A sales tax holiday is a period of time when selected goods are exempted from state (and sometimes local) sales taxes. Such holidays have become an annual event in many states, with exemptions for such targeted products as back-to-school supplies, clothing, computers, hurricane preparedness supplies, and more.
Why Do Sales Tax Holidays Exist?
Ohio and Michigan enacted the first sales tax holidays in 1980, when they offered one-time tax breaks for automobile purchases. However, it was New York that sparked the modern trend, with the first sales tax holiday for clothing in 1997.
New York’s objective was to tackle cross-border shopping, where residents travel to nearby states to take advantage of lower sales tax rates (particularly clothing purchases in New Jersey). The sales tax holiday gave hope of reducing cross-border shopping without having to reduce the state’s sales tax rate.
While sales tax holidays are often defended on grounds of economic benefits, the temptation to limit cross-border shopping, and even lure shoppers from other states, has been a major catalyst.
Are They Sound Tax Policy?
Sales tax holidays have broad political support as they are highly visible and deliver benefits primarily to low-income consumers. Politicians and other supporters claim that sales tax holidays improve sales for retailers, create jobs, and promote economic growth.
In reality, however, sales tax holidays are poor policy. They do not promote economic growth or significantly increase consumer purchases, but instead shift the timing of purchases. Some retailers even raise prices during these holidays, reducing consumer savings.
While state sales taxes are typically somewhat regressive, this does not make sales tax holidays an effective tool for providing relief to low-income individuals. In fact, sales tax holidays give large savings to higher- as well as lower-income groups.
Most sales tax holidays arbitrarily discriminate between products and industries, creating economic distortions (a consumer may choose a tax-exempt backpack instead of taxed messenger bag, for example), but all such holidays discriminate across time. Shifting purchases to a particular weekend is no more beneficial to the economy, all else being equal, than purchases in another time period. Additionally, some consumers may be unable to shop during the sales tax holiday because they are working, out of town, or between paychecks.
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 an implicit recognition that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, they should cut the sales tax rate year-round.
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