As States Mull Sales Tax Holidays, Analysts Bemoan the Policy

As States Mull Sales Tax Holidays, Analysts Bemoan the Policy
June 9, 2014

Ohio is considering a back-to-school tax holiday in August, but some tax experts and economists question the effectiveness of the practice.

House Bill 450 would establish a three-day tax holiday in which sales and use taxes would not be applied on back-to-school items such as clothing, school supplies, and computers.

Meg Wiehe, policy director at the Institute on Taxation and Economic Policy, said 16 to 20 states hold similar tax holidays as a way to increase sales, and none of the anticipated economic goals are achieved.

“The policy intent was that there's a time of year that families had a need to get prepared for school and this is a way of giving them a break,” said Wiehe. “In practice that is not entirely how they work.”

Wiehe said families spend the same amount on necessary items with or without the tax holiday.

Not Very Effective’

“I don't think they are very effective at being targeted,” Wiehe said. “Those very people who are hit the hardest by sales taxes don't have the ability to shift the timing of their purchases based on when the sales tax holiday is. People who have more money are able to shift their purchases to when the sales tax is scheduled.”

Wiehe notes some states consider tax holidays a way to achieve a competitive edge against neighboring states. She cites Florida as an example of a state that has considered using tax holidays as a way to attract tourists.

Most tax holidays are established for school supplies, computers, and clothes before a school year starts, but some states use them to increase sales of items related to hurricane preparedness, guns and ammunition before hunting season, and energy-efficient appliances, Wiehe said.

“In recent years when lawmakers have debated whether or not to have tax holidays, there are lots of arguments. They're costly,” Wiehe said, adding that even though the tax holidays aren’t significantly expensive to states, even $20,000 or $30,000 could make a difference in a state that is having financial difficulty.

Scott Drenkard, an economist for the nonpartisan Tax Foundation, agreed tax holidays don’t work.

“The biggest problem I have with them is it gives policymakers who aren't particularly good at tax reform the ability to claim credit for a policy that doesn't have the beneficial effects that true tax reform does,” Drenkard said. “It's a gimmick. They're not real tax reform.”

Sales Shifted, Not Increased

Drenkard said tax holidays, at best, change when purchases are made. It leads to increased sales on a particular weekend or week, but it does not increase the overall sales for the year.

Drenkard also said tax holidays become complicated for retailers, and especially small businesses, as they have to reprogram their computers and registers to keep from applying sales tax to certain items during the holiday.

Greg Lawson, statehouse liaison and policy analyst at the Buckeye Institute for Public Policy Solutions, also characterized the proposed tax holiday as a gimmick.

“Essentially, a specified class of purchasable items is temporarily able to be sold without sales tax attached, frequently back-to-school-type holidays or clothing. The idea is that this will increase purchases and stimulate economic activity.” Instead, the timing of the purchase is shifted and the total amount of purchases is not increased, he said.

“The problem is that there is no lasting effect,” Lawson said. “They are essentially gimmicks that actually reduce revenue to the state without creating a substantial overall increase in economic activity.”

Wiehe, Drenkard, and Lawson all say states should take a different approach if they want to achieve the stated goals of a tax holiday.  

Year-Round Cuts Better

“It would make more sense to do it as an exemption. An exemption all year round or a targeted tax credit would make more sense,” Wiehe said.

“What would be a better approach is just cutting tax rates year round,” said Drenkard. “Broader bases and lower rates. That's real sales tax reform.”

“Sales taxes should be simply and predictably structured at a low rate and a broad base,” Lawson said. “This is the least distortive way of implementing them. Sales tax holidays fly in the face of these principles by temporarily removing items out of the base of what is taxed while adding administrative burdens—for example, reprogramming cash registers. The real problem, however, is that these are temporary gimmicks that do nothing to advance fundamental tax reform. In fact, all they really do is validate the case that the overall tax burden is probably too high in the first place.”

Lawson added, “Ultimately, policymakers should establish simple tax systems that raise necessary revenue in the least obtrusive way possible for the largest number of people and businesses. That won't be done so long as they cling to temporary band-aids like sales tax holidays.”

Heather Kays (heather.a.kays@gmail.com) reports from River Edge, New Jersey.