Virginia's Energy Efficiency Sales Tax Holiday Starts Tomorrow

October 08, 2009
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Virginia's energy efficient sales tax holiday starts tomorrow and runs through Monday. During the holiday, appliances costing $2500 or less and bearing the EPA's Energy Star label are exempt from the state's sales tax. Retailers are hoping that the holiday will boost sales, shoppers like the tax savings, environmentalists like energy efficiency, and politicians like it when voters are happy. Sounds like a win-win-win-win. But David Brunori summarizes sales tax holidays thusly: "Politicians who hawk them should be ashamed. But politicians are rarely ashamed."

Sales tax holidays are an example of politics winning out over sound policy. Sales tax holidays don't deliver on their promises. The increase in sales during a holiday is largely a timing shift as people move purchases into the holiday period that they would have made before or after the holiday anyway. This means the presumed increased economic benefits (and environmental benefits, in this case) are mostly an illusion. Plus, there is much opportunity for retailers to absorb a large part of the benefit from sales tax holidays by increasing prices or giving less generous discounts.

Some people like sales tax holidays because they are seen as a way to reduce the tax burden on consumers. Two points here. First, while a sales tax holiday is a reduction in taxes paid, one has to ask how such a tax cut will be financed.

Will the lost revenue be made up in higher taxes elsewhere? If so, then there is no net benefit to society from reduced taxes. The burden has simply been shifted from one group to another. It is even possible that the taxes that are used to recoup the lost revenue could be more damaging and burdensome than the sales tax itself.

Will valuable government spending be cut in response to the lost revenue? If so, then society is not better off.

Will wasteful government spending be cut? Maybe, but it is unlikely. Only in this case could a sales tax holiday even potentially be a net benefit to society.

Secondly, even in the last case, a broad based rate cut would be better than a sales tax holiday. Sales tax holidays are accompanied by numerous economic distortions, inequities, and compliance costs, while broad based tax cuts are simple and allow everyone to save money, no matter when or what they buy or how much it costs. Lawmakers in Virginia and around the country should be focusing on this type of real tax reform rather than on flashy holidays.

To delve into the details of why sales tax holidays fail as sound tax policy, check out our recent Special Report, Sales Tax Holidays: Politically Expedient but Poor Tax Policy.

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