Tax-Free Weekends: Good Policy?

August 19, 2014

Over the weekend, Massachusetts offered shoppers a tax-free holiday -- purchases under $2,500, with some exceptions, were free of the state's 6.25 percent sales tax. According to the Boston Globe, shoppers tend to spend close to $500 million during the sales tax holiday. A number of retailers collect 2 percent of their yearly sales during the weekend, with some earning up to 10 percent.

Massachusetts is one of 17 states that have held, or will hold, a sales tax holiday in 2014. But while the holidays draw shoppers into stores, are they good tax policy? Joseph Henchman and Liz Malm of the Tax Foundation argue that tax-free weekends create distortions without generating much of an economic boost:

  • The sales tax break does not generate new spending; it merely shifts it, encouraging consumers to shop for goods that they would already purchase during the exemption period.
  • The tax-free weekend generally applies only to certain products; often, the products exempted from tax are the product of political lobbying. These distinctions distort spending.
  • Tax codes are complex, and creating a sales tax exemption can be burdensome for small businesses, who have to focus limited resources on complying with the holiday.

Ultimately, write Henchman and Malm, sales tax holidays can be a distraction from real, comprehensive tax reform that could yield benefits for consumers without creating economic distortions.

Source: Kathy McCabe and Laura Gomez, "Mass. shoppers take advantage of tax-free shopping," Boston Globe, August 16, 2014; Taryn Luna, "Tax holiday set for this weekend," Boston Globe, August 13, 2014; Joseph Henchman and Liz Malm, "Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2014," Tax Foundation, July 31, 2014. 

 

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