Sales tax holidays: A gimmick's flaws | Arkansas Blog

Tuesday, July 26, 2011

Sales tax holidays: A gimmick's flaws

Posted By on Tue, Jul 26, 2011 at 8:50 AM

Nice timing. Arkansas's first back-to-school sales tax holiday is coming up and the Tax Foundation is out with a national roundup on states with such holidays and a recitation of the things that are wrong about these politically popular events. For example:

* The evidence strongly shows that sales tax holidays do not promote economic growth or significantly increase consumer purchases; instead they shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.

* Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale 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 between products and across time, and distorting consumer decisions.

* While sales taxes are somewhat regressive, this is often exaggerated to sell the idea that sales tax holidays are an effective way of providing relief to the poor. To give a small amount of tax savings to low-income individuals, holidays give a large amount to others.

* Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a "holiday" from its tax system, it is a sign 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.

Just so you'll know: The Tax Foundation is no liberal tax-and-spend outfit. Quite the reverse. I note for the record that the National Federation of Independent Business affiliate in Arkansas is touting the tax holiday as a way to get people "in the mood to spend." They undoubtedly would like to leverage this into still more tax exemptions.

Here are the somewhat detailed rules on the Arkansas tax holiday Aug. 6-7 on clothing (items worth less than $100 and accessories worth less than $50 per item) and school supplies (calculators are covered, for example, but not computers and other electronic gadetry).

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