Businesses and consumers in Virginia are preparing for the state’s Hurricane Preparedness Sales Tax Holiday. The suspension of the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , an event as regular as the hurricane season itself, will last from May 25 to May 31 this year. Certain products that are deemed necessary for hurricane preparedness are exempt from sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. during this time. Sales tax holidays are popular with state lawmakers across the country, but they are not good tax policy.
We’ve written before on why sales tax holidays are bad tax policy. The holidays violate the principles of neutrality and stability because they favor the purchase of certain products over others and certain time periods for those purchases over other time periods. Even so, some would argue that those are precisely the goals of this holiday and that these distortions are necessary to help people prepare for hurricane season.
But there are other more practical problems with sales tax holidays. The distinctions that are made regarding which products are eligible and when they are eligible are rather arbitrary. Cell phone chargers are exempt but laptop chargers are not. Duct tape is exempt but not masking or electrical tape. And why are the worthy products only exempt for one week? If a generator is really necessary for the safety of families and the sales tax is keeping them from making this purchase, why not exempt generators all year? The reason for these inconsistencies is that sales tax holidays are political gimmicks designed to look like tax cuts and generate good PR for politicians. Sales tax holidays may provide a small benefit a few consumers, but they do not provide a substantial benefit to society as a whole.
Plus tax holidays are costly for retailers. Businesses must waste time and labor reprogramming their computer systems for one week to ensure they are in compliance with the law. The most obvious example of this burden would be your local cell phone kiosk that for one week will have to collect tax on all their products except phone chargers. Some argue that sales tax holidays benefit businesses by increasing sales, but there is evidence that most of the increase in sales really represents a shift in sales from one time period to another and therefore does not provide a benefit to the business or economy as a whole.
Overall, a better idea than a sales tax holidayA 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. would be a real, broad-based, permanent reduction in sales tax. Side note: An interesting provision of the Virginia hurricane sales tax holiday says that during the holiday retailers are allowed to “absorb” the tax on items that are not listed as exempt. Generally, it is illegal for a business to say that it will pay the purchaser’s sales tax, but for some reason during the hurricane holiday Virginia has chosen to allow this practice. The retailer must still remit the tax to the state, but they can choose to not collect the tax from consumers.
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