Tax Holiday or Permanent Tax Relief?

February 2, 2007

This commentary was originally published in the Columbian on February 2, 2007.

by Jonathan Williams and Jason Mercier

Usually when lawmakers sponsor tax relief proposals, we’d be first in line to congratulate them. It’s not often, after all, government officials remember it’s not their money they’re spending; families should be given every opportunity to keep more of their hard-earned dollars.

That said, Washingtonians would be wise to pay close attention to this year’s legislative support for a limited sales tax “holiday” each year around the beginning of the school year.

According to Rep. Moeller, sponsor of the sales tax holiday, his “proposal is a modest but genuine and reliable tax break for average middle-class people. These are the thousands of Washington families who do the best they can to buy school-supplies and still make ends meet before the start of every school year.”

Among those items deemed “worthy” of a sales tax holiday: clothing, shoes, school supplies, textbooks, computers and other school-related items purchased during the second weekend of every August.

Supporters of sales tax holidays claim the holidays deliver real savings to consumers and boost sales for retailers. However, the evidence from previous sales tax holidays 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.

As it turns out, sales tax holidays are more hype than anything. Not only do they fail to live up to their advertising, they generate numerous problems. For one, the complexity and administrative burden that sales tax holidays create can be mind-numbing for small-business owners. Tax holidays create unstable tax codes that force businesses to develop new administrative and compliance strategies every time a tax holiday is enacted.

Sales tax holidays also essentially allow government to artificially influence what products are purchased and when. 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 give the dangerous impression that government can manipulate the prices of goods in the free market. When 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-nor should it.

Considering the economic problems with limited sales tax holidays, why would anyone still support such an idea? It’s simple: Our elected officials love to be seen as tax cutters-even if the tax relief is paltry.

When lawmakers have so many good universal tax-cutting alternatives to choose from, it is truly unfortunate that they focus solely on limited relief. 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?

Jonathan Williams is an economist at the Tax Foundation in Washington, D.C. Jason Mercier is the director of EFF’s Economic Policy Center.


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