I recently attended a lecture given by Arnold Kling, who is a former Federal Reserve economist on the Board of Governors staff, former senior economist at Freddie Mac, and all-around financial and monetary expert. The...
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- Virginia Chainsaw Tax Holiday Doesn't Cut It
Virginia Chainsaw Tax Holiday Doesn't Cut It
This week, residents of Virginia seeking to stock up on hurricane supplies are believed to be in luck: Virginia’s Hurricane Preparedness Tax Holiday is in full swing. From May 25-31, the purchase of certain items deemed “needed for hurricane preparedness” by the Old Dominion are exempt from the state’s sales tax. The annual tax holiday is promoted by state policymakers as a means of encouraging readiness by making emergency supplies more affordable to consumers.
Among the list of qualifying items for this year’s tax exemption are flavored water, battery-operated lanterns (but not kerosene lanterns), glow sticks, and—for the first year ever—chainsaws! Yes, you read that correctly: in an apparent attempt to transform residents into tree surgeons ahead of the hurricane season, the state has broadened the tax holiday to include gas-powered saws priced at $350 or less and “chainsaw accessories” for $60 or less each. These “chainsaw accessories” include, but are not limited to, wrenches, bars, chaps, and protective glasses.
Despite the somewhat comical aspect of this new exemption, the expanding Hurricane Preparedness Tax Holiday is no laughing matter: sales tax holidays in general are poor tax policy. Despite their political popularity, we have previously explained why tax holidays are by their very nature distortionary, costly, and ineffective in boosting economic growth.
Supporters of sales tax holidays argue that they stimulate the economy: first by encouraging increased consumption of the exempt goods and second by triggering impulse purchases of non-exempt goods, ultimately leading to both increased economic growth and more revenues. However, evidence suggests that, rather than encouraging new sales, tax holidays simply manipulate the timing of sales. For instance, it is plausible to assume that many Virginians are purchasing fire extinguishers or smoke detectors at a higher rate this week simply because of the tax exemption, despite needing these essential safety household items prior to the holiday.
In addition to discriminating across time, sales tax holidays such as that which encourages hurricane preparedness in Virginia violate the principle of neutrality by arbitrarily favoring some products over others in the marketplace. By exempting only gas-powered chainsaws, manufacturers of electric chainsaws experience an undue disadvantage. And despite the alleged temporary increase in sales, tax holidays often prove costly for retailers, who face temporary spikes in labor costs and must reprogram their computers for a short time period to account for the changes.
Yes, industry may suffer setbacks as a result of the sales tax holiday, but what of Virginia consumers? Lawmakers often tout such policies as benefitting low-income consumers because the purchases represent a higher percentage of their disposable income; yet such holidays actually provide savings to every individual, and the benefits to consumers are heavily outweighed by the policy’s complexities and costs of administration, economic distortion, and biases in the timing of sales. Real relief for taxpayers ought to come in the form of eliminating any means of picking winners and losers, broadening the tax base, and lowering overall rates.
Originally introduced as a means of limiting border shopping between states in 1997, state tax holidays grew in popularity and reached their peak in 2010, when 19 separate states conducted them. This year, 16 states will conduct sales tax holidays (North Carolina was the most recent state to abandon the flawed policy). In the name of sound tax policy, Virginia ought to follow suit with its neighbor to the south and eliminate sales tax holidays. Even tax-free chainsaws will likely not prepare businesses or consumers for the next economic storm.
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