A study by the Tax Foundation suggests that sales tax holidays, in which states exempt certain products from sales tax collection during certain times of the year, have political benefits but are not good tax policies.
“The evidence, which includes a 2017 study by Federal Reserve researchers, shows that they simply shift the timing of purchases,” a statement by the Tax Foundation says. The Tax Foundation is a think tank that publishes research studies on tax policy.
“Some retailers raise prices during the holiday, reducing consumer savings,” it states. “If a state must offer a ‘holiday’ from its tax system, it is an implicit recognition that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.”
Along with shifting the time of purchase, the research found holidays often create complexities in the tax code, efficient labor allocation and inventory management, but that many businesses lobby for the holiday so they can sell goods at a reduced price after tax.
The research also found that politicians oftentimes provide special favors to certain industries by only exempting some products, which distorts consumer decisions and distracts from real permanent tax relief.
In 2019, 16 states will hold a sales tax holiday, including Ohio and Virginia. Two local think tanks – one based in Ohio and the other in Virginia – agreed with the Tax Foundation’s general assessment.
Virginia holds a sales tax holiday to provide breaks on purchasing clothing, school supplies and items for hurricane preparedness. Chris Braunlich, president of the Virginia-based Thomas Jefferson Foundation, told The Center Square via email that the tax holiday is popular, but that it generally just shifts the time of purchase.
Baraunlich said the state should be looking into serious tax reform.
Ohio has a sales tax holiday every year on the first Friday, Saturday and Sunday of August. Andrew Kidd, an economist at the Ohio-based Buckeye Institute, told The Center Square via email that the holiday generally shifts the time of purchases.
“So people hold off on buying things, like school supplies, until those holidays,” Kidd said. “Yet since these holidays reduce the amount of tax revenue the state collects, it forces the sales tax rate to be higher throughout the rest of the year. And these higher rates throughout the year can force people to delay buying other goods they may need, like a new set of tires.”
Kidd encouraged the state to consider reducing the state income tax permanently to have long-term economic growth.