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Sales Tax Holidays: Politically
Expedient but Poor Tax Policy 2015
By Scott Drenkard & Joseph Henchman
Director of State
Projects
Vice President,
Legal & State Projects
Aug. 2015
No. 229
Key Findings

· 18 states, primarily in the southeastern U.S., will hold a sales tax holiday in
2015, down from a peak of 19 states in 2010.

· Sales tax holidays do not promote economic growth or significantly
increase consumer purchases; the evidence shows that they simply shift
the timing of purchases. Some retailers raise prices during the holiday,
reducing consumer savings.

· Sales tax holidays create complexities for tax code compliance, efficient
labor allocation, and inventory management. However, free advertising for
what is effectively a paltry 4 to 7 percent sale leads many larger businesses
to lobby for the holidays.

· Most sales tax holidays involve politicians picking products and industries
to favor with exemptions, arbitrarily discriminating between products and
across time, and distorting consumer decisions.

· While sales taxes are somewhat regressive, this does not make sales tax
holidays an effective tool for providing relief to low-income individuals. In
order to give a small amount of tax savings to those with lower incomes,
holidays give a large amount of savings to higher income groups as well.

· Political gimmicks like sales tax holidays distract policymakers and
taxpayers from genuine, permanent tax relief. If a state must offer a
“holiday” from its tax system, it is a sign that the state’s tax system is
uncompetitive. If policymakers want to save money for consumers, then
they should cut the sales tax rate year-round.
2
Executive Summary
Sales tax holidays are periods of time when selected goods are exempted from state (and
sometimes local) sales taxes. Such holidays have become an annual event in many states,
with exemptions for such targeted products as back-to-school supplies, clothing, computers,
hurricane preparedness supplies, products bearing the U.S. government’s Energy Star label,
and even guns. High-tax New York State sparked the trend in 1997 as a way to discourage
border shopping. In 2015, 18 states will conduct sales tax holidays, down from a peak of 19
states in 2010 (see Table 1).
At first glance, sales tax holidays seem like great policy. They enjoy broad political support,
with backers arguing that holidays are a highly visible form of tax cut and provide benefits
to low-income consumers. Politicians and other supporters routinely claim that sales tax
holidays improve sales for retailers, create jobs, and promote economic growth.
2015 Sales Tax Holidays & Price Caps
State
Dates
Clothing School Supplies Computers
Energy Star Miscellaneous
Alabama
February 20-22
Generators $1,000; Hurricane supplies $60
August 7-9
$100
$50
$750
Books - $30
Arkansas
August 1-2
$100
No Cap
Clothing accessories $50
Connecticut
August 16-22
$100
Florida
August 1-3
$100
$15
$750
Georgia
July 31-August 1
$100
$20
$1,000
October 2-4
$1,500
Iowa
August 7-8
$100
Louisiana
May 30-31
Hurricane supplies $1,500
August 7-8
All purchases of tangible personal property up to
$2,500
September 4-6
Firearms, ammunition, and hunting supplies (no
cap)
Maryland
February 14-16
No Cap
August 9-15
$100
Massachusetts August 15-16
All purchases of tangible personal property up to
$2,500
Mississippi
July 31-August 1
$100
September 4-6
Firearms, ammunition, and hunting supplies (no
cap)
Missouri
April 19-25
$1,500
August 7-9
$100
$50
$3,500
Computer software: $350
New Mexico
August 7-9
$100
$30
$1,000
Other Computer Hard-ware: $500
November 1-3
No Cap
Ohio
August 7-9
$75
$20
School instructional ma-terial up to $20
Oklahoma
August 7-9
$100
South Carolina August 7-9
No Cap
No Cap
No Cap
Towels and Bedding - No Cap
Tennessee
August 7-9
$100
$100
$1,500
Texas
May 23-25
(a)
August 7-9
$100
$100
Virginia
August 7-9
$100
$20
$2,500
Generators $1,000; Hurricane supplies $60
Source: Tax Foundation review of state statutes and revenue department websites.
Note: Massachusetts in 2011, 2012, and 2013 passed legislation for its August sales tax holiday in early August each of those years. As of
press time, the House had approved an August 16-17 holiday and the Senate had approved an August 9-10 holiday, but a final bill had not
been enacted.
(a) Air conditioners up to $6,000; refrigerators up to $2,000; other Energy Star products no cap.
Table. 1
3
Despite their political popularity, sales tax holidays are based on poor tax policy and distract
policymakers and taxpayers from real, permanent, and economically beneficial tax reform.
Sales tax holidays introduce unjustifiable government distortions into the economy without
providing any significant boost to the economy. They represent a real cost for businesses
without providing substantial benefits. They are also an inefficient means of helping low-
income consumers and an ineffective means of providing savings to consumers.
Principles of Sales Taxation
Sales taxes are a type of consumption tax, or a tax on spending on goods and services
purchased by the end user. The principle underlying the use of sales taxes to fund
government is that individuals should pay taxes in proportion to the benefit they
receive from government spending; this idea is known as the benefit principle. Personal
consumption is considered an appropriate proxy for the amount of government services
consumed by an individual.
Thus, a tax on consumption is considered an equitable method of “paying” for government
services.1 Consumption also has the advantage of being relatively easy to track, measure,
and tax. Many economists also prefer a consumption tax over an income tax because the
former does not tax (and thereby discourage) savings.
Sales taxes in the United States are consumption taxes, but they largely exempt certain
transactions such as higher education, housing, and health care. A properly structured sales
tax, however, would tax all consumption by end users including services that are currently
excluded.
Broadening the sales tax base while lowering the sales tax rate will mitigate both volatility
in revenue collections and the economic harm caused by a high tax rate. A high tax rate
increases distortions in the market and can inhibit growth by making a state less attractive
for individuals and businesses.
Another important feature of good sales taxes is that they tax consumption once and only
once. Business inputs, or business-to-business purchases that are used to create other
products or services, should be excluded from the sales tax base. Otherwise, final products
will be taxed multiple times: once (or more) during production and again when purchased by
the end user. In practice, this multiple taxation unfortunately occurs in many states.
Sales taxes tend to be inherently regressive with regard to income, as low-income individuals
tend to spend a greater percentage of their income in taxable sales than high-income
individuals. In an effort to reduce this regressivity, items viewed as basic necessities, such
as groceries, utilities, clothing, and prescription drugs, are often exempted from sales taxes
1 See generally Nicolas Kaldor, An Expenditure Tax, Allen and Unwin, London, 1955.
4
in the United States. But these exemptions also benefit high-income taxpayers, while
narrowing the base and necessitating a higher tax rate.
Ideally, sales tax reform would broaden sales tax bases while lowering sales tax rates, to
produce a system that collects stable revenue with minimal economic distortion. Sales tax
holidays are an example of the opposite—base narrowing—in that they carve out exemptions
for certain transactions during certain time periods.
The History of Sales Tax Holidays
Ohio and Michigan enacted the first sales tax holidays in 1980 when they offered tax
holidays for automobile purchases. But it was New York that sparked the modern trend, with
the first sales tax holiday for clothing in 1997. New York’s objective was to tackle border
shopping, the phenomenon of residents traveling to nearby states to take advantage of
lower sales tax rates (particularly clothing purchases in New Jersey). The sales tax holiday
gave hope of reducing border shopping without the need of actually having to reduce the
state’s sales
tax rate.
While sales tax holidays are often defended on grounds of economic benefits, in reality,
a key motivation has been attempting to stop cross-border shopping, and perhaps even
lure shoppers from other states. In 2005, Massachusetts adopted an extremely generous
weekend sales tax holiday applying to all goods up to $2,500, attempting to stop Bay State
residents from shopping in next-door New Hampshire, which has no sales tax.2 In 2009,
Massachusetts temporarily abandoned the holiday as it raised its sales tax even further, from
5 percent to 6.25 percent.
Since the inception of sales tax holidays, many states have created them around certain
products and industries.3 In 2015, 18 states will hold clothing sales tax holidays, 11 states
will have school supplies sales tax holidays, seven states will have computer sales tax
holidays, and six states will have Energy Star products sales tax holidays. Altogether 18
states will conduct a holiday, one fewer than in 2010. (See Tables 2 and 3 for a chronicle of
sales tax holidays.)
2
In response, New Hampshire launched a $40,000 ad campaign emphasizing the number of days each state has with no sales tax
(“New Hampshire: 365, Massachusetts: 2”). See Alicia Hansen, New Hampshire’s 365-Day Sales Tax Holiday, Tax FoundaTion Tax Policy
Blog, Aug. 4, 2005, http://www.taxfoundation.org/blog/show/998.html.
3 Not included in our list are Ohio and Michigan’s 1980 sales tax holiday for car purchases, nor four gas tax holidays adopted
between 2000 and 2005 (Florida, Georgia, Illinois, and Indiana). For information on state gas tax holidays, see Jonathan Williams,
Paying at the Pump: Gasoline Taxes in America, Tax FoundaTion Background PaPer no. 56, at 14-16, Oct. 2007.
5
Table. 2
State Sales Tax Holidays, 1997–Present
State
Items
Days
Date
Years
Alabama
Hurricane supplies
3
Early February (2013),
July (2012)
2012-2015
Clothing, computers, school supplies books 3
Early August
2006-2015
Arkansas
Clothing, school supplies
2
Early August
2011-2015
Connecticut
Clothing, footwear
7
Mid August
2000-2015
Energy Star appliances
3 months
June-September
2007
Florida
Clothing, footwear, books and school sup-
plies (beginning in 2004)
7-9
(2004-2009),
End July (2004-2009)
1998-2001,
2
(2010-2011)
Mid/early August
(2010)
2010-2015
2004-2007
Emergency supplies
12
Late May/early June
2005-2007 2014
Energy Star appliances
7
Early October
2006, 2014
Georgia
Clothing, footwear, books, school supplies,
and computers
4
Late March (2002),
early August
2002 (twice),
2003-2009,
2012-2015
Energy Star appliances
4
Early/mid October
2005, 2007-2009,
2012-2015
Illinois
Clothing, footwear and school supplies
10
Early/mid August
2010
Iowa
Clothing, protective equipment, select
sports equipment
2
Early August
2000-2015
Louisiana
Tangible personal property, first $2,500
2
Mid December,
2005,
Early August in 2010
2007-2015
Hurricane supplies
2
Late May
2008-2015
Firearms
3
Early September
2009-2015
Maryland
Clothing, footwear
7-May
Mid/late August
2001, 2006, 2010-2015
Energy Star appliances
3
Mid February
2011-2015
Massachusetts
Tangible personal property under $2,500
2-Jan
Mid August
2004-2008, 2010-2015
Mississippi
Clothing, footwear
2
Late July/early August
2009-2015
Firearms
3
Early September
2014-2015
Missouri
Energy Star appliances
7
Late April
2009-2015
School supplies, computer software and
hardware, clothing and footwear (beginning
in 2005)
3
Early/mid August
2004-2015
New Mexico
Clothing, footwear, computers, school
supplies
3
Early August
2005-2015
North Carolina
Clothing, school supplies, computers, edu-
cational, software, sports equipment
3
Early August
2002-2013
Energy Star appliances
3
Early November
2009-2013
New York
Clothing, footwear
7
Mid January
1997-2000, 2004-2006
Clothing, and footwear (beginning in 1998) 7
September, first week
1997-1999, 2003-2005
Oklahoma
Clothing, footwear
3
Early August
2007-2015
Ohio
Clothing, school supplies
3
Early August
2015
Pennsylvania
Personal computers
8
Mid August
(2000, 2001),
2000, 2001 (twice),
2002
mid February (2001, 2002)
South Carolina
Clothing, footwear, school supplies, com-
puters, printers, software, various bath
supplies and bed linens
3
Early August
2000-2015
Most purchases
2
Late November
2006
Firearms
2
Late November
2008-2010
Tennessee
Clothing, school supplies, computers
3
Early August
2006-2015
Clothing, school supplies, computers
3
Late April
2006-2008
Texas
Clothing, footwear
3
Early/Mid August
1999-2015
Energy Star appliances
3
Late May
2008-2015
Vermont
Computers
3
Mid August (2003, 2004),
2003,
mid October (2004)
2004 (twice)
Tangible personal property
2-Jan
Mid July (2008), late August
(2009), Early March (2010)
2008-2010
Energy Star appliances
7
Mid July
2009
Virginia
School supplies, clothing, footwear
3
Early August
2006-2015
6
Energy Star appliances
4
Early October, Early August
(2015)
2007-2015
Hurricane supplies
7
Late May, Early August (2015)
2008-2015
West Virginia
Clothing, footwear, school supplies, com-
puters, educational software
3
Early August
2002-2004
Energy Star appliances
7; 3 months
in 2009 and
2010
Early September;
2008-2010
September 1 - November 30,
2009-2010
District of
Columbia
School supplies, clothing, footwear
10-Sep
Early/mid August
2001-2002,
2004-2008
Clothing and shoes
10-Sep
Late November
2001, 2004-2008
Source: Federation of Tax Administrators; Adam J. Cole, Sales Tax Holidays, 1997-2007: A History, 47 STaTe Tax noTeS 1001 (March 2008);
ala. code § 40-23-210 et seq.; ark. code § 26-52-444; conn. gen. STaT. § 12-407E; ga. code § 48-8-3(75); iowa code § 423.3(68); la.
rev. STaT. § 47:305.54; Md. code, Tax-Gen. § 11-228; MiSS. code § 27-65-111(Bb); Mo. rev. STaT. § 144.049; n.M. STaT. § 7-9-95; n.y. Tax
law § 1115(30) (Repealed); n.c. gen. STaT. § 105-164.13C; okla. STaT. tit. 68, § 1357.10; 72 Pa. conS. STaT. § 7204(58) (Repealed); S.c.
code § 12-36-2120(57); Tenn. code § 67-6-393; Tex. Tax code § 151.326, 151.327; va. code § 58.1-611.2; w. va. code § 11-15-9G; dc
code § 47-2005(32A) (Repealed). Florida did not codify its 2011 sales tax holiday. See H.b. 143, 2011 Leg. (Fla. 2011).
*Massachusetts enacted its 2013 sales tax holiday after press time, bringing the total number of sales tax holiday states in 2013 to 18.
State Sales Tax Holidays, 1997–Present Continued
State
Items
Days
Date
Years
Table. 2
Table. 3
Summary of States with a Sales Tax Holiday
1980
2 (MI, OH)
1981-1996
None
1997
1 (NY)
1998
2 (FL, NY)
1999
3 (FL, NY, TX)
2000
7 (CT, FL, IA, NY, PA, SC, TX)
2001
7+DC (CT, DC, FL, IA, MD, PA, SC, TX)
2002
8+DC (CT, DC, GA, IA, NC, PA, SC, TX, WV)
2003
9 (CT, GA, IA, NY, NC, SC, TX, VT, WV)
2004
12+DC (CT, DC, FL, GA, IA, MA, MO, NY, NC, SC, TX, VT, WV)
2005
12+DC (CT, DC, FL, GA, IA, LA, MA, MO, NM, NY, NC, SC, TX)
2006
15+DC (AL, CT, DC, FL, GA, IA, MD, MA, MO, NM, NY, NC, SC, TN, TX, VA)
2007
15+DC (AL, CT, DC, FL, GA, IA, LA, MA, MO, NM, NC, OK, SC, TN, TX, VA)
2008
16+DC (AL, CT, DC, GA, IA, LA, MA, MO, NM, NC, OK, SC, TN, TX, VT, VA, WV)
2009
16 (AL, CT, GA, IA, LA, MS, MO, NM, NC, OK, SC, TN, TX, VT, VA, WV)
2010
19 (AL, CT, FL, IL, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VT, VA,
WV)
2011
17 (AL, AR, CT, FL, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VA)
2012
18 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VA)
2013
18 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, NC, OK, SC, TN, TX, VA)
2014
17 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, OK, SC, TN, TX, VA)
2015
18 (AL, AR, CT, FL, GA, IA, LA, MD, MA, MS, MO, NM, OH, OK, SC, TN, TX, VA)
Source: Tax Foundation; Federation of Tax Administrators; state websites.
7
A number of states have tried sales tax holidays and then canceled them, a trend that has
accelerated during the current recession and related state government revenue downturn.
Florida and Maryland canceled their holidays after 2007 (but have reinstated them since).
Massachusetts canceled its 2009 holiday after it hiked its sales tax, but reinstated it at the
last minute almost every year since. In 2009, the District of Columbia, faced with declining
revenue and a widening budget shortfall, announced the one-year suspension of its August
sales tax holiday only weeks before it was scheduled to occur, later repealing it permanently.
Meanwhile, Florida, having skipped holidays in 2008 and 2009, returned to having a tax
holiday starting in 2010. North Carolina, in July 2013, approved legislation ending future
sales tax holidays, using the revenue instead for broad-based tax relief.
Many other localities, counties, towns, and even individual vendors, have opted out of their
state’s sales tax holidays.4 As noted tax scholar John Mikesell has put it, “State lawmakers are
in the position of making a politically attractive decision with the cost of that decision being
borne by someone else (local lawmakers), [a] condition[ ] ripe for poor policy choices.”5
Sales Tax Holidays Do Not Promote Economic Growth
Supporters claim that sales tax holidays stimulate the economy. They argue that, first,
individuals will purchase more of the exempted goods than they would have in the absence
of a holiday, and second, consumers will increase their consumption of non-exempt goods
through “impulse” purchases, paying taxes that would otherwise not have been collected.
Rather than stimulating new sales, sales tax holidays simply shift the timing of sales. In
1997, the New York Department of Taxation and Finance studied its clothing sales tax
holiday and found that while sales of exempt goods rose during the holiday, overall retail
sales for the year did not increase.6 On the contrary, shoppers waited until the holiday to
purchase exempted goods, thereby slowing down sales in the weeks prior to and following
the holiday. A University of Michigan study looking at computer purchases during sales tax
holidays found that timing shifts “account[ ] for between 37 and 90 percent of the increase
4 See, e.g., Alabama Department of Revenue, Local Governments That Have Notified the Department Regarding Participation, http://www.
ador.state.al.us/salestax/STholiday.htm (listing 59 localities that have opted out of the state sales tax holiday); Missouri Department
of Revenue, Back to School Sales Tax Holiday—Cities Opting Out, http://dor.mo.gov/tax/business/sales/taxholiday/school/cities.php
(listing 172 cities that opted out of the state sales tax holiday); Larayne Brown, Shoppers throng to state’s sales tax holiday, Jackson
Clarion-Ledger, Aug. 1, 2009. (“Kathy Waterbury, spokeswoman for the [Mississippi] State Tax Commission, has gotten reports
that some retailers weren’t participating in the event.”). However, in most states with sales tax holidays, retailer participation is not
optional.
5 John L. Mikesell, State Sales Tax Holidays: The Continuing Triumph Of Politics Over Policy, 41 State Tax Notes 107, 112, July 10, 2006.
6 New York Department of Taxation and Finance, The Temporary Clothing Exemption, at 23, Nov. 1997, http://www.tax.ny.gov/pdf/
stats/policy_special/clothing/1997/1997_temporary_clothing_exemption.pdf.
8
in purchases in the tax holiday states over [a] 30-week horizon,” depending on price caps and
particular products.7 Anecdotal evidence from other states supports these conclusions.8
Other evidence suggests that sales tax holidays attracted cross-border sales only when
other states did not have their own holidays, which is no longer the case. Peter Morici, an
economist with the University of Maryland, told the Washington Examiner in 2006 that a
sales tax holiday “has to be a novelty to be a measurable success and it’s no longer.”9 As
the costs of squeezing a disproportionate number of sales into a short period of time have
become clear, evidence suggests that fewer shoppers participate.10 For the vast majority of
those who shop during sales tax holidays, the holiday simply provides a modest windfall, or
unexpected benefit, for doing something they would have done anyway.
“Impulse” purchases occur whenever consumers shop, and if consumers merely shift their
purchases into a tax-free period, as the evidence suggests, their “impulse” purchases during
a sales tax holiday are likewise shifted from other time periods. The increase in tax revenue
would be far outweighed by the lost revenue from the much larger amount of tax-free
purchases. It is therefore unlikely there is a net revenue gain from additional “impulse”
purchases. And even if the “impulse” argument were true and consumers are essentially
tricked into making extra unnecessary taxable purchases, that would contradict the
argument that sales tax holidays are designed to provide a tax cut for consumers.
Job creation is a frequent argument in support of sales tax holidays. But this argument
suffers from the same problems as the argument based on general economic growth. Any
increase in employment will be modest and temporary, limiting the benefits. Temporary
increases in labor associated with sales tax holidays are costly for businesses, more so than
an equivalent increase spread over the whole year, because of the fixed cost associated with
7 Adam J. Cole, Christmas in August: Prices and Quantities During Sales Tax Holidays, at 23, May 2009. In a separate paper, Cole suggests
the shifts are short-term ones, finding “no evidence that purchases are shifted across months to exploit the tax holiday in sufficient
amounts to impact tax collections in months preceding or succeeding the month of a tax holiday.” Adam J. Cole, The Fiscal Impact of
Sales Tax Holidays, at 3, May 2009.
8 See, e.g., Jenny Kincaid Boone, Virginia’s Sales Tax Holiday: Just The Icing On The Cake, Roanoke Times, Aug. 5, 2009 (“Larie
Thompson…decided to get a head start on the sales tax holiday. She took her two daughters to the Bonsack Wal-Mart to scout
out school deals, but she planned to wait until the tax-free weekend to buy them.”); Emilie Bahr, New Orleans Merchants Hope Sales
Tax Holiday Brings Boost, New Orleans Citybusiness, Aug. 3, 2009 (“At The Garden Gate on Old Metairie Road, for example, manager
Sara Draper said some customers will select a fancy fountain or bench but wait to swipe their credit cards until they can get the
item during the tax-exemption period.”); Louis Llovio, Sales-Tax Holiday On School Supplies Starts Friday, Richmond Times-Dispatch,
Aug. 2, 2009 (“Diane Parnell, who was shopping with Reason at the Target on Midlothian Turnpike last week, said she will do some
shopping before the tax holiday begins, but will wait until the weekend to buy most of the supplies on her children’s list.”); LaTina
Emerson, Georgia’s Sales Tax Holiday Starts Thursday, Augusta Chronicle, Jul, 29, 2009 (“Robyn Linen of Grovetown was shopping
at Target…. She usually waits until the holiday so she can save money, she said.”); Emma Brown, Shoppers Go For The Gold On Tax
Holiday, Boston Globe, Aug. 17, 2008 (“We’re going to come back again tomorrow’ for a stove, said Mariam Haddad of Somerville,
who waited until this weekend to buy a crib for her day-care business and a digital camera for her 14-year-old daughter.”). The Tax
Foundation has also received calls from individuals asking about the likelihood of their state conducting a sales tax holiday, with
the caller’s intent being to postpone purchases if a holiday occurs. See, e.g., Josh Barro, Even Proposing a Sales Tax Holiday Creates
Instability, Tax Foundation Tax Policy Blog, Oct. 21, 2008, http://www.taxfoundation.org/blog/show/23803.html.
9 Dena Levitz, Sales tax holiday returns to Maryland, Washington Examiner, Aug. 23, 2006.
10 See, e.g., Mary Worrell, Sales Tax Holiday A Bust For Some Retailers, Hampton Roads Business Journal, Aug. 13, 2007 (“Zenisek spent
money advertising the tax-free weekend in area publications and had more employees in-store anticipating an influx of traffic,
which she never saw.”); Mark Albright, Sales Tax Holiday’s Appeal May Be Slipping, Tampa Bay Times, Aug. 2, 2007 (“I’m done,’
proclaimed the Largo nurse and mother of three during a recent outing at Target, ‘I shop the sales year round for real deals. I’m
trying to be more practical. I won’t be fighting crowds for the small savings during the sales tax holiday.’”); Jenny Munro, Budget-
Conscious Shoppers Welcome Sales Tax Holiday, Greeneville News, Aug. 5, 2009 (“Mel Lester, who was shopping for summer shorts
for her two children, said she probably wouldn’t shop on the sales tax holiday weekend. ‘You don’t save enough to make it worth
fighting the crowds,’ she said.”); Christel Phillips, Many East Texans Not Waiting For Tax Free Weekend To Shop, KTRE (Lufkin, TX)
(“‘Parents tend to do it two weeks in advance,’ said Maria Hernandez, a JC Penny store manager. She says many parents don’t want
to take a risk when school is just around the corner…. Some store managers recommend shopping before the tax free weekend to
avoid missing out on items that could be out of stock.”).
9
hiring and training multiple temporary employees. By focusing on encouraging a few days
of temporary employment during sales tax holidays, lawmakers lose sight of and undermine
policies that promote long-term economic growth and job creation.
Recent budget difficulties have prompted some states and localities to cancel or opt out of
their sales tax holidays. The District of Columbia Office of Taxation and Revenue estimated
that it would save $640,000 in tax revenue by canceling its sales tax holiday in 2009.11 After
eight years of sales tax holidays, District tax officials found the holiday did not spur enough
economic growth to offset the costs. Other states would be wise to follow DC’s lead and
re-evaluate the costs and benefits of sales tax holidays.
Sales tax experts and economists widely agree that there is little evidence of increased
economic activity as a result of sales tax holidays.12 Politicians claim that sales tax holidays
largely pay for themselves through increased economic activity and new collections. But
experience shows that the claims of economic stimulus, increased revenue, and consumer
savings are greatly exaggerated. States see little net economic activity as a result of sales
tax holidays; the holidays instead represent a costly-to-administer revenue loss for the
government.
Sales Tax Holidays Discriminate Arbitrarily Between Products
Sales tax holidays usually only apply to a specific list of products, such as school supplies,
sports equipment, clothing, or computers. The number of categories has expanded in recent
years to specific appliances, hurricane preparedness supplies, and even firearms. Restaurant
owners in Massachusetts have even pushed for a prepared food sales tax holiday.13 These
lists are a product of political forces. Politicians single out specific populations or industries
and bestow targeted tax breaks on them. Such discrimination between products distorts
consumer spending and reduces market efficiency by favoring certain products over others.
For example, the New Mexico sales tax holiday exempts computer microphones but not
headsets, blank painting canvases but not dry erase boards, and backpacks but not duffel
bags. Many states exempt backpacks during their “back to school” sales tax holidays even
though a student may prefer to purchase a comparably priced messenger-style bag or duffel
bag which accomplish the same functional goal but are not tax-exempt. The sales tax holiday
raises the price of these items relative to the backpack and so the student is influenced to
purchase the backpack. Though she saves a little money on the purchase, she ends up with a
less suitable product that she would not have purchased in the absence of the holiday.
11 See, e.g., Micah Cohen, A True Cause for Celebration: DC Cancels Sales Tax Holiday, Tax FoundaTion Tax Policy Blog, July 22, 2009,
http://www.taxfoundation.org/blog/show/24902.html.
12 See, e.g., David Brunori, The Politics of State Taxation: Dumber Than a Bag of Hammers, 2001 STaTe Tax noTeS 48-63, Mar. 12, 2001.
After listing many of the flaws of sales tax holidays and citing scholars on left and right, Brunori colorfully writes that sales tax
holidays are “dumber than a bag of hammers.”
13 See Kendall Hatch, Restaurants Seek Their Own Tax Holiday, TaunTon gazeTTe, Feb. 7, 2011. See also S.B. 1528, 2011 Leg. (Mass.
2011).
10 Likewise, a low-income elderly or childless couple may not have a need for school supplies,
a computer, or sports equipment, but presumably they are as deserving of tax cuts as
a consumer purchasing any of the exempt products. Using the tax code to discriminate
between products can easily translate into discrimination between certain types of
consumers, driving sales taxes further away from the ideal policy based on the benefit
principle.
While it is true that consumers always face these cost-benefit tradeoffs in the market, tax
policy should avoid adding unnecessary and discriminatory market distortions. In general,
political efforts to manipulate the economy make markets less efficient by influencing
consumers, retailers, and manufacturers to consume, sell, and produce more or less of a
product than they otherwise would. While the economic costs of these distortions may be
difficult to measure, they are real and economically damaging.
The fact that most sales tax holidays impose a price limit on the goods that are exempt only
worsens the economic distortions. This encourages consumers to purchase cheaper goods
over more expensive goods during sales tax holidays, even if they would prefer an item of
better quality or suitability. Consumers should make consumption decisions for economic
reasons, not tax reasons.
Sales Tax Holidays Can Mislead Consumers about Savings
Large retailers are often the biggest supporters of sales tax holidays. Given that they are
the beneficiaries of free marketing for what is essentially a modest 4 to 7 percent sale, and
that the mad customer rush in a short time allows them to raise prices, this is not surprising.
Policymakers should not be convinced that a sales tax holiday is a good idea just because
retailers support it.14
As weeks or months of sales cram into a weekend or a week, demand rises dramatically
during sales tax holidays. Because the amount of inventory a retailer can have on hand is
finite, many retailers understandably respond by raising prices rather than running out of
stock too quickly. When lawmakers create sales tax holidays, the assumption is that the
benefit will be passed on to consumers in the form of lower prices. In reality, retailers often
absorb those benefits for themselves.
14 In December 2008, as interest groups of all kinds sought a piece of federal stimulus proposals under consideration, a group of large
retailers pushed Congress to adopt three nationwide sales tax holidays for 2009. See, e.g., Ann Zimmerman, Retailers Want In on
Stimulus Plan, wall STreeT Journal, dec. 24, 2008. The group stated its proposal would be stimulative, and pointed to a survey that
82 percent of consumers favored a sales tax holiday and that 69 percent said they would make purchases they otherwise wouldn’t
make. That consumers support receiving benefits when no costs are explained to them shouldn’t be surprising. The economic
evidence from various studies provided in this report undermines the idea that many additional purchases would occur, especially in
a recession.
11 For example, assume a pair of shoes costs $50, and with tax the total comes to $53. During
a sales tax holiday, the shoes are exempt from the sales tax, so the consumer would expect
to pay $50. But if the shoes are in high demand due to crowds turning out for the sales tax
holiday, a retailer may have to raise the price or risk running out of stock too quickly. If he
raises the price to $51 or $52, he absorbs a large share of the savings that are intended to
go to the consumer.
Researchers at the University of West Florida studied the price effect of Florida’s sales tax
holiday in 2001.15 Using ten different types of apparel across ten retail locations, data was
collected over a three-week period to analyze whether before-tax prices were comparable
before, during, and after the sales tax holiday. Based on the prices observed in Pensacola
before the sales tax holiday, it was expected that shoppers would save $125.58 during the
holiday on a representative basket of $1,674.41 worth of consumer goods. Due to changes
in the before-tax price of the various products, actual savings observed during the holiday
were $100.06. In short, retailers absorbed up to 20% of the benefit of a sales tax holiday,
significantly reducing the benefit that consumers received. Their study is not conclusive for
all tax holidays, but it strongly suggests uncertainty about how much consumers actually
benefit from sales tax holidays.16
There is even evidence that the prices consumers pay during holidays may exceed the
prices during other times of the year, even after accounting for the tax savings. A reporter in
Charlotte, North Carolina, found that consumer price savings were better at six large stores
in the week before the 2009 tax holiday than during it.17
Indeed, this seems to be a perverse effect of sales tax holidays: the more consumers they
turn out, the more demand goes up, and the more prices rise.
15 See Richard Harper, et al., Price Effects Around a Sales Tax Holiday: An Exploratory Study, 23 PuBlic BudgeTing & Finance 108-113,
2003.
16 The University of Florida researchers noted that prices also rose in nearby Mobile, Alabama, suggesting that some of the price
increase occurred for reasons other than the sales tax holiday. Cole found in his study of computer prices during sales tax holidays
that the holiday induced retailers to raise prices of inexpensive laptop computers but lower prices of inexpensive desktop
computers. See Cole, Christmas in August, supra note 6. Additionally, scholars Richard Hawkins and John Mikesell note that
retailers’ ability to raise prices are more constrained during recessions. See Richard R. Hawkins & John L. Mikesell, Six Reasons to
Hate Your Sales Tax Holiday, 2001 STaTe Tax noTeS 801-803, Mar. 7, 2001. Further research analyzing price effects before and during
sales tax holidays would be valuable.
17 See, e.g., Michael Handy, Sales Tax Holiday Not All It’s Cracked Up To Be, WBTV (Charlotte, NC), Aug. 3, 2009 (“If you looked at the
fine print in Sunday’s newspaper advertisements, you may have noticed some of the best sale prices will end several days before
tax-free weekend. In fact, JC Penney started a huge sale on Sunday which ends Tuesday. For example, Levi Jeans are marked down
to $32.99 which is $11 cheaper than the normal price. If you wait for the sales tax holiday, you will pay the full price of $44 and
save only $3 in taxes. Belk is also offering some of its best prices from now until Tuesday, including an extra 15 percent off all
home purchases. Remember, you will save only seven percent if you wait for tax-free weekend. Some retailers are honoring their
discounts for at least part of the sales tax holiday. Office Depot, Best Buy, Target and Sports Authority are running their biggest
sales from now through Saturday. In these cases, you are better off waiting until the weekend.”). See also David Brunori, The Politics
of State Taxation: Welcome to the Club? 2001 STaTe Tax noTeS 265, Jan. 22, 2001, (“I talked to several retailers in New York, who said
they raised prices considerably knowing that people thought they were saving money by shopping tax-free.”).
12 Sales Tax Holidays Cause Costly Complexity and Instability
Tax codes should be as simple as possible. Tax complexity means additional tax compliance
costs. Because of their impacts on labor allocation and inventory management, sales
tax holidays add complexity to sales taxes and are accompanied by administrative costs
which can place a large burden on businesses. This extra burden represents a real cost
to businesses, particularly small businesses, as valuable resources are diverted to pay for
compliance with and implementation of sales tax holidays.
Businesses must reprogram their registers and computers to ensure they are in compliance
with the temporary tax changes. Most states, for instance, prohibit stores from advertising
that they will pay the sales tax on a purchase for the consumer; during a sales tax holiday,
what is normally prohibited becomes mandatory. Lawmakers are likely to be under strong
political pressure to provide ever expansive exemptions, and businesses are required to
track and comply with these year-to-year law changes. These costs are especially high for
small businesses without the overhead to dedicate employees to tracking these changes and
ensuring compliance.18
Sales tax holidays force businesses to operate under more than one set of sales tax laws
each year. These include non-intuitive and sometimes absurdly minute regulations about the
holiday’s operation. For example, Mississippi’s sales tax holiday regulations prohibit the sale
of individual shoes (evidently done as a way to get under the holiday price cap), permit the
use of coupons, prohibit layaway sales but permit rain checks, and exclude shipping costs
from the holiday.19 Virginia’s sales tax holiday permits layaway sales and rain checks, does
not permit rebates to lower the sales price, and excludes shipping but includes handling.20
South Carolina subjected layaway sales to tax during its holiday.21 Texas exempts layaway
sales as well as shipping, handling, and even installation costs as part of its Energy Star
product tax holiday.22
Vermont’s sales tax holiday for computer purchases in 2004 applied to keyboards and mice
but not printers, unless purchased as part of a bundled package, with the enigmatic caveat
that “(1) the package is sold for $4,000 or less and (2) the most common selling price of
items that would be taxed if charged separately is not more than $250 or 15 percent of
the selling price of the package, whichever is greater.”23 Pennsylvania’s 2000 holiday taxed
18 See, e.g., Mary Worrell, Sales Tax Holiday A Bust For Some Retailers, HaMPTon roadS BuSineSS Journal, Aug. 13, 2007 (“Corprew said
larger corporations and department stores have the luxury of big computer systems to calculate tax-free items, but for a small
business like her clothing shops, she and her partner spend hours photocopying receipts and organizing sales information just
to make sure everything is accurate and in order. ‘We have to split all the details and it’s a tremendous amount of work for us,’
Corprew said.”).
19 See Mississippi State Tax Commission, Official Guide for 2009 Sales Tax Holiday,
http://www.mstc.state.ms.us/taxareas/sales/06-03-09SalesTaxHolidayGuide.pdf.
20 See Virginia Department of Taxation, Sales Tax Holiday for Clothing and School Supplies Guidelines and Rules, http://www.tax.virginia.
gov/Documents/School%20Supplies%20and%20Clothing%20Sales%20Tax%20Holiday%20Guidelines.pdf.
21 See S.c. code § 12-36-2120(57)(a)(vi).
22 See Texas Comptroller of Public Accounts, Energy Star Sales Tax Holiday,
http://www.window.state.tx.us/taxinfo/taxpubs/tx96_1331.
23 Vermont Department of Taxes, Temporary Exemption for Computers August 7-9 and October 9-11, 2004,
http://tax.vermont.gov/pdf.word.excel/legal/tb/TB30.pdf.
13 computer accessories, but they became exempt for the 2001 holiday, even when not
purchased with a computer.24
Virginia’s hurricane preparedness holiday is ostensibly to help consumers stockpile needed
supplies, but the list there is arbitrary as well.25 Cell phone chargers are exempt, but laptop
chargers are not. Duct tape is exempt but not masking or electrical tape. What some states
include is somewhat unusual. South Carolina included “bath wash clothes, blankets, bed
spreads, bed linens, sheet sets, comforter sets, bath towels, shower curtains, bath rugs and
mats, pillows, and pillow cases” in its general sales tax holiday.26 Virginia includes “clerical
vestments” in its definition of clothing, along with suspenders (listed twice).27
Besides the complexities of preparing for the sales tax holiday, businesses will have to deal
with a distortion in consumer spending as shoppers shift their buying patterns to coincide
with sales tax holidays. The increased activity during sales tax holidays may be accompanied
by the need to hire temporary workers or pay their employees overtime compensation, as
previously noted. But because this increase in consumption is largely a result of consumers
shifting the timing of purchases, the result is simply a loss in efficiency for businesses
without an overall boost in sales.
One retail establishment respondent in a 2015 survey of Massachusetts Retailers Association
members said, “The sales tax holiday has created more problems than benefits for us.
Business is nonexistent three weeks before and two weeks after. As a result, five weeks of
business are crammed into two days, and the total amount of sales does not come close to
five normal weeks of summer business.”28
Instability in tax law is costly to the economy not only because of complexity but also
because it disrupts the plans and expectations of consumers and businesses. Not every state
codifies its sales tax holiday in law; some instead pass a new bill establishing it each year.
Florida alternated between having a holiday, not having one, and now having one again.29
New York did the same. Even states that have codified them can suspend them. Washington
DC’s last-minute cancellation of its 2009 sales tax holiday created more costs and left
everyone involved uncertain.30 The sudden change meant businesses had to change their
pricing systems and registers yet again.
Lawmakers should avoid creating temporary tax laws like sales tax holidays. From the
perspective of a business trying to operate at maximum efficiency, the extra administrative
and labor costs associated with a sales tax holiday are an unjustifiable burden, considering
24 72 Pa. conS. STaT. § 7204(58) (repealed).
25 See Mark Robyn, Virginia’s Hurricane Sales Tax Holiday, Tax FoundaTion Tax Policy Blog, May 20, 2009,
http://www.taxfoundation.org/blog/show/24716.html.
26 See S.C. code § 12-36-2120(57)(a)(vi).
27 See Kail Padgitt, VA Sales Tax Holiday, Tax FoundaTion Tax Policy Blog, Aug. 5, 2009,
http://taxfoundation.org/blog/show/24977.html.
28 David Tuerck, Paul Bachman, & Frank Conte, The Effects of the Massachusetts Sales Tax Holiday on the State Economy, Beacon Hill
Institute of Suffolk University, June 2015. https://retailersma.org/sites/default/files/BHISalesTaxHolidayReport2015.pdf.
29 See, e.g., Pat Hatfield, The Mystery Of Florida’s Vanishing Sales Tax Holiday, THe deland-delTona Beacon, July 8, 2008.
30 See, e.g., D.C. Shoppers Fuming Over Canceled Holiday Tax Relief, wJla newS, July 20, 2009,
http://www.wjla.com/news/stories/0709/641909.html.
14 the unlikelihood that sales tax holidays increase overall sales. Instead of creating a subset of
tax laws that apply only temporarily and then creating ambiguity about whether those very
laws will even be implemented on a year-to-year basis, lawmakers should focus on enacting
real and permanent tax relief.
Sales Tax Holidays Discriminate across Time
There is little economic justification for why a product purchased during one time period
should be tax exempt while the same product purchased in another time period should be
taxable.31 Experience with sales tax holidays shows that consumers will wait until a holiday
to purchase the same goods they would have purchased earlier in the year. But purchases in
one time period are no more beneficial to the economy, all else being equal, than purchases
in another time period.
Time discrimination also has serious negative consequences for some consumers and
businesses. Some consumers may be unable to shop during the sales tax holiday because
they’re working, are out of town, or are between paychecks. Presumably they are no less
deserving of a tax break than consumers who can shop during the holiday, but the nature of
the timing leaves them out.
Sales tax holidays result in government influencing consumers to change when they
purchase goods, but in some cases, it might not be wise for consumers to put off the tax-
free purchases until the holiday. (For example, it may not be the best idea to wait until the
weekend before school begins to buy school supplies.) For others, it might be wiser to wait
until after the holiday. For example, scholars Richard Hawkins and John Mikesell describe a
working class family that puts off repairing its only car so that it can take advantage of the
holiday, or a single, low-income mother who runs up her credit card during the August tax
holiday to buy winter coats for her children.32
Such government manipulation of consumer timing decisions is unwarranted and
economically damaging. Experience shows that political decisions about holiday scheduling
and product selection are often arbitrary and sometimes wholly unpredictable. Distorting
consumer behavior with sales tax holidays is frequently not to consumers’ benefit.
31 An exception would be where there is a negative externality, or societal cost, caused by consumers postponing their purchase. For
instance, if an epidemic were raging and vaccines were available but too costly, immediately suspending governmental costs on
vaccine purchases could encourage people to move up their vaccination, benefiting all society. In most such cases, however, other
policy solutions such as subsidies or outright government provision would be more effective than a tax holiday.
Another example would be a desire to move the timing of consumer spending, such as with stimulus packages. Whether this would
be effective economic policy can depend on one’s view about the effectiveness of stimulus packages, although sales tax holidays
would likely be too small and too temporary for even a stimulative boost to aggregate demand. Similarly, stimulus proposals in 2009
for a federal payroll tax holiday were rejected in favor of direct government spending.
32 See Hawkins & Mikesell, supra note 16.
15 Sales Tax Holidays Are Not an Effective Means of Relief for Low-
Income Consumers
Some supporters claim that sales tax holidays provide tax relief to the working poor.
However, sales tax holidays are an inefficient way to achieve that purpose. Because sales tax
holidays only provide a benefit for a short time, low-income consumers who may not be able
to shop during the designated time for cost, mobility, or timing reasons cannot enjoy the
benefits of the holiday.
Sales tax holidays provide savings to all income groups, not just low-income individuals.
People of every income level can and do buy goods during sales tax holidays. If the purpose
of sales tax holidays is to make school supplies and clothes cheaper for low-income
individuals, then a 4 to 7 percent price reduction for all consumers, but only for a brief
period, is an odd and ineffective way of achieving that. It’s an example of politicians using a
fire hose when a garden hose will do a better job.
If the citizens of a state determine that there truly is a legitimate need to help low-income
consumers obtain particular products, a more targeted and effective approach could be a
rebate or voucher program. Such a program would be administratively similar to existing
food stamp programs and would only be available to the needy, avoiding a windfall for
higher-income consumers. A rebate or voucher should make benefits available to low-income
consumers regardless of when they shop. The poor would receive real benefits, while society
avoids the economic distortions and burdens associated with sales tax holidays.
If policymakers genuinely want to save money for consumers, then they should cut the sales
tax rate year-round. While the rate reduction may be modest, such a change would put the
same money back in taxpayers’ hands without the distortions and complications associated
with a sales tax holiday. For example, applying the revenue loss from a 2008 New Jersey tax
holiday proposal could reduce the state’s sales tax rate from 7 percent to 6.6 percent year-
round.33 If tax relief for consumers looks good for a few days, why not give it to them all year
long?
33 See, e.g., Josh Barro, New Jersey Republicans Propose Sales Tax Holiday, Tax FoundaTion Tax Policy Blog, Oct. 14, 2008, http://www.
taxfoundation.org/blog/show/23769.html.
16 Sales Tax Holidays Are Not Real Tax Cuts and Distract
Policymakers and Taxpayers from Tax Reform
Some sales tax holiday advocates support them as a way of giving revenue back to
taxpayers. However, if the ultimate policy goal is reducing government involvement in
individual and market decisions, sales tax holidays are a poor choice due to their complexity,
administrative burdens, distortions, and arbitrary government micromanaging. As scholars
Hawkins and Mikesell put it, sales tax holidays are highly intrusive, going so far as to call
them “a Soviet-style state-directed price reduction on items selected by the state….”34
Because states must balance their budgets, and because states rarely, if ever, cut spending
to offset the revenue loss from sales tax holidays, the net result is that tax rates must rise
elsewhere, now or in the future. Pushing for a sales tax holiday without associated spending
cuts means that the government will have to raise revenue from other sources, creating even
more complexity in the tax code.
Looking only at tax collections provides an incomplete picture of the economic damage
caused by sales tax holidays. One must also look at the harmful effects of discrimination
between different products and time periods, burdensome administrative and complexity
costs on businesses, distortions of consumer behavior, and economically damaging
uncertainty about tax policy. Real reform—broadening sales tax base and lowering sales tax
rates—can achieve desired revenue collection levels without these costs. Going further to
eliminate the sales tax year-round for all consumers is another option to reduce negative
effects.35
Tax holidays are a gimmick that distract policymakers and taxpayers from real, permanent,
and economically beneficial tax reform. Their creation came about as a way to avoid
addressing the negative effects of high sales taxes. Politicians often receive favorable media
attention for pushing for these short-sighted policies, denigrating the hard work of those
who support genuine tax relief.
34 See Hawkins & Mikesell, supra note 16.
35 Broadening the base and lowering the rate, or eliminating the sales tax, could find support on the left side of the political spectrum,
where individuals often view sales taxes as harmful to the working poor. The four states with no state or local sales taxes are not all
traditionally anti-tax states: Delaware, Montana, New Hampshire, and Oregon. The lack of a sales tax enjoys broad popular support
in those states.
17 Conclusion
Sales tax holidays have enjoyed political success, but recently policymakers are reevaluating
them. Rather than providing a valuable tax cut or a boost to the economy, sales tax holidays
impose serious costs on consumers and businesses without providing offsetting benefits.
Taxes should raise revenue, not micromanage a complex economy by picking winners and
losers in the market. Lawmakers should aim to raise the necessary revenue in the least
economically distortionary and destructive way. To achieve this goal, sales taxes should
be neutral toward products and timing decisions: all end-user goods and services should
consistently be subject to the same sales tax. Narrowing the tax base, by contrast, is likely to
lead to higher and more damaging taxes elsewhere.
Sales tax holidays neither promote economic growth nor increase purchases. They create
complexities for all involved, while inserting the political process into consumer decisions.
By distracting high-tax states from addressing real problems with their tax systems, holidays
undermine efforts to provide legitimate relief to consumers in general and low-income
individuals in particular. Sales tax holidays are no part of sound tax policy.