Tax Holiday or Gimmick?

Cash

The state’s sales tax holidays begin today, and the Tax Foundation’s latest report is out which explains why these holidays aren’t as good of a deal as some politicians make them out to be. Tax holidays are basically days when businesses do not have to charge sales tax on items they sell in their stores.

Here are the key findings from the report:

  • Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.
  • Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale leads many larger businesses to lobby for the holidays.
  • Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating between products and across time, and distorting consumer decisions.
  • While sales taxes are somewhat regressive, this does not make sales tax holidays an effective tool for providing relief to low-income individuals. In order to give a small amount of tax savings to those with lower incomes, holidays give a large amount of savings to higher income groups as well.
  • Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round

As the Tax Foundations’ economist Liz Malm points out:
“Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state has to offer a ‘holiday’ from its tax system, it’s a sign that there’s a problem with the system itself. If sales tax relief looks good for a few days and politicians want to save consumers money, then why not offer the needed relief all year long?”

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