A Holiday from Sales Tax Holidays

Fall must be right around the corner. TV is filled with back to school ads and states have begun their annual sales tax holidays. These tax respites may have made sense when states were flush. They gave consumers a modest cost break at relatively little expense to government. But today, when state and local treasuries are bare, do governors still want to exempt some sales from tax, even temporarily? These days, consumers are faced with an explicit trade-off, even if politicians won’t admit it: Save a couple of bucks at the checkout counter in return for more cuts in government services or higher other taxes.

Retailers claim that states might make money due to additional sales.  However, evidence suggests that these holidays only accelerate purchases or encourage people to cross state lines to buy. In fact, New York started the trend back in the late ‘90s precisely to get folks to buy in-state rather than crossing the river to New Jersey.

In good times, sales tax holidays might make sense. When state coffers are full, they are an easy way to rebate some money to residents without affecting the long-run tax base. States such as Texas and Florida have used it that way.  Temporarily suspending a tax for a set period of time when rainy day funds are full seems better than other alternatives – namely eliminating some taxes permanently or expanding spending programs to reflect higher revenues caused by economic bubbles.

When asked about these holidays, people almost always say they favor these holidays but that response might be due to the way the question is framed. When asked if they want lower taxes, people will almost always say yes; but what if they were asked about the trade-off:  “Would you want this tax holiday if it meant closing the library two days a month?”  I suspect that the answer might change. 

Some places, including the District of Columbia, Maryland, Florida, and Illinois, have canceled or haven’t enacted the holidays this summer. Others, including Virginia, Iowa, and Connecticut have held theirs, while Texas actually expanded its program.  This might make sense in Iowa where revenues continue to match expenditures and where the rainy day fund isn’t empty.  But for Connecticut, a state that has had to cut spending across-the-board and has yet to pass a budget, a sales tax holiday seems short-sighted.

I hope that sales tax holidays don’t follow the path of many “temporary measures”, and become part of the permanent tax structure. Better that states think about their actual cost, and how they fit into their very difficult budget pictures.