US Sales Tax Holidays Said To Be Poor Policy
29 July 2013
Posted by: Author: Leroy Baker
Author: Leroy Baker
In its latest study, the Tax Foundation (TF) has concluded that, despite their political popularity in the United States, states sales tax holidays are "based on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform."
Sales tax holidays are described as periods 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, products bearing the US government's Energy Star label, and even guns.
"At first glance, sales tax holidays seem like great policy," the TF notes. "They enjoy broad political support, with backers arguing that holidays are a highly visible form of tax cut and provide benefits to low-income consumers. Politicians and other supporters routinely claim that sales tax holidays improve sales for retailers, create jobs, and promote economic growth."
However, it points out that "sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy. They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers."
Ohio and Michigan enacted the first sales tax holidays in 1980 when they offered tax holidays for automobile purchases, but high-tax New York State started the trend in 1997 as a way to discourage border shopping (particularly residents traveling to Jersey for clothing purchases, to take advantage of lower sales tax rates).
In 2013, 17 states will conduct sales tax holidays, the same number as last year but down from a peak of 19 states in 2010. This year, 16 states will hold clothing sales tax holidays, 11 states will have school supplies sales tax holidays, seven states will have computer sales tax holidays, and six states will have Energy Star products sales tax holidays.
The TF believes that, while their advocates argue that individuals will purchase more of the exempted goods than they would have in the absence of a holiday, and that consumers will increase their consumption of non-exempt goods through "impulse" purchases, paying taxes that would otherwise not have been collected, sales tax holidays simply shift the timing of sales, rather than stimulating new sales. Shoppers wait until the holiday to purchase exempted goods, thereby slowing down sales in the weeks prior to and following the holiday.
"While sales taxes are somewhat regressive," it adds, "this is often exaggerated to sell the idea that sales tax holidays are an effective way of providing relief to the poor. To give a small amount of tax savings to low-income individuals, holidays give a large amount to others."
The TF also considers that, as sales tax holidays usually only apply to a specific list of products, such discrimination between products distorts consumer spending and reduces market efficiency by favouring certain products over others.
"Politicians single out specific populations or industries and bestow targeted tax breaks on them," it states. "Such discrimination between products distorts consumer spending and reduces market efficiency by favoring certain products over others. Consumers should make consumption decisions for economic reasons, not tax reasons."
Its conclusion is that "political gimmicks" like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. "If a state must offer a 'holiday' from its tax system, it is a sign 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."