Sales Tax Holidays in 2011: Politically Expedient but Poor Tax Policy
July 25, 2011
Today we release our updated study on Sales Tax Holidays. (Click here to download a PDF version of the full study.)
We list this year’s sales tax holidays, examine the economic evidence which suggests that they are poor tax policy, and provide a history of past sales tax holidays.
The key findings of our report:
- This year, 16 states will hold a sales tax holiday, down from a peak of 19 states in 2010.
- Such holidays have been an annual event in many states, with exemptions for targeted products ranging from appliances bearing the U.S. government’s Energy Star label, to back-to-school supplies, to hurricane preparedness supplies, to even firearms and ammunition. (See page 2-5.)
- The evidence strongly shows that sales tax holidays do not promote economic growth or significantly increase consumer purchases; instead they shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings. (See page 5-7.)
- Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale leads many larger businesses to lobby for the holidays. (See page 11-13.)
- 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. (See page 7-11 and page 13.)
- While sales taxes are somewhat regressive, this is often exaggerated to sell the idea that sales tax holidays are an effective way of providing relief to the poor. To give a small amount of tax savings to low-income individuals, holidays give a large amount to others. (See page 14-15.)
- Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round. (See page 15-16.)
Late summer and early autumn see the greatest concentration of sales tax holidays, with states anticipating the back-to-school shopping season. While states schedule such events throughout the year, Mississippi kicks off the current cycle with a holiday running July 29th-July 30th. Fifteen states follow with holidays throughout the month of August.