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Sales Tax Holidays Reconsidered

Written by Nickel - 4 Comments
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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.

Published on August 1st, 2005 - 4 Comments
Filed under: Taxes

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

Related articles...

» One Year Ago This Week (July 30th – August 5th)
» From the Archives (July 29th – August 4th)
» 2011 Sales Tax Holidays (Map)
» Tax Holidays Starting Soon
» State and Local Sales Tax Rates (Map)
» 2011 Sales Tax Holidays for Back-to-School Shopping
» 2010 Sales Tax Holidays
» State Sales Tax Holidays

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4 Responses to “Sales Tax Holidays Reconsidered”

  1. 1
    Matt Says:

    Even if I don’t _save_ money, I’d prefer that it go to the store or the manufacturer or even some middleman distributor, rather than the government. Too bad there aren’t any tax holidays happening ’round here.

    (It’s amazing to me that I’m still the #4 commenter here, despite the fact that this blog’s subject matter is entirely unrelated to any of the reasons I follow most of the blogs I do. :) )

  2. 2
    nickel Says:

    Even if this isn’t your usual cup of tea, we still like having you around…

  3. 3
    Jose Anes Says:

    I don’t like tax holidays.
    I do not buy on impulse on tax holidays. I buy when I NEEED things.

    This makes me pay tax when I NEED things, and pay for the tax not payed for the people who buy on impulse.

    Money And Investing

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