It sounds good, doesn't it? For one day per year, skip paying sales tax on — depending on the state — school supplies, clothing, computers, hurricane supplies, and other essential items.
After all, depending on your state's tax rate, you could save up to 7 percent off your purchases.
The brief history of sales tax holidays
Although the first sales tax holidays — no sales tax on automobiles! — were offered by Ohio and Michigan in 1980, New York gave birth to the modern sales tax holiday in 1997, this time for clothing. New York's goal was to keep residents from shopping in nearby states which had lower sales tax rates.
The list of states changes from year to year; but more states have jumped on the bandwagon since then, sometimes as many as 19 states offering incentives. In 2014, 17 states participated with sales tax holidays on a variety of items.
Save money on school supplies, shoes, or clothing? Why not? Many states are running these sales tax holidays right now, just in time for back-to-school shopping.
Not the win-win it appears to be
Indeed, why not save your shopping for these sales tax holidays?
At the very least, sales tax holidays are neutral; at the other end of the spectrum, however, they hurt the very people they were intended to help.
1. The impact on retailers
A report from TaxFoundation.org found that sales tax holidays do not significantly increase consumer spending. Instead, consumers shift the timing of their purchases to coincide with the sales tax holidays.
Remember New York's 1997 sales tax holiday? Even back then, the Tax Foundation reported the same finding: While consumer spending was up over the sales tax holiday, consumer spending over the entire year (for clothing) was stagnant.
On the other hand, sales tax holidays provide free advertising for the retailers who find themselves selling the items favored by sales tax holidays. This may, again according to the Tax Foundation, lead larger businesses to lobby for sales tax holidays.
2. The impact on politicians
And speaking of lobbying, how do sales tax holidays affect politicians? Politicians do pick the products and industries to favor with sales tax holidays. And these sales tax holidays seem great on the surface, which always helps a reelection campaign (she said cynically). But these sales tax holidays provide a distraction from permanent tax relief.
3. The impact on consumers
Before your eyes glaze over from the mention of things such as “permanent tax relief,” let's ask ourselves a simple question first: Do sales tax holidays help consumers?
Yes, if the consumer is actually saving the sales tax. However, through the years, researchers have demonstrated that sometimes retailers actually raise the prices on the goods that are available for the sales tax holidays.
So who is absorbing the cost of the sales tax hiatus? It actually might be you, the consumer. So much for savings, right?
Let's say consumer savings do occur. But that isn't the only touted benefit, either. Job creation is another. Hiring workers to cover sales tax holidays is temporary. And even so, hiring and training temporary workers is a waste of resources when compared to hiring and training permanent employees (especially if the sales tax holiday doesn't result in higher purchases through the whole year).
A tax by any other name is still a tax
But now it's time to really tackle the tax information — even if our eyes do start to glaze over a bit.
A sales tax is a regressive tax. What does that mean? Basically, regressive taxes impose a greater burden on the poor than the rich. In other words, low-income individuals spend a greater percentage of their income in taxable sales than high-income individuals. Said still another way, low-income equals lower savings, high-income equals higher savings.
In any case, the Tax Foundation uses “inefficient” to describe this method of providing tax relief to the working poor.
Even if sales tax holidays truly benefited low-income individuals, there are other challenges as well.
First, low-income individuals may not have the funds available to buy the sales-tax-exempt items during the short window when the sales tax holidays occur.
Second, they may not be able to take time off work or secure transportation during this time either.
Even if they wanted to, there are barriers that hinder low-income individuals from taking advantage of sales tax holidays.
No matter which side of the political aisle you find yourself on, most experts agree that tax relief is not found in sales tax holidays.
How to make the most of sales tax holidays
But if your state does run sales tax holidays, you can still take advantage of them.
Answer these questions to be a smart consumer, even during sales tax holidays.
- Were you going to buy the item anyway? If you were, saving up to 7 percent is smart!
- Do you have funds to pay for the item? If you were going to swipe your credit card and incur some finance charges, your 7 percent savings will be eaten up in no time.
- Are you immune from impulse purchases? Just making an unusual stop in a store increases the chance you'll make an impulse purchase or two. Be aware so that your savings aren't erased by purchasing items you don't really need — or items you hadn't budgeted for.
- Have you researched prices in the weeks before a sales tax holiday? If your retailer marks up its merchandise for the sales tax holiday, you will be saving less than you think.
Sales tax holidays offer you an opportunity to be a cynic and a smart consumer at the same time, a fun combination!
Do you take advantage of sales tax holidays or do you think they take advantage of you?