Tax Analysts Blog

Back-to-School! Time for a Holiday

Posted on Jul 31, 2013

It’s back-to-school season, which for many parents means purchasing new kids’ clothes and school supplies for the upcoming school year. It's also the time of year that some states announce sales tax holidays for the stated purpose of easing the financial pain of back-to-school shopping. Sales tax holidays, as most are aware, are a temporary reduction or elimination of the sales tax on certain goods.

This August, 17 states are offering some sort of sales tax holiday, all aimed directly at back-to-school shopping. States offer sales tax holidays at other times of the year and for other types of goods, but in August, the focus is on clothing and school supplies.

For example, beginning August 2 in Alabama, consumers will not pay sales tax on purchases of clothing up to $100 (per article of clothing), computers up to $750, school supplies up to $50, and books up to $30. And in my home state of Virginia, from August 2-4, consumers can avoid paying sales tax on purchases of school supplies of $20 or less and on clothing and footwear purchases of $100 or less.

Because several of the other sales tax holidays kick off this weekend, it seemed like a good time to point out that they represent horrible tax policy. Don’t get me wrong. I have kids, and they need clothes and school supplies. I may actually go out shopping this weekend because of the five percent savings on some clothing and school supply purchases. But in my head, I will be thinking that while sales tax holidays are politically expedient and publicly popular, they do not represent good tax policy.

The concept behind sales tax holidays is relatively simple. If the sales tax is eliminated, there will be a two-fold benefit. Consumers, particularly low income consumers, will benefit from paying a lower price on some goods. Retail stores will see more sales, which will boost local economies.

But the actual benefits of sales tax holidays to consumers, retail stores, and states are much smaller than politicians would have us believe. The Tax Foundation recently published a report on sales tax holidays. The report concludes that sales tax holidays “do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases.”

So while there is a small benefit to low income consumers who do pay less for clothing and school supplies, many won’t be aware of the holiday and simply miss it entirely. Most of the shoppers that receive the benefit are those, like me, who would buy clothes and school supplies regardless of whether there is a sales tax holiday. During the sales tax holiday, stores may show strong sales numbers, but subsequent weeks will likely be slim to offset the fact that more consumers did their shopping during the holiday period.

I suspect that most states are not in a position to give up revenue, but if they are, then why not cut the sales tax rate by .25 percent (or some other amount) for the entire year, rather than eliminate it on specific goods for a very short period of time? Better yet, why not reduce the sales tax rate and broaden the sales tax base to include most services?

Read Comments (2)

edmund dantesAug 1, 2013

In your mind, and in mine, a good tax policy is simple, easy to administer, and
has minimum impact on economic decisions. But in the mind of a politician,
these are attributes of bad tax policy. For them, a "good" tax policy has
plenty of opportunity to hand out "goodies" to favored interest groups. As
they are writing the rules, don't ever expect a change.

For two days each year, families with children get to think that the
politicians are on their side. Sure, it's not true, but the perception is more
important than the reality. There will be no constituency for rolling back
"sales tax free" days.

Cara Griffith's picturecara griffithAug 1, 2013

You are exactly right. We can talk until we are blue in the face about what
constitutes good tax policy, and there will still be sales tax holidays. It
won't stop me from beating the drum, though!

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