NCPA - National Center for Policy Analysis

Sales Tax Holidays Are Bad Tax Policy

August 4, 2011

Sales tax holidays have become popular in many states.  They exempt from taxation products such as school supplies, clothing and even computers.  Politically popular, sales taxes have been touted as economic growth generators and beneficial to low-income individuals, say Mark Robyn, a staff economist, Micah Cohen, an adjunct scholar, and Joseph Henchman, director of state projects, with the Tax Foundation.

The proponents of sales tax holidays want consumers to purchase more of the exempted goods and to increase their impulsive consumption of nonexempt goods on the holidays, thus generating revenue that would not have been collected had it not been for the holiday.  

  • In reality, the holidays have the effect of encouraging consumers to not shop for exempted items in the weeks before the holiday, which distorts the market.
  • Indeed, a University of Michigan study looking at computer purchases during sales tax holidays found that timing shifts "account for between 37 and 90 percent of the increase in purchases in the tax holiday states over [a] 30-week horizon."

There is more to the negative side of sales tax holidays:

  • They do not bring any significant boost to the economy.
  • Businesses do not receive substantial benefits from the holidays.
  • They are inefficient and ineffective in helping low-income consumers save.
  • Large retailers tend to be the main beneficiaries, since they raise their prices on those holidays.

Sales tax holidays do not provide legiti­mate relief to consumers and distract policymakers and taxpayers from serious tax reform.  State and local governments would be wise to reject them in favor of more sound tax policy, including lower sales taxes across the board on all products and not exempting so many products and services.

Source: Mark Robyn, Micah Cohen and Joseph Henchman, "Sales Tax Holidays: Politically Expedient but Poor Tax Policy," Tax Foundation, July 2011.


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