Sales tax holidays were first introduced in 1980 when Michigan and Ohio offered a brief tax-free period for automobile sales. In subsequent years, states have offered tax-free periods for hunting supplies, hurricane preparedness supplies, and back-to-school items. Though the concept of the tax-free holiday gained momentum for many years, it has since declined in popularity. Many states repealed their tax holidays during the economic recession, and some are hesitant to bring it back. This leaves financial and tax professionals asking the critical question – can the tax holiday effectively serve its purpose?
What Are Sales Tax Holidays?
Sales tax holidays typically take place in late summer, offering relief from state sales tax for items related to back-to-school shopping. Holidays have also been offered for hurricane preparedness supplies or hunting season. Coverage varies by state, and not all states participate in this tax relief program.
While tax holidays do offer notable savings to shoppers, they’re not all-inclusive. Shoppers need to pay close attention to their shopping strategies to make sure they’re maximizing their savings. Tax holidays often have a price ceiling. Products above that price point don’t qualify for the tax savings. This includes packaged items, so purchasing school supplies in bulk over a tax holiday may actually cost more than buying them in smaller quantities.
Tax holidays also exclude many items. For example, the back-to-school tax holiday doesn’t always include athletic gear. Shoppers need to be careful about which apparel items they select if they’re counting on the tax break to make these items affordable to them.
Sales Tax Holidays and Consumer Behavior
Sales tax holidays effectively increase shopping during the tax-free period, but this doesn’t necessarily mean more purchases overall. It simply means that shoppers shift the timing of their buys. Sales tax holidays benefit consumers most when applied to items like Apple technology that never goes on sale.
The sales tax holiday is meant to benefit low-income families, for whom the 5 to 10 percent savings can make a notable difference. However, the Federal Reserve Bank of Chicago conducted a 2010 study that indicated the holiday wasn’t benefiting its targeted audience. Shoppers whose consumption increased during tax-free days were statistically married couples making more than $30,000. The Institute on Taxation and Economic Policy (ITEP) argues that wealthier shoppers who have the flexibility to time their purchases right see the most benefit from the holiday.
ITEP also argues that low-income sales tax credits and Earned Income Tax Credits would offer a more effective way to help low-income families. As Bill Fox, director of the Boyd Center for Business and Economic Research at the University of Tennessee, pointed out, tax savings around 10 percent are actually far less than many sales which discount items as much as 25 percent off. Though the tax holiday seems appealing, it’s not always the most effective way for families to save money.
How Stores Cash in On Sales Tax Holidays
Tax holidays provide a natural draw, pulling consumers into major retail stores. J. Craig Sherman, vice president of the National Retail Federation, told CNBC that “Retailers have found tax holidays to be tremendously successful in order to get people into the stores and frame of mind to shop.” According to USA Today, tax holidays benefit retailers by bringing in shoppers who may not only purchase tax-free items, but splurge on things that fall outside the scope of the holiday as well.
The holidays also help level the playing field between brick and mortar retailers and their online competitors. The Pew Charitable Trusts indicates that taxes are not collected on most remote retail sales. An estimated $26 billion in potential sales taxes is lost. Though Alabama, Indiana, North Dakota, Tennessee, Wyoming, and Virginia have enacted laws to address remote taxes, this still leaves most of the United States with an inviting loophole to draw shoppers online. During a sales tax holiday, physical store locations can operate on even footing with their virtual competitors.
Knowing that they’ll see an influx of shoppers during the sales tax holiday, many stores quietly increase their prices. USA Today reports that some critics staunchly contend that shoppers can save more outside the holiday due to this pricing quirk. Yet, as Bill Rennie, vice president of the Retailers Association of Massachusetts, said, “Consumers have responded.” This makes the holiday a compelling feature for stores.
What Sales Tax Holidays Mean for States
States are on the losing end of the sales tax holiday. According to the Boston Globe, Massachusetts lost $25.5 million in tax revenue during the 2015 holiday, spurring lawmakers to cancel the subsequent holiday in 2016. USA Today reports that Georgia lost $42 million in tax revenue during its 2016 sales tax holiday. The Liberal Institute on Taxation and Economic Policy estimates a total loss of $300 million in the United States due to 2016 tax holidays, despite the fact that only 17 states participated.
States that are struggling to close budgetary gaps may regain a significant amount of funding by cancelling tax holidays. With so many arguments against the holiday, many are reconsidering whether this is really the best way to assist low income families.
Current Trends in Sales Tax Holidays
The popularity of the sales tax holiday hit its peak in 2010, with 19 states participating. Since then, numbers have dropped steadily to 17 states in 2016 and just 16 in 2017. Arguments to continue tax holidays are faltering as statistical evidence from the Federal Reserve indicates the holidays do not increase consumer spending or promote economic growth significantly.
Though sales tax holidays are effective at offering free marketing for retailers, they’re not serving their greater purpose efficiently. The Tax Foundation argues that the meager savings of just 4 to 7 percent on purchases isn’t an effective tax strategy. If current trends continue, the sales tax holiday may be on its way out.
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