Why you should avoid sales tax holidays

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?

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Beth
Beth
4 years ago

We don’t have sales tax holidays per se, but many retailers have “Save the HST” sales. (A 13% discount where I live.) I mostly avoid them because there are often better discounts to be had if you watch sales cycles. For instance, why save 13% on clothes when I can wait for 20-30% off?

However, 13% off is a good deal for items that rarely go on sale. It’s all about carefully planning your purchases.

Ali @ Anything You Want
Ali @ Anything You Want
4 years ago

I live close enough to New Hampshire that if I need to make a big purchase I can go there any time, thus eliminating the need for the sales tax holiday. We did participate last year when we purchased our couch (which had to be delivered and therefore could not avoid sales tax). Many stores in my area anticipate the sales tax holiday and offer sales before the actual holiday, so we benefit without having to wait for the specific (and usually crazy!) holiday weekend.

Jessica
Jessica
4 years ago

Ohio’s first school tax holiday is this upcoming weekend. I will be buying socks and underwear for the family. We will also finish out our school supply lists.

Alexandra @ Real Simple Finances
Alexandra @ Real Simple Finances
4 years ago

These are really good points. I was planning on doing some shopping for my state’s sales tax weekend, since I absolutely need new maternity clothes, but I can see how it wouldn’t be good for many other reasons!

Katherine
Katherine
4 years ago

Now that I have two kids, I think the biggest waste of my money was buying new maternity clothes. I have an entire bag full to donate to the Salvation Army and I often see great batches of newish maternity clothes with the high end brands on FB B/S/T groups for next to nothing. Sorry for the unsolicited advice…

Mandi
Mandi
4 years ago

Arizona does not do this. I wish they did!

KWL
KWL
4 years ago

The tax free weekend in Texas is this weekend and I was planning to go shoe and jean shopping this weekend regardless due to payday being Friday and they are things I need sooner rather than later. I’ve gone school clothes shopping on this weekend a few times when I was in school and never had a problem finding good sales in addition to the items being tax-free. I am hopeful that will be the case this year, so I will research before heading out. I also use the Ibotta cash back app and noticed they have a few good… Read more »

Frank
Frank
4 years ago

“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.” Your math is backwards (or at least unclear) here. Lower income would receive a higher saving by not paying sales tax (as a percentage of income) than a high-income earner. 7% sales tax on a $1000 item is $70. If you earn $20,000, $70 is 0.35% of your income. If you earn $100,000, $70 is 0.07% of your… Read more »

PaulGH
PaulGH
4 years ago
Reply to  Frank

This is true, but incomplete. On any given purchase, low income families will be benefitted, however, they are in the worst situation to actually make those purchases. That is to say that they likely don’t have the savings available to puy in bulk or ahead of actual need, so they reap less overall savings from the holiday. The biggest advantage goes to modest middle income earners who can manage to buy in quanitity without using debt but still don’t have major savings. The more effective form of reducing the regressive tax would be a year round reduction in tax, not… Read more »

Lisa Aberle
Lisa Aberle
4 years ago
Reply to  Frank

Thanks to you both for clearing up my murky writing!

Jeff
Jeff
4 years ago

Living in Illinois all my life I’ve never heard of such a thing.

Funny about Money
Funny about Money
4 years ago

Jeez. I live in a state that has one of the highest sales taxes in the nation. Never heard of a sales tax holiday.

Sure sounds like a scam and a come-on, though. There is no free lunch, and there is no tax holiday. One way or another, they’re gonna getcha.

Juli
Juli
4 years ago

Save up to 7%? I wish! Here in TN our sales tax is almost 10%! But I still don’t shop on tax free weekends. Ours is coming up this weekend, but school started this part Monday. So it’s a little late to be buying school supplies. My boys get oodles on hand-me-downs, so I rarely buy them clothes. And we don’t need a new computer or anything else on the list. So I avoid the insane crowds and stay far away.

Jen Anastasopulos
Jen Anastasopulos
4 years ago

Here in TX we just had our tax free weekend for back to school . Thanks for the tips. I definitely should have read this before going shopping this past Saturday. I went back and looked at the receipts and before the tax free sale prices and you were right. they marked it up! Next year I guess. 🙁

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