Sales Tax Holidays 2010: Politically Expedient but Poor Tax Policy

July 26, 2010

As a number of states prepare for back-to-school sales tax holidays beginning early next month, an updated Tax Foundation study shows that the temporary, targeted periods of sales tax exemption are nothing more than political gimmicks that do little to help consumers. Instead, the holidays distort consumer choices while favoring certain industries over others, increase tax code complexity, and distract from real, permanent tax relief.

Eighteen states are offering sales tax holidays in 2010 – up from 16 in 2009 and 17 in 2008 – including 15 that exempt clothing, 10 for school supplies, six targeting computers, and five applied to Energy Star products. Tax Foundation Special Report, No. 182, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy,” is available online at http://www.taxfoundation.org/legacy/show/26533.html.

Compared to 2009, Florida, Illinois and Maryland added a sales tax holiday, while Georgia dropped its holiday, citing a $2 billion budget deficit. As of press time, the Massachusetts House had approved a bill to reenact a sales tax holiday on all items up to $2,500 from Aug. 14-15. If the Senate and governor approve the holiday, the total number of states with sales tax holidays in 2010 would be 19, an all-time high.

Among the report’s key findings:

  • Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, effectively absorbing the benefit of the holiday and reducing consumer savings.
  • Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management.
  • Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating between products and across time, and distorting consumer decisions. For example, Virginia’s hurricane-preparedness sales tax holiday applies to cell phone chargers but not laptop chargers, and duct tape but not masking or electrical tape. South Carolina’s gun sales tax holiday applies to firearms but not associated safety products.
  • While sales taxes are somewhat regressive, sales tax holidays are a bad way of providing relief to the poor. Sales tax holidays amount to a 4 percent to 7 percent price reduction for all consumers, but only for a brief period of time.

Taxes should raise revenue, not micromanage a complex economy by picking winners and losers in the market. If a state must offer a “holiday” from its tax system, it’s a sign that the state’s tax system is uncompetitive – something that must be addressed with permanent reform.

The report is available online at http://www.taxfoundation.org/legacy/show/26533.html. It includes a table of sales tax holidays for 2010.


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