The Truth about Sales Tax Holidays

Everyone loves a bargain, so it’s no surprise that sales tax holidays are hugely popular in the 17 states hold them.

Over the past few weekends, 13 states temporarily suspended their sales tax, and four more will do so in the coming weeks.  Most state sales tax holidays will coincide with back to school season, but a subset of these 16 states also hold separate sales tax holidays to help consumers save on purchases tied to hurricane and hunting season. State lawmakers reap public relations benefits from these “holidays”, and media tend to cover them favorably.

But taxpayers should look beyond political talking points, long lines and bargains. The truth about sales tax holidays is that they are a costly gimmick. While they may provide taxpayers some savings on necessary purchases, they are a distraction from the bigger picture problem with regressive state tax systems.

Virtually every state’s tax system takes a much greater share of income from middle- and low-income families than from wealthy families. Nationwide, the poorest 20 percent of households pay more than 11 percent of their income in state and local taxes on average, compared to just 5.6 percent for the top 1 percent. States’ heavy reliance on sales taxes exacerbates this problem.

In theory, sales tax holidays should help mitigate this problem. But temporary reprieves from taxes on back to school items aren’t well targeted. In fact, temporarily suspending sales taxes often benefits wealthy families more than low- to moderate-income families.  Better-off families are positioned to time their big purchases to occur during sales tax holidays–a luxury that often isn’t available to folks living paycheck to paycheck. One recent study found that households earning more than $30,000 per year are more likely to shift the timing of their clothing purchases to coincide with sales tax holidays than lower-income households. Further, low-income seniors and families without children who have no need to purchase “back to school” items get nothing from sales tax holidays.

Another problem is sales tax holidays often apply to an arbitrary assortment of items that may have more to do with lobbying power than consumer needs.  Maryland, for example, continues to tax wedding veils, but it exempts bridal gowns and tuxedos during its sales tax holiday.  Diapers are also exempt, but don’t expect to buy any diaper bags or receiving blankets tax-free. In New Mexico, ice skates are taxed, but not ski boots; chalkboards are taxed, but not chalk or erasers.  In Texas, golf cleats and football pads are taxed but not swim suits or tennis shoes.

Sales tax holidays will collectively cost states more than $300 million this year. This is money states can ill afford to lose. The revenue lost through sales tax holidays will ultimately have to be made up somewhere else, either through spending cuts or increasing other taxes.

Instead of expending resources planning, promoting and implementing sales tax holidays, policymakers would do better to focus on long-term solutions with real benefits for working families.  They could implement policies such as sales tax credits for low-income taxpayers, expand or implement a state earned income tax credit, or permanently reduce sales taxes rates and shift toward a progressive personal income tax.

If lawmakers really want to help families’ bottom lines, they should look to these more thoughtful and permanent reforms.