July has Independence Day, September has Labor Day and August has sales tax holidays.
The last of the back-to-school sales tax holidays has passed for 2015, with shoppers in 18 states celebrating purchases made without having to pay sales tax. While the holidays are politically popular, they fail to achieve their intended effects: Increased economic growth and consumer purchases. Tax cuts are generally regarded as a good thing, but these short-term tax cuts are more trouble than they’re worth.
“Not all tax cuts are good tax cuts,” Tax Foundation Economist Liz Malm told the Washington Examiner. “Sales tax holidays are, in our opinion, a political gimmick that don’t really do much good. They don’t achieve the goals that they are stated to achieve and they end up just adding complexity to the tax code. A better option is to look at more broad-based reforms to your sales tax rather than a targeted, one weekend-long cut.”
The 18 states that offer sales tax holidays are located mostly in the southeastern United States. Tax-free products include hurricane supplies, clothing, school supplies, shoes and energy efficient appliances. Louisiana has a three day exemption for firearms and ammunition, while Iowa includes certain athletic equipment in its two-day tax holiday.
Rather than actually boosting sales, studies show tax holidays simply shift the timing of purchases that would have already happened. For example, if you need a new appliance, you might time your purchase to happen during the tax holiday, but you won’t buy one you don’t need just because it’s temporarily tax-free. “If the goal is to increase demand, it’s not working,” Malm said.
In many ways, sales tax holidays can be bad for business. Managers who spend all but a few days a year collecting sales tax suddenly have to figure out how temporarily to exempt certain purchases from the tax. They also have to bring in extra workers to deal with the concentrated sales activity. “There’s even some anecdotal evidence that retailers might actually raise prices during the week to deal with the fact that there is that increased demand at that specific point in time,” Malm said.
Figuring out which products are tax-free can be a burden for businesses and customers. What counts as school supplies is often a gray area with an arbitrary dividing line. “Maybe a backpack will be tax free but a duffle bag won’t,” Malm said. “Maybe lined paper will be tax free but computer paper won’t. … A lot of times that distinction can be very arbitrary, especially when you get into more detailed rules, like layaway rules.”
Unfortunately, it may be difficult to get states to repeal the sales tax holidays. Because most of the states are clustered in the southeast, states are likely concerned about losing economic activity to border states that maintain the holidays.
The case against sales tax holidays is outlined in an August report co-authored by Malm’s Tax Foundation colleagues Joe Henchman and Scott Drenkard. Other than being an easy way for politicians to collect campaign donations and boost political support, sales tax holidays are mostly useless.
Rather than celebrating sales tax holidays next year, states should ditch them. If states want to give taxpayers a break, they should offer a broad sales tax cut instead of a confusing, burdensome and temporary break.
