While sales tax exemptions have long been politically popular, they have seen a boost from lawmakers in several states this year as a way to share unanticipated surpluses with taxpayers. While state budgets may be in unusual places this year, sales tax exemptions remain the same as they always have been – inefficient and ineffective.

Seventeen states will host a sales tax holiday in 2021, up from a peak of 19 in 2010, but above 16 last year. This year, in addition to its regular Duty Free Weekend, Florida hosted a “Freedom Week” from July 1 to July 7, exempting camping and outdoor recreation supplies from sales taxes. Tennessee has increased its number of statutory holidays by one, adding a one-year holiday for gun safety supplies starting July 1. likely to cross the finish line at this plane.

Proponents argue that sales tax exemptions promote economic growth. They postulate that individuals will buy more exempt goods than they would have in the absence of the holidays, and that they will also increase their consumption of non-exempt goods. However, the evidence (including a 2017 study by Federal Reserve researchers) shows that instead of increasing purchases, consumers are simply changing the timing of the purchases they were already going to make. For most of those who shop during sales tax breaks, the exemptions simply offer a modest and unexpected benefit for doing something they would have done anyway.

The other prevailing argument is that sales tax exemptions are a means of giving tax relief. This too is exaggerated. Although sales taxes are somewhat regressive, this fact does not make sales tax exemptions effective in providing relief to low-income people. To provide small tax savings for low-income people, vacations also offer big savings for higher-income groups.

Most sales tax exemptions arbitrarily discriminate between products and create economic distortion. In the case of the back-to-school holiday, backpacks may be exempt, for example, but messenger bags may not be, prompting consumers to choose backpacks even if they would have otherwise chosen bags. messenger. Likewise, a low-income or childless couple may not need school supplies, but they probably deserve as much tax breaks as those who buy exempt goods.

Such vacations discriminate over time. There is little economic justification for a product purchased in one period to be exempt from tax while the same product purchased in another period should be taxable. Staggering shopping over a particular weekend is no more beneficial to the economy, all other things being equal, than shopping over another period. Additionally, some consumers may not be able to shop during the sales tax break because they are working, being out of town, or between paychecks – situations that no one makes. less worthy of a tax break.

The Massachusetts sales tax exemption does not discriminate between products, as it applies to all tangible personal property, but always distinguishes over time. Tennessee’s most recent vacations have the opposite problem: they decrease time discrimination by lasting an entire year but only favor gun safety products.

In addition to failing to meet their stated goals, sales tax exemptions create complexities for tax code compliance, efficient labor allocation, and inventory management. However, the free advertising for what is effectively a 4-7% discount is leading many large companies to push for the holidays.

At the end of the day, sales tax exemptions are political gimmicks that distract from real, permanent tax relief. If a state is to offer a “holiday” from its tax system, it is an implicit recognition that the tax system is not competitive. If policymakers want to save money for consumers, they should strive to reduce the sales tax rate year round.

For more details on sales tax exemptions, see our report.

Does your state have a sales tax holiday?

Note: The author would like to thank Jeremiah Nguyen for his research assistance in compiling the data for this map.

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