Are Sales Tax Holidays Effective Economic Tools? Not So Fast

In 2016, shoppers in 17 states will have the opportunity to purchase certain items free of sales tax on what are known as sales tax holidays. Widely popular with consumers, sales tax holidays are often pitched as a win-win for everyone; spurring further local economic growth while giving taxpayers’ pocketbooks some much needed relief. Recent findings, however, suggest that these holidays are often ineffective fiscal tools.

While there are sales tax holidays throughout the year, the majority take place in late summer, just before the start of the new school year. Many states provide sales tax exemptions on these holidays for school supplies, clothing, footwear, computers, and other items students need to gear up for school. Some states also exempt emergency preparedness supplies and energy efficient appliances. All 2016 sales tax holidays and the items included with price limits can be found in the map below.

According to a report by the Washington D.C.-based non-partisan group The Tax Foundation, sales tax holidays do not promote further economic growth, as consumers just time their already planned purchases to fall within the tax holidays. The group also found that these holidays create further “complexities for tax code compliance, efficient labor allocation, and inventory management.” Additionally, retailers often raise product prices during sales tax holidays to take advantage of the free publicity, effectively negating consumers’ sales tax savings.

Another D.C.-based non-partisan group, the Institute on Taxation and Economic Policy (ITEP), similarly found sales tax holidays to be weak economic tools. On top of no increased retail sales, less-than-anticipated consumer sales tax savings, and administrative inefficiencies, the group found that these short-term sales tax holidays hurt state budgets significantly in the long run. ITEP found that in 2015, sales tax holidays cost the 18 participating states over $300 million in lost revenue that would either need to be made up through spending cuts or tax increases in other areas.

Tags: