NCPA - National Center for Policy Analysis

Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2015

August 21, 2015

18 states will hold tax holidays in 2015. Most tax exemptions target items such as school supplies and clothing. These events enjoy a lot of popular support because it is believed they help low income households. Politicians back tax holidays as well and claim that they promote economic growth, create jobs and increase sales.

A key motivation to implement tax holidays was to stop cross-border shopping (e.g. NY to NJ) and attract shoppers from other states.

However, in spite of their popularity, tax holidays are poor tax policy because they distract stakeholders from a more beneficial tax reform and introduce distortions into the economy. Here is what the authors of this article found:

  • Tax holidays do not stimulate the economy, they simply shift the timing of sales. Shoppers will wait until the holiday to purchase the desired goods but sales before and after the holiday will slow down.
  • Job creation is another argument in favor of tax holidays but any increase in employment will be temporary. Moreover, these temporary increases in employment are costly for businesses and discourage long-term job      creation.
  • Tax holidays discriminate between types of products and also between types of consumers, thereby not benefiting everyone equally.
  • In many cases retailers raise prices during tax holidays, thus, retailers are the ones absorbing the benefits.
  • Tax holidays add complexity to tax codes which result in additional compliance and administrative costs.
  • Tax holidays might not provide relief to low-income consumers because many of them might not be able to shop during the designated time.

Ideally, sales tax reform should broaden sales tax bases while lowering sales tax rates, resulting in a system that collects stable revenue with little economic distortion. Sales tax holidays are an example of the opposite: they narrow the base.

Source: Scott Drenkard and Joseph Henchman, "Sales Tax Holidays: Politically Expedient but Poor Tax Policy 2015," Tax Foundation, August 17, 2015.

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