
- Clothing and school supplies, including art supplies, costing $100 or less
- Computers, other than those for use in a trade or business, costing $1,500 or less.
Texas: August 15-17, 2008:
- Most clothing, footwear, and school backpacks priced at less than $100
- (Clothing and footwear used primarily for athletic activities or for protective wear are ineligible, as are accessories and rentals of clothing.)
Vermont: July 12-13, 2008:
- The first $2,000 of the price of most items of tangible personal property
- Appliances have an extended holiday, July 12-18, 2008
Virginia: August 1-3, 2008:
- Sales of clothing and footwear costing $100 or less
- School supplies costing $20 or less.
More on sales taxes here.
