April 15, 2024

Taxes/Finance

The state of finance in Florida

Jason Garcia | 9/28/2017

The Low-Down on Sales-Tax Holidays

A little more than 30 years ago, lawmakers in Ohio and Michigan enacted the first sales-tax holidays when they offered a short-time tax exemption on sales of automobiles. Nearly two decades later, in a bid to prevent border shopping, New York borrowed the concept and established a sales-tax holiday on clothing. And that kicked off a stampede as other states scrambled to copy and top one another.

This year, 16 states will have salestax holidays on clothing, school materials, emergency supplies and energy-efficient appliances, among other things.

Florida lawmakers have been especially enthusiastic supporters of sales-tax holidays, holding one or more kinds of holidays most years since 1998.

Here’s the thing: Sales-tax holidays don’t work, at least not according to a new report by the Tax Foundation, a think tank in Washington, D.C., that studies tax policies. Sales-tax holidays, the Tax Foundation says, don’t promote economic growth or significantly increase purchases; rather they merely shift the timing of purchases. Sales-tax holidays also create complications on everything from tax compliance to staffing management; they are an ineffective way to provide relief to low-income consumers; and they involve politicians arbitrarily choosing what products and industries deserve tax breaks and distorting market forces (such as exempting backpacks but not duffel bags).

The Tax Foundation noted that large retailers are often the leading supporters of sales-tax holidays — in large part because they amount to free advertising. What’s more, the report notes that other studies have found evidence that retailers raise prices during sales-tax holidays, eating into, and in some cases even eliminating, any savings that flow to consumers.

“Indeed, this seems to be a perverse effect of sales tax holidays,” Joseph Henchman, the Tax Foundation’s executive vice president, and Scott Drenkard, its director of state projects, wrote in the July 2017 report. “The more consumers that turn out, the more demand goes up, and the more prices rise.”

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Tags: Banking & Finance, Economic Backbone

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