How Effective are Sales Tax Holidays?

This year seventeen states will hold brief sales tax holidays in order to attract back-to-school shoppers and boost the economy. However, according to a recent report by the Tax Foundation, sales tax holidays do not promote economic growth or significantly increase consumer purchases. The report concludes that sales tax holidays simply shift the timing of purchases, and some retailers raise prices during the holiday, reducing consumer savings.

Sales tax holidays are periods of time when selected goods are exempted from state and sometimes local sales taxes. It is important to note that sales tax holidays only apply to certain types of purchases, such as school supplies or clothing. For example, in certain states, such as Tennessee, computers up to $1500 will be exempt from the usual state sales tax of 7 percent, which equals to savings up to $105.

The Tax Foundation states that despite broad political support with proponents arguing that tax holidays improve sales for retailers, create jobs, and promote economic growth,  sales tax holidays are based on poor tax policy and distract policymakers and taxpayers from real, permanent, and economically beneficial tax reform. The report explains that sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. Further, taxes should raise revenue, not micromanage a complex economy by picking winners and losers in the market.

In 2010, the Federal Reserve Bank of Chicago raised doubts, stating that the sales tax holiday falls short of satisfying all of the policymakers’ stated intentions. In 2012, the Institute on Taxation and Economic Policy (ITEP) stated that sales tax holidays are poorly targeted, do not boost sales, create administrative difficulties, and cost revenue for the state. The ITEP suggests that permanent low-income sales tax credits or the Earned Income Tax Credit may be a better way of achieving tax equity.

2013 Sales Tax Holiday

July 26-27

Mississippi: clothing ($100 or less)

August 2–4

Florida: school supplies (no single item more than $15), clothing ($75 or less), computers ($750 or less)
South Carolina: clothing, school supplies, computers (no limit provided)
North Carolina: clothing ($100 or less), school supplies ($100 or less), instructional material ($300 or less), computers ($3,500 or less), other computers ($250 or less), sports equipment ($50 or less)
Virginia: clothing, backpacks and school supplies ($100 or less)
Iowa: clothing ($100 or less)
New Mexico: clothing ($100 or less), computers ($1,000 or less), computer equipment ($500 or less), school supplies ($30 or less)
Louisiana: all tangible personal property ($2,500 or less)
Alabama: clothing ($100 or less), computers ($750 or less), school supplies ($50 or less), books ($30 or less)
Tennessee: clothing ($100 or less), school supplies ($100 or less), computers ($1,500 or less)
Missouri: clothing ($100 or less), computers ($3,500 or less), school supplies ($50 or less)
Oklahoma: clothing ($100 or less)

August 3–4

Arkansas:  clothing ($100 or less), school supplies (no limit provided)

August 9–10

Texas: clothing, backpacks, and school supplies ($100 or less)
Georgia: school supplies ($20 or less), clothing ($100 or less), computer ($1,000 or less)

August 11–17

Maryland: clothing and footwear ($100 or less)

August 18–24

Connecticut: clothing and footwear ($300 or less)