August 26, 2009
Sales Tax Holidays Distort Consumer and Business Decisions, Provide Little Relief to Taxpayers
Many states recently wrapped up back-to-school sales tax holidays, periods of time during which certain goods are exempted from the state (and sometimes local) sales tax. Sales tax holidays are politically popular not just for back to school items, but others such as energy-efficient products and hurricane-preparedness materials. However, they're also problematic for a number of reasons.
A new Tax Foundation Special Report and Tax Policy Podcast both explain the pitfalls of sales tax holidays. Key findings of the new study, "Sales Tax Holidays: Politically Expedient but Poor Tax Policy," 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, effectively absorbing the benefit of the holiday and reducing consumer savings.
- Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. Instability in tax law is costly to the economy not only because of complexity, but because it disrupts plans and expectations of consumers and businesses, especially as states cancel sales tax holidays due to the recession and related revenue loss.
- 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. For example, Virginia's hurricane-preparedness sales tax holiday applies to cell phone chargers but not laptop chargers, and duct tape but not masking or electrical tape. South Carolina's gun sales tax holiday applies to firearms but not associated safety products.
- While sales taxes are somewhat regressive, sales tax holidays are a bad way of providing relief to the poor. Sales tax holidays amount to a 4 percent to 7 percent price reduction for all consumers, but only for a brief period of time.
In this week's podcast, Tax Foundation Staff Economist Mark Robyn, co-author of the new Special Report, elaborates on the problems with sales tax holidays. Click here to listen.
