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. holidays continue to be politically popular, especially as states seek to share strong budget surpluses with taxpayers. Although state coffers may be unusually full, 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. holidays remain the same as they always have been—ineffective and inefficient.
Eighteen states will hold a 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. in 2023, up from 17 in 2022. This, however, is down from a peak of 19 in 2010. Sales tax holidays can include a limited tax-free weekend timed around the start of the new school year or they can have lengthy and broader applications. For example, Florida has opted to hold multiple tax-free periods, including “Freedom Summer” which exempts some admissions fees and outdoor activity supplies from the end of May to the beginning of September. The Sunshine State also offers a year-long sales tax holiday on cooktops, gas ranges, and certain appliances, as well as a two-year holiday, which began in 2022, on impact-resistant doors, garage doors, and windows. Mississippi offers its residents one sales tax holiday on clothing and school supplies and another on firearms, ammunition, and hunting items.
Proponents argue that sales tax holidays promote economic growth. They posit that individuals will purchase more of the exempted goods than they would have in the absence of the holiday, and that they will also increase their consumption of nonexempt goods. However, the evidence (including a 2017 study by Federal Reserve researchers) shows that, instead of increasing purchases, consumers simply shift the timing of purchases they were already going to make. For most who shop during sales tax holidays, the exemptions simply provide a modest and unexpected benefit for doing something they would have done anyway.
The other prevalent argument is that sales tax holidays are a way of giving tax relief. This, too, is overstated. While sales taxes are somewhat regressive, this fact does not make sales tax holidays effective for providing relief to low-income individuals. To give small tax savings to those with lower incomes, holidays give large savings to higher-income groups as well.
Most sales tax holidays arbitrarily discriminate between products and create economic distortion. In the case of back-to-school holidays, backpacks may be exempt, for instance, but messenger bags may not be, influencing consumers to opt for a backpack even if they would otherwise have chosen a messenger bag. Likewise, a low-income or childless couple may have no need for school supplies, but they are presumably just as deserving of tax relief as those who purchase exempt products.
Such holidays also discriminate across time. There is little economic justification for why a product purchased during one time period should be tax-exempt while the same product purchased in another time period should be taxable. Shifting purchases to a particular weekend is no more beneficial to the economy, all else being equal, than purchases that may occur at a different time of year. Additionally, some consumers may be unable to shop during the sales tax holiday because they are working, out of town, or between paychecks—situations that do not make anyone less deserving of tax relief.
Massachusetts’ sales tax holiday does not discriminate between products, as it applies to all tangible personal property (up to $2,500), but still discriminates across time. Several of Florida’s holidays have the opposite issue, they lessen time discrimination by lasting an entire year (or two) but favor certain products over others.
In addition to not accomplishing their stated goals, sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. And such holidays are rarely implemented as the result of serious legislative deliberation—as shown by the fact that some Virginia lawmakers were evidently unaware that the Commonwealth’s sales tax holiday was not renewed in this year’s budget. (It is not clear, however, that this was an oversight by legislative leadership, as had been reported; and the expiration was good policy—even if not all members noticed the policy change.) However, while holidays do not do much to benefit consumers or many businesses, free advertising for what is effectively a four to seven percent discount leads many larger businesses to lobby for the holidays.
In the end, sales tax holidays are political gimmicks that distract from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is an implicit recognition that the tax system is uncompetitive. Policymakers should reduce the sales tax rate year-round, rather than relying on politically popular but economically inefficient and ineffective tax holidays.
For further discussion of sales tax holidays, see our report from last year.
Does your state have a sales tax holiday?
Note: The author would like to thank Zachary Esses Johnson for his research contributions.
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