Tennessee Struggles to Schedule Sales Tax Holiday

March 4, 2008

We’ve written that sales tax holidays are poor tax policy:

First, sales tax holidays are distortionary because they are non-neutral across products. This means that consumers have an incentive to buy products which fall under the sales tax holiday as opposed to goods that are not covered in the holiday.

Second, sales tax holidays are non-neutral over time, which means that they create incentives for consumers to purchase items during the sales tax holiday that they otherwise would have purchased at another time.

Additionally, sales tax holidays add to retailers’ compliance costs and make the tax code less stable. Although sales tax holidays are good for certain consumers of certain products, they are poor tax policy overall.

Lawmakers in Tennessee, determined to hold such a holiday, are running into problems each time they schedule it:

After receiving complaints from religious leaders and merchants, Tennessee legislators have voted to change the dates for a sales tax holiday that had been planned for the Easter weekend celebrated by most Christians.[…]

But Rep. Stacey Campfield (R) said the new dates chosen, April 25 to April 27, conflict with Easter as celebrated by the Greek Orthodox Church.

Burchett said his office was contacted by several merchants who typically like to close on Easter weekend to spend time with their families and attend church.[…]

The tax holiday covers Friday, Saturday, and Sunday, which Musacchio noted would clash with Good Friday and Holy Saturday as well as Easter Sunday.

The measure is SB 2730/HB 3443. As introduced, the bill calls for moving the holiday to March 14 through March 16, but was amended to set the dates in April. It will exempt sales of clothing, school supplies, and computers of up to $1,500 in value from state and local sales taxes for the covered period.

The measure now goes to Gov. Phil Bredesen (D) for his expected signature. A spokesman for the governor said the administration was neutral on the change of dates.

It would be better tax policy (less distorting, more neutral) to drop the three-day tax holiday altogether and instead reduce the overall sales tax rate by 3/365ths (or more) all year long. Consumers would get the same benefit without all the headache and administrative mess of picking a date that everyone can agree on.

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