Sales Tax Holidays: Helping the Children or Just Political Show?

August 6, 2007

It’s back-to-school time again, and that means it’s time for sales tax holidays. Sales tax holidays typically occur around the beginning of the school year, making tax-free many of the supplies children need for the upcoming school year. And in some cases, the holidays apply for more items than just school supplies. For the politicians, this appears to be the best of all worlds: a policy that’s “for the children” while also appearing to “cut taxes.” And the politicians get the credit for it.

But before you cheer and thank your elected official, remember that there is no such thing as a free lunch. Here are a few points about sales tax holidays that you are unlikely to hear from the news media or politicians:

(1) Sales tax holidays force higher taxes throughout the rest of the year and/or reduce state spending. This “for the children” sales tax holiday may raise taxes on the children’s families the rest of the year or result in reduced spending by the state government – possibly lower spending “for the children.”

(2) The value of the tax holidays is offset to a large degree by the time cost of waiting in line throughout the madness that erupts as a result of these tax holidays. Remember the price controls on gasoline? You paid less money to the gas station, but you spent 2 hours waiting in line too, thereby reducing or eliminating any gain from the price limit. Why not just have a tax holiday the entire year by lowering the rate? Consumers, on whole, would still save the same amount of money, but would not have to endure the chaos of shopping on a tax-holiday weekend. And what about the large fraction of the population that is not purchasing any tax-free items because they have no children in school (assuming that the holiday only applies to school supplies)? They get no savings, but still have to be a part of the chaos if they choose to shop on that weekend, or they must shop some other time.

(3) Sales tax holidays can be an administrative nightmare for stores to implement – which items are tax-free and how much is tax-free? Local “Mom and Pop” stores are likely to be at a disadvantage compared to large-scale retailers like Wal-Mart or Target due to the store’s logistics (scanning barcodes that have tax savings programmed in versus cash registers where the employees must look up what is tax-free). In other words, the tax holiday is a government-created cost to efficiency that can be better handled by larger stores, further driving a wedge between the cost differentials that come from differently scaled operations.

(4) Consumers are likely to be confused over what is covered versus what isn’t, likely leading to disputes at the checkout line. See reason #2 again.

For more on sales tax holidays, check out our previous research on the topic.

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