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Tax holidays are popular, but bad tax policy

School supplies backpacks HEB July 29 2016_Kay Bell photo_resized 063017
School supplies are among the items that are sales-tax-free during some of this summer's state tax holidays. (Photo by Kay Bell)

Shoppers in 15* states are gearing up for their summer state tax holidays. Mississippi and Tennessee are next in line, with those sales-tax-free events set for this coming weekend.

But are they really saving? As I noted in my blurb for this week's tax tip on these summer 2017 event, they are bad public policy.

How bad?

Quotation-marks-quotePolitical gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a "holiday" from its tax system, it is an implicit recognition that the state's tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.

That assessment is from The Tax Foundation, a Washington, D.C.-based nonprofit tax policy think tank.

Slim savings, bigger long-term costs: It's not a new message. Most tax folks agree that tax holidays don't really do much, for:

  • Businesses, since people simply time shift the shopping they would do anyway,
  • Consumers, since they're generally going to shop for and buy what they must, particularly when it comes to their children's educational needs, and certainly not for
  • Governments, which lose millions by waiving state and, in many cases, local sales tax collection even for just a few days.

Longtime blog readers know that I share The Tax Foundation's stance, which it also has held for as long as I've been following that organization.

In its latest examination of sales tax holidays, The Tax Foundation's Joseph Henchman (Executive Vice President) and Scott Drenkard (Director of State Projects) argue that despite their political popularity, sales tax holidays distract policymakers and taxpayers from real, permanent and economically beneficial tax reform.

Some highlights from the 2017 report, which you can download as a PDF and peruse at your leisure, include:

  • Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management.
  • Free advertising for what is effectively a paltry 4-to-7 percent discount leads many larger businesses to lobby for the holidays.
  • Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating among products and across time, and distorting consumer decisions.
  • Sales taxes are somewhat regressive, but sales tax holidays are not an effective tool for providing relief to low-income individuals. In fact, they provide only a small amount of tax relief to lower income earners, while giving much more in tax savings to higher-income groups.

Basically, the tax bottom line, according to The Tax Foundation, is that "sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy."

Bad but likely to continue: But a solid economic reason has never stopped lawmakers, at any level of government, from making bad tax policy decisions for purely political reasons.

So expect at least a handful of states to continue to offer a variety of tax holidays — in addition to the summer ones pegged to the coming school year, there are hurricane preparedness and energy efficiency holidays — throughout the year.

As always, I'll blog on the various sales-tax-free events as they near. You can check the upcoming dates and highlights of the remaining summer back-to-school tax holidays in the updated table in my prior tax holidays 2017 post.

*And yes, I know 16 states scheduled tax holidays this summer, but Alabama shoppers got their tax-free shopping shot last weekend, July 21-23.

Tax holidays nationwide, year-round: As for the tax holidays that were earlier or will come later this year, check out The Tax Foundation's map below.

Sales-Tax-Holidays-2017-01-map_Tax-Foundation

Do you think The Tax Foundation and I are right or wrong in smacking sales tax holidays? Why or why not?

Do you look forward to tax holidays? Do you schedule your purchases around them? How much money do you save thanks to the tax-free events?

Let me and the ol' blog's readers know in the comments section.

And if you're a fan, happy and tax-saving shopping!

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Comments

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Really?!

Sales tax holidays are a joke.
Many of the reasons why it does not Really help have been listed except for One MAJOR point... Stick it to the state/local government!
It's a psychological and emotional approach which tax laws help create.

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