Sales Tax Holidays Fail to Make the Grade

Back to school shopping season is just around the corner, which means it’s also time for our annual lesson on the follies of “sales tax holidays,” a tax policy idea that fails to make the grade. In our newly updated brief on the subject, we look at recent developments in this area and provide some insight on why the 17 states currently using sales tax holidays should drop them in favor of more effective alternatives.

Sales tax holidays suspend or reduce sales taxes on a particular set of items at a particular time of year. The most common use is for a weekend-long back to school holiday on certain clothing and supplies, but some states also have holidays for severe weather season, hunting season, and energy efficient products.

As our brief explains, sales tax holidays fail in several subjects:

• In Math, sales tax holidays just don’t add up. The amount of savings going to the families most in need is small compared to the hit that state budgets take.
• In Social Studies, it becomes even more clear that sales tax holidays are poorly targeted to the families that could use the help the most. Low-income families are less likely than their higher-income neighbors to be able to schedule their shopping trips around the brief time windows.
• In Economics, sales tax holidays violate one of the central lessons of taxation: consumption taxes should apply low rates to broad bases, and generally not attempt to encourage particular choices in the market. They also increase administrative difficulties and costs for the businesses that have to figure out what is taxed and what is not. And sales tax holidays do not provide a boost to retailers or state economies. Families are not likely to buy significantly more school supplies than they otherwise would have; they simply buy them at a different time.
• In Government, sales tax holidays score political points but are not effective tax policy. This is no more clear than in Louisiana, where a serious revenue crunch led cost-cutting lawmakers to cancel their hurricane-preparedness holiday but keep their “Second Amendment Weekend” for guns and hunting supplies. Sadly, the revenue loss from holidays usually hits states’ general funds that also pay for K-12 education, and much of the benefit flows to nonresidents who just happen to be passing through on summer vacation.

But we also note that many states have taken these lessons to heart. Although the concept has reached more than 20 states over the years and proposals to expand it continue to arise, no states enacted new sales tax holidays this year and several states have reduced or canceled theirs in the last few years. Lawmakers in Kansas, Maine, Nebraska, Rhode Island, and Wisconsin recently rejected new back to school holidays and North Carolina decided not to reinstate its “holiday.” Florida lawmakers pared back the state’s back to school holiday and rejected proposals to create new holidays for hunting and fishing gear, items bought from small businesses, and all purchases by veterans.

We hope states lawmakers and families will add our brief to their summer reading lists!