This year, 16 states will hold a sales tax holiday (you can see the list here). If that number sounds low, it is. While 45 states have a state-wide sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon do not), more states are opting out of offering shoppers a tax break each year. This year, for example, Georgia dropped its annual sales tax holiday, the third state to do so since 2010.
That feels like it’s a bad thing. But perhaps it’s not. According to the independent tax policy nonprofit, Tax Foundation, “[s]ales tax holidays do not promote economic growth or significantly increase consumer purchases.” In fact, says the organization, evidence from a new 2017 study by Federal Reserve researchers shows that shoppers don’t buy more: they simply shift the timing of purchases. And, some actually retailers raise prices during the sales tax holiday, reducing consumer savings – a potential egregious maneuver since retailers don’t pay sales tax out of pocket. You and I pay sales tax as consumers.
Calling sales tax holidays “political gimmicks,” the Tax Foundation argues that the sales tax holidays “create complexities for tax code compliance, efficient labor allocation, and inventory management.”
So why bite?
For one, sales tax holidays are free advertising for retailers. While the “sale” typically involves a 4 to 7 percent discount – the kind of “sale” most folks wouldn’t line up on Black Friday for – it attracts notice. That, claims the Tax Foundation, leads many larger businesses to lobby for sales tax holidays.
Not all retailers, however, are convinced that it’s a good thing. One retailer in a 2015 survey of Massachusetts Retailers Association members (downloads as a pdf) reported that the sales tax holiday does more harm than good. “Business is nonexistent three weeks before and two weeks after,” the business said. “As a result, five weeks of business are crammed into two days, and the total amount of sales does not come close to five normal weeks of summer business.”
The holiday is also considered favorable for politicians. If you’ve ever read the fine print on sales tax holidays, you’re likely baffled by the numerous exclusions and exemptions. That, according to the Tax Foundation, is being politicians choose “products and industries to favor with exemptions, arbitrarily discriminating among products and across time, and distorting consumer decisions.” Those products and industries tend to be those which offer benefits of some kind to politicians, either in the way of political support and/or contributions or good press. As a result, the cherry-picking of items included in the sales tax holidays from state to state can be so intrusive that they’ve been called “a Soviet-style state-directed price reduction on items selected by the state.”
In fact, instead of saving consumers money – or promoting economic growth – sales tax holidays take politicians away from measures that could provide permanent tax relief, argues the Tax Foundation. “If a state must offer a ‘holiday’ from its tax system, it is an implicit recognition that the state’s tax system is uncompetitive,” the organization says. “If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.”
That hasn’t happened. Worse, since many states must balance their budgets (unlike the federal government), a cut in sales tax revenue without corresponding spending cuts means that the state has to find the missing revenue somewhere. And how do states plan to make up that shortfall? They’ll get it from you and me in the form of revenue-raisers (read: increased taxes) elsewhere. That kind of revenue shifting led the Tax Foundation to conclude, “Sales tax holidays are no part of sound tax policy.”
You can read the entire report here (downloads as a pdf).
