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1 Janelle Cammenga, Sales Tax Holidays: Politically Expedient but Poor Tax Policy, 2020 1 (2020)

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Sales Tax Holidays: Politically

Expedient but Poor Tax Policy, 2020


Janelle Cammenga
Policy Analyst


Key   Findings


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  Sixteen states will hold a sales tax holiday in 2020, down from a peak of 19 in
   2010  but unchanged  from  last year. Given the coronavirus crisis, Tennessee
   established a second sales tax holiday, targeting restaurants.

  Sales tax holidays do not promote economic  growth  or significantly increase
   consumer   purchases; the evidence (including a 2017 study by Federal
   Reserve  researchers) shows that they simply shift the timing of purchases.

  Sales tax holidays are not an effective solution to the current economic crisis,
   as the drop in consumption  is caused by a public health crisis, not less desire
   to spend.

  Sales tax holidays create complexities for tax code compliance, efficient labor
   allocation, and inventory management.  However,  free advertising for what is
   effectively a 4 to 7 percent discount leads many larger businesses to lobby for
   the holidays.

  Most  sales tax holidays involve politicians picking products and industries to
   favor with exemptions, arbitrarily discriminating among products and across
   time, and distorting consumer decisions.

  While  sales taxes are somewhat regressive, this does not make sales tax
   holidays effective for providing relief to low-income individuals. To give small
   tax savings to those with lower incomes, holidays give large savings to higher-
   income  groups as well.

  Such  political gimmicks distract from genuine, permanent tax relief. If a state
   must  offer a holiday from its tax system, it is an implicit recognition that
   the tax system is uncompetitive. If policymakers want to save money for
   consumers,  they should cut the sales tax rate year-round.


FISCAL
FACT
No. 721
July 2020

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