The left-leaning Citizens for Tax Justice called the idea “silly.” The right-leaning Tax Foundation deemed it “poor policy.” So why do 16 states continue to offer sales tax holidays during the August back-to-school shopping season?
The most likely answer is that these policy gimmicks are popular among consumers and a certain set of retailers, especially big chain stores. But they aren’t in the public interest. The states that still stage sales tax holidays should do what Washington did a few years ago: Get rid of them.
Maryland’s sales tax holiday, going on this week, eliminates state sales tax on clothing and shoes priced under $100. Virginia’s also exempts school supplies. The theory is that these tax breaks will encourage economic activity, or at least save people money.
In fact, though the research on the subject is sparse, several analyses indicate that sales tax holidays fail to produce notable economic benefits for the states that enact them. Mostly, people appear to time purchases they would have made anyway so that they fall within the holiday. For example, New York, a pioneer of the back-to-school sales tax holiday in 1997, found that sales of exempted goods rose during the holiday – but that sales fell in the weeks before and after. The state no longer offers a sales tax holiday.
There’s no compelling economic rationale for time-shifting consumer purchases, but there are many reasons it’s not worth the forgone tax revenue. Studies suggest that some stores merely raise their prices a bit during tax holidays, siphoning off the state’s generosity for themselves. Wealthier people, meanwhile, are much more likely than poorer people to have the spare cash needed to take full advantage of holidays, possibly skewing the benefits to the rich.
If the goal is to help strapped consumers purchase supplies during back-to-school season, or whenever it would be most helpful to them, then the state would be better off handing low-income residents sales tax vouchers that they could use any time, the Tax Foundation argues.
It’s true that sales tax holidays aren’t major state budget-busters. Maryland’s week-long reprieve costs several million dollars of a $38 billion budget. If tax holidays get some people into spending mode maybe they aren’t policies to get worked up about.
But that argument can’t rebut one simple point: The state can do a lot more good if its leaders put that money somewhere else.