In 1996 New York instituted the first sales tax holiday. Since then about 1/3 of states and DC have signed on to do similar holidays. For most states the idea is to give consumers a break on goods they’re about to buy. It is almost always seen this time of year in these states because of back to school shopping. But it’s not exclusive to school supplies, Virginia offers a break on hurricane preparedness items and Louisiana offers breaks on guns and ammo (I didn’t bother to figure out why).
Twitter user @ericdc1 asked me if it was economically destructive to have these holidays despite them being good for consumers. I hadn’t really thought about it before mostly because the holiday is not something I’ve really taken advantage of before despite many of the participating states being in my home region of the south. It seems to mostly be used by parents, but anyone looking to get a 4-8% discount likely has this on their calendar and is willing to cross state lines to get to some of that good tax free stuff.
So are the tax free holidays good for the economy or bad? Let’s find out:
The pros of a tax free holiday:
- It gets people spending: Obviously people will take advantage of such a discount. Especially when it applies to things like computers and iPads, which in many states do count. Could the spending stimulate the economy? Absolutely.
- Those that struggle get some help: People in a financially difficult situation could use a some help. A tax holiday does that. When you think of kids with parents that have very little money, the tax holiday could help them get some new outfits and shiny kicks for the first day of school. I can attest that having an influence on first day of school confidence.
- It could actually raise state revenue: Think about it. More people are out shopping. Surely they will buy items that are on tax holiday. But they will likely buy things that aren’t on holiday too. In Alabama for instance computer purchases are limited to $750, so anything above that incurs a sales tax. People might get over excited with the tax holiday and put their savings into a taxable purchase.
The cons of a tax free holiday:
- It gets the wrong people spending: While some states have spending limits, the limits may be higher or nonexistent in others. Computer purchases up to $3500 count in Missouri. So while $750 computers might help those on a budget, tax savings on $3500 computers just help people that may not really need it. Likewise, the limits are almost always on items. So while clothing purchases may be limited to $100, it’s $100 per item. So a spoiled teen can get all the wardrobe she wants tax free so long as each item is below $100.
- It doesn’t increase spending: Studies of these policies have shown that it shifts spending, not increases it. People will put off their back to school shopping until the holiday. Likewise, really sharp parents might try to get some Christmas shopping done then. But people don’t spend more individually or in aggregate. Trade groups of course have studies that say otherwise, but there certainly isn’t any definitive research justifying the holiday as good policy.
- It doesn’t increase revenue: We could hope that people will spend more on taxable items, but that also doesn’t seem to be the case.
So whether or not the tax holiday is good for the economy is a matter with room for debate. It doesn’t seem to do much more than decrease revenue for the state holding the holiday. But tweaks in execution could make it a good policy. I much more favor the idea of allowing for tax deductible purchases. Perhaps everyone can deduct the first $500 of education expenses every year and have the deduction expire at a certain income bracket.
But the tax holiday is an easy win for politicians so don’t expect it to change much anytime soon.