Research & Commentary: Sales Tax Holidays are Inefficient Tax Gimmicks
In this Research & Commentary, Matthew Glans discusses sales tax holidays and how they mask wider problems in a sales tax system.
Since 1980, state and local governments have increasingly used sales tax holidays, which temporarily exempt or reduce state and/or local sales taxes for certain kinds of products, to encourage consumer demand. The most common sales tax holidays are applied to school supplies and children’s products at the beginning of school years. They are also frequently applied to energy-efficient products and appliances, seemingly because they fit a political agenda.
The sales tax holiday trend peaked in 2010, when 19 states enacted sales tax holidays. Recently, the trend seems to be reversing. According to the Tax Foundation, in 2019, 16 states will implement at least one sales tax holiday, one less than in 2018.
Despite their popularity with legislators and some consumers, sales tax holidays are not sound tax policy. Tax holidays mask wider problems in a sales tax system by giving consumers temporary relief rather than fixing the actual problem of high taxes and the compounding effects of too many taxes and fees at the local and state levels.
Proponents of sales tax holidays claim they promote economic growth and provide relief for the poor. In reality, several studies show these holidays simply shift spending patterns to the duration of the tax holiday, when retailers routinely increase prices.
Indeed, a 2017 Federal Reserve study on the impact of sales tax holidays found that a shift in spending nearly always occurs in response to a tax holiday. Additionally, although tax holidays are often pitched as measures that provide assistance to the poor, studies show the most significant increases in consumption come from the wealthiest households. A 2009 University of Michigan study examining computer purchases during sales tax holidays found this spending shift “accounts for between 37 and 90 percent of the increase in purchases in the tax holiday states over [a] 30-week horizon.”
Many retailers support tax holidays because they serve as free advertising and practically guarantee more revenue. However, sales tax holidays simply distort the market and place a burden on small businesses in regulatory and compliance costs. A good example of this can be found with sales tax holidays on energy-efficient goods. Although there may be a social or economic benefit from using energy-efficient products, many consumers choose not to use these products for many reasons: they are more expensive, require more maintenance, are complicated to use, etc. By creating a tax holiday for these products, government is simply subsidizing such products. If these products had value in the market, they would not need a sales tax holiday to spur sales.
Instead of sales tax holidays, state legislators should create permanent, less-complicated sales tax systems that benefit all consumers with lower rates.
The following documents provide more information about sales taxes and tax policy.
Sales Tax Holidays: Politically Expedient but Poor Tax Policy, 2019
In this article, Janelle Cammenga of the Tax Foundation examines sales tax holidays and how they are “poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform.”
Don't Believe the Hype: Sales Tax Holidays Are Usually a Rip-off
Alex Muresianu of Reason.com examines the downsides of sales tax holidays and how they artificially increase consumer spending.
The Effect of Sales-Tax Holidays on Consumer Spending
Researchers at the Federal Reserve investigate whether pre-announced state sales tax holidays noticeably alter the spending behavior of consumers. The study found “sales-tax holidays are associated with significant shifts in the timing of purchases by consumers. Our results suggest sharpest responses are in purchases of durable goods such as furniture or consumer electronics. However, the exact magnitude of the spending effect from a sales-tax holiday depends crucially on details of its implementation, including the breadth of purchases covered and salience of the policy.”
Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2017
Scott Drenkard and Joseph Bishop-Henchman of the Tax Foundation examine state sales tax holidays and how they impact the economy. Drenkard and Henchman argue sales tax holidays are political gimmicks that “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, then they should cut the sales tax rate year-round.”
Why You Don’t Care About Sales Tax Holidays
Jason Notte, writing for The Street, examines sales tax holidays and why they are losing momentum in states across the country. “However, considering that these tax holidays are currently designed to give local businesses an edge over online competitors, they’re failing at their one task while draining local tax revenue in the process. A survey by Connexity’s Bizrate Insights found that half of online shoppers pay sales tax, but those who do don’t consider it an important factor in choosing a retailer,” wrote Notte.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Better for Politicians than Consumers
Aleks Karnick speaks with Jonathan Williams, an economist and director of the Tax and Fiscal Policy Task Force of the American Legislative Exchange Council, about tax holidays in this Heartlander article. Williams argues tax holidays rarely confer the full value of the tax cut to consumers; prices tend to remain the same, while the suppliers tend to increase their profits.
Mark Robyn: Sales Tax Holidays Help Politicians, Not Shoppers
Sales tax holidays are annual events in many states. Politicians like them because they can boast about providing a highly visible, though short-term, tax cut. In this Heartland Institute podcast, however, Tax Foundation economist Mark Robyn says sales tax holidays do nothing to boost retail sales or economic growth, burden small retailers by adding complexity to tax collections, and can distort consumer behavior in ways that help sales of some items at the expense of others.
Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform
The Institute on Taxation and Economic Policy examines the many deficiencies of sales tax holidays as a tax reduction device and concludes they have more political than policy benefits.
The Fiscal Impact of Sales Tax Holidays
Adam Cole investigates the effects of sales tax holidays on state sales tax collections. Estimates indicate tax collections decrease 0.52 percent to 7.83 percent during tax holiday months: “Up to half of the revenue reduction is due to consumers' timing purchases within the month to exploit the tax holiday. There is no evidence of large substitutions of purchases across months.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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