Special to the Journal
Temporary Rollbacks Are Poor Substitutes for Real Reform
Washington, DC, July 24, 2013—Temporary rollbacks of sales taxes, despite being sold as a boon for consumers and businesses, actually impose significant costs on both groups without yielding significant benefits, according to a new report by the nonpartisan Tax Foundation. So-called sales tax “holidays,” whether targeting clothing, school supplies, or disaster readiness, are costly and misguided substitutes for substantive reform of a state’s sales tax regime.
This year, 17 states will sanction periods of time when selected goods are exempted from state (and sometimes local) sales taxes, down from a high of 19 states in 2010. Such holidays have become an annual event in many states, with exemptions for targeted products ranging from towels and bedding to firearms and ammunition.
“Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief.” said Tax Foundation Vice President for Legal & State Projects Joseph Henchman. “If a state has to offer a ‘holiday’ from its tax system, it’s a sign that there’s a problem with the system itself. If politicians want to save money for consumers, then they should cut the sales tax rate year-round.”
Research has shown that the vast majority of consumer purchases during sales tax holidays are merely timed to coincide with the holiday period, rather than being stimulated by it. Thus, such programs have little or no effect on overall economic activity. In addition, sales tax holidays also create complexities for compliance and inventory management. Reconfiguring software and other procedures for only two or three days causes headaches for business owners while only providing consumers a temporary 4 to 7 percent discount.
“If tax relief for consumers looks good for a few days, why not give it to them all year long?” said Henchman.
Late summer and early autumn see the greatest concentration of sales tax holidays, with states anticipating the back-to-school shopping season. While states schedule such events throughout the year (and some states have two or even three), the greatest concentration will occur next weekend, August 2-4, when 12 states will have holidays.
Tax Foundation Special Report No. 209, “Sales Tax Holidays: Politically Expedient but Poor Tax Policy” by Joseph Henchman, is available online.
The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937.