Sales Tax Holidays: Boon or Bust?


Throughout much of the summer, and particularly in August, when families are purchasing notebooks, backpacks and other back-to-school accoutrements, a healthy chunk of states offer sales tax holidays, exempting consumer purchases during that time from sales taxes. This year, 17 states are hosting such holidays, the Tax Foundation reports.

For instance, in May, shoppers in Louisiana could forego sales tax on the first $1,500 they spent purchasing hurricane preparedness supplies, Thomson Reuters reports. Earlier this month, consumers buying clothing, school supplies, computers, and other items in South Carolina could skip the sales tax, also according to Thomson Reuters.

It's probably not surprising that a majority of consumers – 58 percent, in fact – support sales tax holidays, according to a recent Rasmussen report. Almost as many – 52 percent – said their spending increases during the holidays.

Of course, retailers also tend to enjoy sales tax holidays. They argue that not only do the holidays prompt shoppers to spend more on the items that are exempted, but that many also pick up impulse items for which they still have to pay taxes on.

But, do annual tax holidays make for sound policy? The answer from the Tax Foundation is no. Its recent report, "Sales Tax Holidays: Politically Expedient but Poor Tax Policy," identifies a number of reasons behind this conclusion. "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 introduce unjustifi­able government distortions into the economy without providing any significant boost to the economy," the report states.

Many of the arguments used to support sales tax policies don't hold up, the Foundation says. For instance, the tax holidays are touted as way to stimulate demand and boost sales – indeed, that's their raison d'etre. While that occurs to some extent, a healthy chunk of the sales that occur during the holidays are due to timing changes and would have occurred anyway, according to this study from the University of Michigan. Adam Cole, the study author, found that timing changes accounted for between 37 and 90 percent of the increase in purchases during the tax holidays. (At the time of the study, Cole was with the economics department at the University; he's now a financial economist at the Office of Tax Analysis in the U.S. Treasury Department.)

Another argument supporters of tax holidays may cite: that they prompt employers to hire temporary workers to handle the boost in demand. But, the benefits are minor and short-lived, the Tax Foundation asserts. What's more, retailers incur costs to comply with the holidays. Indeed, the rules surrounding the holidays can be complex, and compliance can require an inordinate amount of time.

Perhaps more significantly, sales tax holidays are temporary, and distracting Band-Aids. What the U.S. tax code needs is comprehensive, lasting reform. Elected officials' time would be better spent addressing real tax reform.

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Karen Kroll supplies the Business Finance community with reporting and commentary examining cash management and treasury-related topics.

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