Massachusetts Gov. Deval Patrick (D) has signed legislation creating a state sales tax holiday this upcoming weekend. Bay State residents will pay no 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. on any item purchased up to $2,500.
Massachusetts has passed this bill at the last minute for three years running now, perhaps to discourage consumers from taking advantage of it by shortening the amount of time the sales tax holiday can be advertised. The other 17 states with a sales tax holiday this year at least have it on their books and people can plan ahead for it.
While business executives and lobbyists applaud the government-provided advertising that gets everyone to run to their stores this weekend, the floor managers and people behind the register mostly have headaches. Computers have to be reprogrammed, inventory has to be managed, and crowds controlled. Unfortunately, for the most part, these are not new sales but rather sales shifted in time.
Academic studies looked at consumer behavior and found that many shoppers put off purchases or move them up to take advantage of the 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. . Others accidentally take advantage of the holiday, by happening to buy the item on the weekend.
Shoppers might not even be better off, if prices go up during the holiday as everyone rushes to grab limited inventory. One reporter in North Carolina compared prices of a list of items 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 with prices the week before, and found shoppers would have been better off the week before.
“Tax free” sounds impressive but it’s only about a 6.25% off sale, compared to routine advertised store sales of 20% off or more. Which raises the question: Why do state lawmakers bother voting for a two-day sales tax holiday in the first place? The answer is that they like voters to think they’re being given a tax break, despite its small scope and fleeting nature. They like to be seen to be “doing something” to goose the economy along, despite the almost nonexistent economic effects.
The truth is that sales tax holidays are political gimmicks, designed to distract taxpayers from demanding permanent, genuine tax reform. If a state must offer a "holiday" from its tax system, it is a sign that the state’s system is not competitive or well-designed. If policymakers want to save money for consumers, then they should look to year-round tax relief.
A few years ago, I debated the head of the Massachusetts Retail Federation on sales tax holidays; the video is here.
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