November 22, 2006

Holiday Season”Tax Holidays” No Break for Taxpayers

(The following article originally appeared in the November 23, 2006 edition of the Myrtle Beach Sun News.)

The shopping frenzy that takes place the day after Thanksgiving is a celebrated annual tradition – almost as much as turkey and pumpkin pie. This year, South Carolina lawmakers have enacted a gimmicky, two-day “sales tax holiday” to follow the real holiday, but it will only remind us of their unwillingness to let taxpayers keep more of their money year round.

During Friday and Saturday, shoppers throughout South Carolina will not be charged the state’s 5 percent sales tax. Fifteen states and the District of Columbia offered similar deals this year, with most of them taking place during the “back to school” season.

Supporters of sales tax holidays claim the holidays deliver real savings to consumers and boost sales for retailers. The evidence suggests otherwise.

According to the New York State Department of Taxation and Finance, while the Empire State’s first sales tax holiday increased sales during the period of the holiday, sales for the year were virtually unchanged. In other words, shoppers didn’t buy more; they just shifted the timing of their purchases.

Other studies have indicated that retailers may raise their pre-tax prices during the tax holiday, leaving consumers out of the full tax savings. As it turns out, sales tax holidays are more hype than anything.

Tennessee’s recent back-to-school sales tax holiday saved the average Volunteer a whole $2.51. Some holiday. Residents may be out of town, they may be working on Friday or Saturday, or they may not have enough cash on hand to splurge during those two days. Taxes should treat all customers equally at all times; not only those who can afford it, or whose schedules permit.

Not only do tax holidays fail to live up to their advertising, they generate numerous problems. For one, sales tax holidays essentially allow the government to artificially influence the timing of purchases. By doing so, the government places itself in the business of deciding economic winners and losers – a function that should always be the sole responsibility of the free market.

Sales tax holidays also give the dangerous impression that government can manipulate the prices of goods in the free market. If prices fall during a temporary suspension of sales taxes, consumers can mistakenly believe the government directly controls prices. In reality, the government can do very little to affect the price of any good or commodity.

Considering the practical and the economic problems with sales tax holidays, why are they so popular? For starters, politicians love them. Tax holidays are an easy way for our elected officials to be seen as tax cutters — even if the tax relief is paltry. Supporters of tax holidays can pose for photo-ops as “friends of the taxpayer,” while pushing off the hard work of tax reform for another day.

When lawmakers have so many good tax-cutting alternatives to choose from, it is truly unfortunate that tax holidays are so popular. It’s time for lawmakers to reject the gimmick of sales tax holidays and support long-lasting tax relief for all. If tax relief for consumers looks good for a few days, why not give it to them all year long? That would be something that every resident of the Palmetto State could be thankful for.

Jonathan Williams is an economist at the Tax Foundation in Washington, D.C.