August has become a holiday season of sorts – a "tax holiday" season. As families begin planning for back-to-school shopping and retailers begin offering their annual discounts and sales, at least 17 different states will be offering temporary suspensions of sales taxes on certain goods. These tax holidays have been described as a win/win/win for retailers, shoppers and states. However, there are more problems here than proponents would like you to believe.
Tax Holidays Do Not Promote Economic Growth
Supporters of these sales tax holidays argue that the tax-free shopping periods stimulate the economy, prompting individuals to purchase more of the goods included on the state's tax-free list and make other "impulse" purchases.
However, when studying the effects of the first such holiday ever offered by a state, the New York State Department of Taxation and Finance found that the holiday did not stimulate additional purchases. It merely incentivized shoppers to delay purchases until the holiday was in effect. A recent study from the University of Michigan, looking at nine different sales tax holidays in 2007, found that in some instances these strategically-timed purchases accounted for nearly 90 percent of the sales during the holiday.
Back-to-school tax-free weekends primarily compel consumers to either delay or rush purchases they plan to make regardless.
Government Picking Winners and Losers
Another problem with sales tax holidays is that they put politicians in a position of granting temporary tax-free status to particular items, thereby favoring some firms and industries over others. These political efforts distort the market and influence consumers and retailers to make decisions for tax reasons, not economic ones.
Most holidays only apply to a special list of goods selected by the state, with every special interest hoping to get their turn. What results is a situation where these back-to-school sales tax holidays have grown far beyond back-to-school items, and the Tax Foundation has noted that these lists end up being the product of political maneuvering.
For example, Iowa's "tax free" list for the back-to-school season this year will apply to all sorts of products, such as jewelry, baby bibs, water ski vests and adult diapers. Louisiana has broadened its list to cover all consumer purchases of personal property up to $2,500 per person, which includes guns, ammunition and other hunting supplies. New Mexico has even gone through the trouble to include in the tax holiday backpacks "for school" and oil painting canvases, but not backpacks for "hiking and similar activities" or dry erase boards.
Complicating the Tax Code, Holding Back Broader Reform Efforts
Although temporary tax-free shopping can be a popular political tool, these holidays distract from the need to consider substantive tax reform. Instead of engaging in attempts to reform the code – such as broadening the base and lowering the tax rate – policymakers are making the tax code even more complicated by creating special exemptions. At the end of the day, if politicians are genuinely interested in promoting economic development and helping consumers, they should focus on substantive and lasting reforms that provide genuine tax relief. These sorts of gimmicks are not real tax relief, but simply another way for politicians to hand out privileges to their favorite firms.
Christopher Koopman is a program manager at the Mercatus Center at George Mason University.