July 22, 2013

Three Problems with Back-to-School Sales Tax Holidays

Christopher Koopman

Senior Affiliated Scholar
Summary

As families begin planning for back-to-school shopping and retailers begin offering their annual discounts and sales, at least 17 different states will be offering temporary suspensions of sales taxes on certain goods. These tax holidays have been described as a win/win/win for retailers, shoppers and states. However, there are more problems here than proponents would like you to believe.

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August has become a holiday season of sorts – a "tax holiday" season. As families begin planning for back-to-school shopping and retailers begin offering their annual discounts and sales, at least 17 different states will be offering temporary suspensions of sales taxes on certain goods. These tax holidays have been described as a win/win/win for retailers, shoppers and states. However, there are more problems here than proponents would like you to believe. 

 Tax Holidays Do Not Promote Economic Growth

Supporters of these sales tax holidays argue that the tax-free shopping periods stimulate the economy, prompting individuals to purchase more of the goods included on the state's tax-free list and make other "impulse" purchases.

However, 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. A recent study from the University of Michigan, looking at nine different sales tax holidays in 2007, found that in some instances these strategically-timed purchases accounted for nearly 90 percent of the sales during the holiday.

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