The sales tax holiday scam

  • 17 July 2017
  • NormanL
The sales tax holiday scam

Many states have jumped on the sales tax holiday bandwagon. For a few days each year, selected items, be they for school supplies, disaster preparedness, or a host of other products and services, states suspend sales tax collections to boost sales, and issue press releases touting their generosity. 

The thing is, these "holidays" are bad public policy. And as some states are beginning to realize, the benefits they have long touted just haven't materialized, and may actually have hurt far more than they have helped:

State and local governments lose revenue from temporary tax holidays, and that loss eventually translates into cuts to public programs or higher taxes elsewhere, ITEP’s report said. And ultimately, someone has to foot the bill for the holidays. It estimates that in 2017 sales tax holidays will cost governments in the 16 states holding them more than $250 million.

That expense is why lawmakers in many states have scaled these events back or decided against holding them in recent years. Florida’s sales tax holiday used to last 10 days, but is now only three days long. Lawmakers in Massachusetts also appear poised to forego the event this year, due to budget shortfalls, and Georgia and North Carolina have eliminated their back-to-school sales tax holidays recently.

Meanwhile, attempts at creating sales tax holidays in other states such as Wisconsin and Nebraska have failed. (On the flip side, New York chose to make its sales tax exemption on clothing and footwear purchases under $110 permanent.)

Instead of these holidays, Wiehe said state governments would serve their residents better by canceling these tax holidays in favor of overall tax reform. For instance, North Carolina lawmakers decided to end the state’s tax holiday as part of a broader tax reform bill.

“You could be more targeted and effective in delivering [tax relief],” said Joe Henchman, executive vice president of the Tax Foundation, a nonprofit think tank based in Washington, D.C. that says its goal is to improve people’s lives through tax policy. “Having twice as much of your income be tax-free is more meaningful to a low-income person than taking off the sales tax one weekend a year.”

Smart public policy makes state tax bases very broad, and the rates very low. That allows more people to keep much more of what they earn, while also eliminating favors, carve outs, and other goodies hidden in the tax code.

Even smarter policy keeps a lid on state spending, which limits the need for higher taxes (and additional gimmicks) in the first place.

But making those decisions is very hard, and has the potential to create political problems incumbent lawmakers would rather avoid. So we get temporary tax holidays, instead -- because inside every politician is a Santa Claus just waiting to shower gifts on voters.