Sales tax holidays are politically popular with elected officials because they offer direct discounts, whether real or perceived, to consumers in a highly visible way. Consumers often believe they’re getting a good deal. Thus, they remain popular despite their economic inefficiencies, unintended consequences and frequent inability to achieve their stated goals.
Proponents of sales tax holidays claim they create economic growth by increasing retail activity within their timeframes. However, studies show that much of the increased shopping during holidays is shopping that consumers would have done at other times but moved to the holiday timeframe to take advantage of discounts. While some consumers make incidental “impulse” purchases during these holidays, those additional purchases are not enough to justify the revenue costs associated with these holidays, even if such impulse purchases are desirable. Since sales tax holidays shift the timing of demand but do little to increase its magnitude, sales tax holidays reduce state and local tax collections for little or no economic benefit.
Additionally, states often schedule sales tax holidays to exempt specified goods and services during times when demand for these goods and services is highest, such as back-to-school products in August and hurricane preparedness supplies before storm seasons. As a result, most of these revenue losses are associated with retail transactions that would have occurred without the added incentive. The prevalence of sales tax holidays is indicative of deeper structural weaknesses in state tax codes: the existence of a sales tax holiday is a tacit admission that the sales tax is overly burdensome throughout the rest of the year.
While these revenue losses may not be particularly large, they still have to be offset by revenue generated elsewhere, which is a net negative for states’ overall economic health since other revenue sources are often more economically damaging than sales taxes. And states that can consistently cover these holidays out of surplus revenues could better utilize their excess funds on more economically efficient tax reforms, particularly rate reductions.
Proponents of sales tax holidays sometimes suggest that they encourage out-of-state consumers to travel for discounts, increasing in-state sales. Since so many states now have tax holidays, and because the holidays often apply to lower-cost items that wouldn’t justify a large detour, their effect on consumer behavior is dubious. Furthermore, while compliance is undeniably low, a consumer who makes a sales-tax-free, out-of-state purchase intended to be consumed in their own state is legally obligated to pay use tax on that purchase.
Tax holidays also incentivize consumers to put off shopping for selected items. A lower-income family that waits to buy school supplies until a back-to-school sales tax holiday on the weekend before school starts — a point when many families have already finished their shopping — might have been better off if they had shopped earlier, when products are most likely to be well stocked.
This is just one aspect of sales tax holidays that can inadvertently harm lower-income consumers. Because sales tax holidays induce high demand for an often narrow, predetermined set of goods during a limited timeframe, retailers often increase prices to avoid running out of stock. Though this aspect of sales tax holidays is difficult to study, some research has suggested companies can absorb up to 20 percent of the benefit of sales tax holidays through price increases, hurting consumers with the lowest incomes. These shoppers are also the most likely to face difficulties in being able to prepare for sales tax holidays by increasing household savings or requesting time off work.
Better Options
If governments truly want to help low-income consumers, targeted assistance policies are better options. Better yet, policymakers could permanently ease tax burdens by trimming rates year-round — but permanent solutions tend to be deprioritized when politically easier temporary gimmicks like sales tax holidays persist.
In addition to their inefficiencies as a vehicle for tax relief, sales tax holidays often have economically distortive structural flaws. For example, by imposing a cap on the price of goods that qualify for the sales tax holiday, consumers may be influenced to purchase a less expensive and lower quality product when they otherwise would have purchased a higher quality product that exceeds the specified price threshold. Low price caps can also disadvantage goods from small businesses whose prices may be higher.
The compliance costs associated with sales tax holidays are further damaging to small businesses. Additional short-term staffing is often necessary to handle the induced spikes in demand, and that can be harder to schedule for businesses with fewer employees. Moreover, small businesses may find it more difficult to absorb the spending slowdowns in the weeks immediately before and after sales tax holidays, as consistent revenue is more important when margins are thin. Even if overall revenue remains only slightly changed, the timing distortions can be painful. Additionally, the work required to comply with sales tax holiday provisions (e.g., determining which products qualify for exemption and changing cash register settings in accordance) can be especially difficult for small businesses, which are often unable to sustain entire teams dedicated to legal compliance.
Compliance Difficulties
Sales tax holiday structures vary widely from state to state, exacerbating these compliance difficulties. Beyond the differences in product lists and price caps, different states treat shipping, handling, layaway sales and “rain check” sales differently. The difficult task of compliance must often be done on short notice, because details sometimes aren’t agreed to until just weeks before holidays are scheduled to take place.
Take Massachusetts’ sales tax holiday for this year: It must occur at some point during August. Massachusetts legislators chose to give the Massachusetts Department of Revenue multiple weeks to determine when the 2024 state sales tax holiday will be held. Statutorily, it didn’t need to be decided for weeks. Such administrative delays encourage administrative slowdowns which could be harmful, or at least not as helpful, if they choose dates during which demand is low for the qualifying set of goods and services covered under the state’s sales tax holiday.
For small online retailers selling into Massachusetts, among others, this is a nightmare. There are legal consequences for over-collecting sales tax from consumers, so they need to adjust to sales tax holidays that may be called at the last moment, on an evolving range of products, and often with definitions that require careful product-by-product eligibility judgments.
Some businesses thrive on sales tax holidays while others struggle to comply with them. Some consumers benefit from them while others might be inadvertently hurt by them. Sales tax holidays pick winners and losers — and their costs aren’t offset by any meaningful economic benefit.
Nevada recently implemented a sales tax holiday for National Guard members. SB 50 requires Nevada National Guard members to pay the sales tax on eligible items, then submit a request for a refund of the tax, a copy of the letter of exemption issued to the person, and the receipt issued to the person by the retailer indicating that the person paid the tax. Only then will Nevada National Guard members receive a refund and benefit from the sales tax holiday. Is this an efficient or desirable system?
Picking Favorites
From a political standpoint, sales tax holidays are harmful because they create space for politicians and regulators to pick political favorites in the process of selecting eligible products. They also pave the way for lobbyists to solicit policymakers in hopes of securing a sales tax holiday exemption for their products because small retail businesses often lack resources for lobbying and because there is no way for legislators to perfectly know what consumers want. The lists of goods included in tax holidays can become an unholy matrimony of centralized economic planning and corporate lobbying. Any decision about which goods are and aren’t exempt will discriminate against some consumers.
Overall, sales tax holidays are an inefficient vehicle for providing tax relief or generating additional economic activity. They often end up hurting the taxpayers they intend to help. They inject unnecessary instability into government and business revenue streams; create administrative and compliance costs for businesses, governments and consumers; and do not promote long-term economic growth.
Several states realized these downfalls and accordingly abandoned their sales tax holidays in recent years. However, their electoral utility remains an incentive for policymakers, and with 19 states offering sales tax holidays in 2024 — an increase over recent years — it doesn’t look like they’re going away any time soon.
Joseph Johns is a state tax policy Analyst with the Tax Foundation. Benjamin Patrick is an intern with the Tax Foundation’s Center for State Tax Policy. This commentary originally appeared on the website of the Tax Foundation and is republished with permission. To read the original, which includes state-by-state information on sales tax holidays, click here.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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