Sales Tax Slice: Assault Continues Against Sales Tax Holiday Policy

Spring has arrived.  With it, a new round of state sales tax holidays.  And, as usual, a policy debate that pits consumer sentiment and political will against recent economic research.

In a Louisiana state-commissioned tax study released in March, some of that state’s leading thinkers advocate for comprehensive tax reform.  They argue, among other things, that Louisiana repeal its existing sales tax holidays and issue a moratorium on any new sales tax exemptions.

First, some background.  A sales tax holiday is a temporary period—anywhere from a day to a week—in which a state exempts consumer purchases from sales tax.  Sixteen states held at least one last year.  Some are general and exempt most purchases.  Others are narrowly defined to exempt one or a few item categories, such as energy-efficient appliances, back-to-school clothing and supplies, or severe-weather items.  Louisiana, for example, holds three sales tax holidays each year: a hurricane-preparedness holiday in May, a general holiday in August, and an aptly named “Second Amendment” holiday in September.  As one might assume, the last exempts hunting firearms, ammunition, and supplies.

Sales tax holidays are popular among consumers.  In fact, some stores have reported being busier during sales tax holidays than on Black Friday or other high-volume days.  Politicians tend to love them too.  They claim that the temporary tax breaks drive consumers to stores and provide an economic boost to the state.  So when each holiday draws near, states publish press releases, notices, and videos asking consumers to open their wallets.

But mounting economic research suggests that sales tax holidays fail from a policy perspective.  Critics rebut claims that the holidays stimulate consumer spending.  They argue that consumers merely shift purchases that they would already make from one day or month to another, with no net increase in dollars spent, and instead a resulting loss in tax revenue.  The Louisiana study found, among other things, that Louisiana experienced $4 million in reduced sales tax collections last year due to its three tax holidays.  Arguing for a broader tax base, the authors concluded that “there is no evidence of any major gains to the state or to the citizens” from sales tax holidays.

Similarly, the Tax Foundation—perhaps the most ardent and vocal holiday detractor—has long argued that sales tax holidays are “politically expedient but poor tax policy.”  The Tax Foundation’s many reports assert, in part, that sales tax holidays:

• do not promote economic growth;
• discriminate arbitrarily between products, such as by exempting backpacks but not messenger bags, or by exempting painting canvases but not dry-erase boards;
• create a complex short-term compliance regime for businesses, for example by forcing a business to reprogram its cash registers for the holiday or to stay abreast of whether layaway items are exempt;
• distort consumer behavior;
• create crowds; and
• impose unnecessary additional enforcement costs on government.

The Louisiana tax study, the Tax Foundation, and other critics compel us to rethink policy and re-examine sales tax holidays from an economic lens.  Whether policy-makers will heed the call is still an open question.

Continue the discussion on LinkedIn: Are sales tax holidays good tax policy?

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by Ryan Voorhees