Even Proposing a Sales Tax Holiday Creates Tax Instability

Last week, in criticizing a proposed sales tax holiday for New Jersey, I described one peril of tax holidays:

They violate stability because they create uncertainty about future tax rates. If a legislature makes an irregular practice of enacting sales tax holidays—as is the case in many states that offer them only in flush economic years—consumers may wait to make large purchases on the belief that the legislature might enact another holiday.

Predictably enough, I received a phone call today from a New Jersey resident, requesting my “professional opinion” on whether the sales tax holiday would become law. He was planning to purchase a new car, and wanted to know whether he should delay his purchase in anticipation of the holiday.

I think I gave the caller sound advice. However—and I hope this doesn’t give too many car dealers heartburn—many more New Jersey residents are probably making this decision without the benefit of counsel from Washington, D.C.-based think tank professionals.