Florida governor Rick Scott announced his support for a large expansion of the state’s existing three day sales tax holidayA sales tax holiday is a period of time when selected goods are exempted from state (and sometimes local) sales taxes. Such holidays have become an annual event in many states, with exemptions for such targeted products as back-to-school supplies, clothing, computers, hurricane preparedness supplies, and more. for certain school supplies, clothing, and computers. The Florida press reported earlier this month that he would soon pitch an increase in the length of the holiday from three days to ten. The governor’s website also announced this week that part of his executive budget would include a 15 day holiday for hurricane preparedness supplies. (It’s unclear if he will push both proposals or just one or the other.) These would cost an estimated $60 million and $20 million, respectively.
During a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. holiday, selected goods are exempted from the state sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . They are generally two or three days long and often include school supplies, disaster preparedness supplies, computers, clothing, and energy efficient appliances. Though they are popular amongst politicians and taxpayers alike, sales tax holidays poor tax policy. My colleague Joseph Henchman summarized why nicely in a report from last summer:
At first glance, sales tax holidays seem like great policy. They employ broad political support, with backers arguing that holidays are a highly visible form of tax cut and provide benefits to low-income consumers. Politicians and other supporters routinely claim that sales tax holidays improve sales for retailers, create jobs, and promote economic growth.
Except that they don’t. Here’s why:
- Contrary to popular belief, they do not promote economic growth nor pay for themselves. Proponents argue that consumers buy more of the tax-free goods since they are now cheaper and will make impulse purchases on other items, thus generating more tax revenue. This doesn’t happen in reality. All sales tax holidays do is shift consumption to a different point in time, not generate more overall sales. (Here are a few studies demonstrating this effect: one, and two.) There’s also plenty of anecdotes on the shifting of consumer purchases to take advantage of a holiday (check out footnote 7 of our paper on the topic, where we summarize quite a few).
- They don’t create permanent jobs. If anything, retailers might have to add extra part-time or temporary employees to help during the holiday due to increased foot traffic. This has big associated compliance costs. Imagine having to hire and train employees just for this short period of time. It wouldn’t merely cost a significant amount of time, but it would have monetary costs, as well.
- Products exempted from the tax are arbitrarily picked. For example, take a look at what’s in and what’s out during Florida’s existing sales tax holiday. Backpacks aren’t subject to sales tax, but briefcases and duffel bags are. Notebook filler paper is tax-free, but computer and printer paper isn’t.
- Holidays have real economic costs for businesses because of their complexity. Businesses operate the other 360 or so days of the year under a sales tax system that is entirely different than the one they must comply with during the holiday. Large and small businesses alike must account for the detailed and arbitrary rules that apply under the holidays. For example: “Mississippi’s sales tax holiday regulations…permit the use of coupons, prohibit layaway sales but permit rain checks, and exclude shipping costs from the holiday. Virginia’s sales tax holiday permits layaway sales and rain checks, does not permit rebates to lower the sales price, and excludes shipping but includes handling…Texas exempts layaway sales as well as shipping, handling, and even installation costs as part of its Energy Star product tax holiday.”
Florida should remember that tax gimmicks such as these aren't real tax reform. And though things like hurricane preparedness supplies and school supplies for kids are indeed important, they shouldn't be part of the sales tax code. A better option would be to use that money to lower rates on everyone, putting more money in taxpayer pockets to purchase items such as these.
More on sales tax holidays here. More on Florida here. Follow Liz on Twitter @elizabeth_malm.
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