August 5, 2013

Back-To-School Sales Tax Holidays: What Do Economists Think?

Eileen Norcross

Senior Research Fellow

Matthew D. Mitchell

Senior Research Fellow

Christopher Koopman

Senior Affiliated Scholar
Summary

As back-to-school shopping gets under way, many states are offering shoppers a sales-tax-free weekend in an attempt to help consumers and retailers alike. However, researchers at the Mercatus Center at George Mason University have found that the tax holidays do little to help the economy and allow government officials to favor some business and industries over others.

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As back-to-school shopping gets under way, many states are offering shoppers a sales-tax-free weekend in an attempt to help consumers and retailers alike. However, researchers at the Mercatus Center at George Mason University have found that the tax holidays do little to help the economy and allow government officials to favor some business and industries over others.

In an op-ed for US News & World Report, Mercatus program manager Christopher Koopman explains that sales tax holidays primarily encourage shoppers to time their purchases differently rather than buy more products.

When studying the effects of the first such holiday ever offered by a state, the New York State Department of Taxation and Finance found that the holiday did not stimulate additional purchases. It merely incentivized shoppers to delay purchases until the holiday was in effect.

Koopman also says that the back-to-school holidays in some states have expanded far beyond their original intent—likely due to lobbying by firms seeking favorable treatment from lawmakers—and add more complexity to the tax code.

Mercatus senior research fellow Matt Mitchell questions the overall effectiveness of tax holidays, and identifies some ways that they may actually be harmful.

There is very little evidence that these sorts of targeted and temporary tax breaks do anything to help the overall community. They introduce distortions and inevitably privilege some firms at the expense of others. Worse, they distract policy makers and the public from real reform.

Mercatus senior research fellow Eileen Norcross adds that the tax holidays could be offset by hidden retail price increases. Rather than pursuing the political quick fix of a tax-free weekend, lawmakers should instead pursue real tax reform that benefits everyone.

Basically, the one-time break is a way for politicians to crow about tax relief while avoiding more substantive reforms to the code such as broadening the base and lowering the tax rate.