Taxes

Don't Believe the Hype: Sales Tax Holidays Are Usually a Ripoff

A weekend where a few items are free of sales taxes is a poor substitute for permanent reforms.

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When Florida started experimenting with sales tax holidays in the late 1990s and early 2000s, something interesting happened. According to a paper by four economists at the University of West Florida, some businesses actually increased their prices during the holidays, thus likely capturing a portion of the savings that the policy was supposed to create for consumers.

That's just one of the many potential downsides that these tax-free weekends have: They're gimmicky ways for states to dodge the tough work of making their regular taxes less harmful, and they don't deliver many benefits for consumers. It's always nice to be able to pay a little bit less taxes, of course, but research shows that the bulk of sales tax holidays' benefits don't go to the people most hurt by sales taxes, that they often impose higher compliance costs on small businesses, and that they distract states from more substantive reforms of their burdensome tax codes. 

Numerous states will have sales tax holidays this month. Most will primarily exclude common back-to-school purchases, such as backpacks and school supplies, while some states have more expansive exemptions.

These weekends are supposed to help working-class families afford basic necessities and increase consumer spending. But creating a holiday in which the government doesn't collect sales taxes for a couple days doesn't benefit lower-income people as much as just slightly reducing the sales tax rate year-round would.

Why? Because people living paycheck-to-paycheck can't afford to time their purchases to take advantage of the holiday. A 2010 study from the Federal Reserve Bank of Chicago found that households with more than $70,000 in annual income benefit the most, thanks to their greater ability to time their purchases. 

Nor do sales tax holidays help increase consumer spending by much—they mostly just lead consumers to time their spending differently. And consumers don't get all of the benefits of the sales tax holiday. With higher demand on sales tax holiday weekends, retailers sometimes raise prices. 

Some businesses don't see the benefits of sales tax holidays either—so much that they sometimes opt out of the holiday altogether. Participating businesses have to adjust their cash registers to take into account the temporary change in sales taxes. This is easy for big businesses and department stores, but for a small business those compliance costs are much more burdensome. In a survey of independent retailers in Massachusetts, one small businessman said that the state's sales tax holiday "has created more problems than benefits."

"If you need to give people a holiday from your sales tax to keep them shopping in your state," says Janelle Cammenga, state policy analyst at the Tax Foundation and author of a new study of sales tax holidays, "then your tax code probably isn't that competitive to begin with."

And then there are the often arbitrary boundaries between which consumer goods get a tax holiday and which don't. Consider those exemptions for school supplies: Some states exempt backpacks but not messenger bags. 

In 2013, North Carolina eliminated its sales tax holiday and used the revenue it gained to help lower tax rates across the board. Other states should follow its lead: Instead of gimmicks like sales tax holidays, make real reforms to their tax codes.

NEXT: The Trade Deficit Keeps Growing. And Here's 3 More Data Points Showing Trump Is Losing His Trade War

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  1. As my dearly departed father used to say, “Prices have dropped from the outrageous to the merely ridiculous.”

  2. Exempt school supplies from the tax holiday in August. Nice.

    1. I think he means exclude them from taxes not the holiday. The wording confused me at first too because the rest of the context suggests they aren’t taxed.

  3. >>>exclude common back-to-school purchases

    thought the *opposite* of this was why Texas implemented it

  4. This is incoherent drivel

    Everyone here runs sales in conjunction with tax free weekend

  5. Hooray, 8% off. (maybe 9% in a bad town.)

    If Kohl’s sent me an 8% off coupon, it would go in the trash, along with the 10% and 20% off coupons they send. 30% off gets me in the store.

    1. Hooray, 8% off. (maybe 9% in a bad town.)

      The combined sales tax rate for Seattle, WA is 10.1%.

      1. So Seattle is doing evil?

    2. Would a state tax holiday exempt you from local taxes as well? I would imagine not, but then I live in Illinois, we would never dream of not taxing something, even for a day

  6. Sales tax holidays harm businesses in NH because people in MA don’t need to drive here to buy items without paying sales tax.

  7. But sometimes tax holidays pave the way for permanent tax exemptions or reductions. That’s how it went in NY for clothing sales, and another tax if I remember right. The success of the holiday tells politicians this is what people want.

  8. This is ‘Reason’ Purity Control in a nutshell — it’s not perfect, so to perdition with it, and all you peons, too. You’re all Kevin Williamson sneerpuppets at ‘Reason.’

    1. Boom.

    2. Except they don’t deploy this stance uniformly. It’s not a control, it’s a matter of having something bad to say whenever they want.

      If they wanted to they could say this state’s cutting taxes, period, is a sort-of bad thing because the state is borrowing, and they didn’t cut spending at the same time. And if they cut spending, they could say cutting spending on this is a distraction when so much more is spent on that. They stop at any intermediate point they like, and point out that they can’t be consistent anyway, since they’re a collection of bloggers writing whatever they want without coordination.

      1. I like this new Hihn you’re doing Hihn.

  9. Have no idea regarding the point of the article.
    Sellers try to recapture some loss to sales taxes? Perhaps sales taxes should be abolished?

    1. Fail

  10. Florida man here…

    We actually see a pretty good benefit from the sales tax holiday. The big retailers time their “back to school” sales to coincide with the sales tax holiday.

    So school uniforms are purchased during this holiday.

    An Izod shirt that would normally cost $15-$20 plus 8% sales tax will be on sale for $5-$7, with no tax.

    I have 3 kids. Times 7-8 shirts each. Plus pants. And shoes.

    It adds up pretty quickly.

    Sure, the sales tax saved might be only $20 or $40. But that’s cash I get to keep, so it is all to the good.

    And for the government- they are offering a freebie on a day when prices are artificially extremely low anyway. So if you are gonna do it, that would be the day.

    Beyond that.. yeah, probably just moves some sales forward or backward a couple of weeks.

    The only other issue is that they have the big sales and the tax holiday before you meet your new teachers. So you can’t get whatever supplies they are requiring on the tax holiday and big box retailer sales.

  11. This doesn’t make any sense.

    Kids need supplies for school. This is mandatory. Parents will buy them, low income, paycheck or paycheck or not.

    Yes, lower taxes all year round would help them more. But this obviously helps them since they have to buy the school supplies now.

    And if you work retail, the whole thing is chaotic. Worse than Black Friday.

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