Sales Tax Holidays Reconsidered

As a followup to the list of this year’s state sales tax holidays that I published the other day, I thought I’d point out an article written by David Brunori, a professor of public policy at George Washington University who has been an outspoken critic of the regressive nature of sales taxes. Brunori argues that, although sales tax holidays are effective political gimmicks, they’re not good for much else. While this article was first published in 1999, Brunori continues to express this point of view today. Read on for the meat of Brunori’s argument…

…sales tax holidays fail to provide meaningful relief to those who need help the most. In that sense, they are poor vehicles for promoting tax justice. First of all, sales tax holidays do not provide significant relief to poor and lower-income taxpayers, who like everyone else shop year round. If they happen to miss the holiday, relief is denied.

Relief is dependent on knowing when (or even that) the tax holiday will take place. The experience in Texas suggests that retailers manage to get a lot of people into the stores. Yet it seems clear, to me anyway, that the wealthier you are the better information you have and the more likely you are to know about the tax holiday. Another problem is that tax holidays are always targeted toward families with school-age children. That is noble, but there are plenty of less fortunate people without children.

Moreover, there is evidence that retailers either temporarily raise prices or do not reduce prices during normal back- to-school sales. There is plenty of anecdotal evidence to support that finding. If it is true, neither the poor nor the rich are getting much of a break.

But the biggest problem is that tax holidays obscure the real inequities of the tax. The sales tax is unfair. Rather than addressing the unfairness in a comprehensive way, political leaders provide small, short-term relief. People in states with tax holidays still face regressive taxes 51 weeks a year.

From a tax policy perspective, holidays do not measure up very well either. As sales tax specialist John Mikesell has explained, tax holidays are an inefficient way of providing tax relief. Because they apply to everyone, rich and poor get to shop tax-free. The cost of providing relief to the poor is magnified by the cost of providing the same relief to the wealthy. Tax holidays also increase collection costs for administrators and vendors.

In fact, there’s been a bit of research on the effect of tax holidays on prices, and the results suggest that there might be something to Brunori’s arguments. So if you’re pumped up about the possibility of saving a bundle during a tax holiday, do your homework and make sure that you’re getting a deal.

Note: Special thanks to reader JimL for pointing out this issue in general and David Brunori’s views in particular.