Sales-tax holidays are popular, but how effective are they?
This is the time of year when football players head to training camps, kids go back to school and various states hold sales-tax holidays. If you're looking to save a few dollars on selected items, these can be good opportunities, provided that you can get the dates and locations right.
Tax holidays are temporary waivers of sales taxes on certain consumer items such as school supplies and sometimes clothing, shoes and even computers. Most states, especially in the West, don’t offer tax holidays. And for most of those that do participate, the exemptions typically apply to a small sampling of consumer items.
Nor are these policies all that effective in stimulating business, critics say, merely shifting the timing of purchases more than anything else. If you don’t live in a tax-holiday state, they probably aren’t worth bothering with.
Yet, they remain popular enough and are justified in part by many states sitting on budget surpluses that they can share with taxpayers, wrote the Tax Foundation in a recent, updated analysis.
Tax holidays often limited in scope
To make any tax break effective, you need to levy taxes in the first place. Five states don’t impose a statewide sales tax, making holidays irrelevant in those places. Of the remaining 45 states and the District of Columbia, holidays are in effect in just 18, with the number remaining fairly constant for several years.
Most holiday states are situated in the southern and central regions of the United States, along with a few in the Northeast. Arizona and California don’t offer tax holidays, with Nevada and New Mexico the only participating states in the West. Nevada’s policy is very limited, extending only to purchases by National Guard members over three days in October, according to the Tax Foundation.
The items exempt from taxation, and the dates when holidays are in effect, can be quite arbitrary. School supplies, books and backpacks are frequently offered free of taxes, making it no coincidence that the exemptions on these items typically occur in August.
In a few places, especially Florida, consumers occasionally can purchase bigger-ticket items such as computers, laptops or tablets without paying sales tax. The pricier the item, the more valuable the exemption, especially if the normal sales tax rate is on the high side.
2023 Sales-tax holidays:See when and where they're available
From state to state, many arbitrary policies
Florida’s holidays are extensive, offering tax breaks on everything from school supplies to garage doors to appliances, natural gas ranges, flashlights, tool boxes and more, with the various promotions scattered around eight periods on the calendar.
Massachusetts’ tax holiday is the broadest, applying to all tangible personal items up to $2,500 in purchases. Most of the other states offering tax holidays cap purchase amounts well below that.
Among the more unusual policies, Mississippi offers a sales-tax exemption on firearms, ammunition and other hunting items, while Tennessee exempts gun safes and gun-safety devices.
The Tax Foundation summarized the tax holidays, effective dates and applicable items in a chart contained within its report.
The number of states offering tax holidays has remained fairly steady in recent years, with no rush among other states to jump on the bandwagon.
How much do sales taxes matter?
Holidays do help shed light on state tax policies. On average, sales taxes account for 32% of overall collections at the state level, according to the Tax Foundation. In general, states rely even more heavily on individual income taxes for about 40% of average collections, with corporate income taxes, property taxes and other levies accounting for the rest.
Sales taxes and, especially, property taxes, contribute much of the revenue collected by cities, towns and counties.
California has the highest overall sales-tax rate at 7.25% but its ranking drops to seventh when local taxes are included, according to a separate midyear update by the Tax Foundation. Tennessee has the highest combined state and local tax rate at 9.55%, nosing out Louisiana, followed by Arkansas, Washington state and Alabama.
Arizona ranks 11th with a combined 8.37% sales-tax rate, including 5.6% at the state level and 2.77% on average from cities and counties.
Many of the states with the highest combined levies, including Tennessee, Arkansas and Alabama, are those with tax holidays, though it’s worth noting that Tennessee is one of the five states without a statewide sales tax.
What critics say about sales-tax holidays
While tax holidays can save consumers some money and help retailers promote their businesses, critics including the Tax Foundation call such policies ineffective and inefficient.
The dates and items excluded are arbitrary, and lower-income consumers typically don’t receive any more relief than more affluent households since income eligibility isn’t a requirement. Complying with these tax breaks can also pose headaches for businesses.
And even the economic-stimulus impacts are debatable, as a 2017 study by researchers at the Federal Reserve showed that consumers taking advantage of holidays mainly shift the timing of purchases rather than buy more.
"Shifting purchases to a particular weekend is no more beneficial to the economy, all else being equal, than purchases that may occur at a different time of year," wrote Manish Bhatt, a senior policy analyst at the Tax Foundation. "The exemptions simply provide a modest and unexpected benefit for doing something they would have done anyway."
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