A True Cause for Celebration: DC Cancels Sales Tax Holiday

July 22, 2009

Following the lead of Florida and Maryland, the District of Columbia passed legislation to repeal its sales tax holiday. Pointing to the current economic climate and cash-strapped government, DC’s Office of Tax and Revenue estimates that by canceling the holiday, the district will avoid losing an estimated $640,000 in tax revenue.

As the Tax Foundation has argued many times before, sales tax holidays are poor tax policy. Politicians claim that the tax holiday would largely “pay-for-itself” through increased economic activity which would make tax revenue neutral. DC’s legislators, by admitting there is revenue loss associated with the sales tax holiday, are contradicting this argument. While it is true that general sales go up during holidays, overall retail sales for that month might not.

New York, being the first to have a sales tax holiday for clothing in 1997, decided to do an internal study on the worth of their holiday. The study concluded that while sales increased during the holiday, sales for the year were almost unchanged. Increased clothing activity during the tax holiday was offset by reduced activity before and after. Shoppers didn’t any buy more goods; they simply shifted their time of retail purchases to the tax exempt period. After the study was published, New York decided to make their sales tax reduction year-long.

Besides not spurring economic activity, these holidays introduce costly harms into the tax code. The holidays add heavy administrative costs which place a large burden on business owners. These holidays force businesses to revise tax collection procedures, familiarize themselves with new rules and regulations, operate under more than one set of sales tax rules each year along with making them develop systems for targeting and marking which goods are covered by the temporary sales tax; these tasks combine to make the holidays unavoidably complex.

Even with the evidence staring politicians in the face, many have merely turned their heads due to the political popularity of sales tax holidays. This has gone so far that states like South Carolina and Louisiana have started singling out popular industries for a holiday; in their case, they chose to enact the so-called “Second-Amendment” tax holiday: a weekend tax break for handguns, rifles and shotguns.

It is important to provide tax relief without harming the efficiency of the economy or distorting the decision making of individuals or firms. By choosing industries or products for weekend tax breaks, the government is making itself the decider of winners and losers which introduces costly distortions into the market. Taxes ought to be neutral to consumer spending patterns (like what time of year a purchase is made) and firm decision making. Instead of instituting political gimmicks, legislators should provide a real, broad-based, permanent reduction in sales tax.

While 15 states are offering some kind of sales tax holiday this year, some states and localities have decided to cancel their sales tax holidays in order to save revenue. Assuming that states must raise revenue to solve budget gaps, legislators should be looking at the option of eliminating distortionary and onerous sales tax holidays rather than introducing more distortions into the tax code through higher rates elsewhere.


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