BUHL:  Sales tax holidays may be good politics, but are bad tax policy

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EDITOR’S NOTE:  More than 100 items are exempt from South Carolina’s 6-percent state sales tax and applicable local taxes during South Carolina’s 18th annual sales tax holiday, which will be Aug. 4 to 6.  In recent years, Statehouse Report has editorialized about the political gimmickry of the tax-free weekend.  Here’s a related view.

By John Buhl, special to Statehouse Report  |  Sales tax holidays represent poor tax policy, costing states revenue while providing little benefit, according to a new Tax Foundation report .

Buhl

More policymakers are recognizing this less-than-desirable tradeoff; South Carolina is one of only 16 states to use sales tax holidays for 2017, down from a peak of 19 states in 2010. South Carolina will offer a back-to-school sales tax holiday August 4-6.

Key findings:

  • Sales tax holidays create additional tax compliance costs, but larger businesses tend to lobby for the holidays as a form of free advertising.
  • Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating among products and across time, and distorting consumer decisions.
  • While sales taxes are somewhat regressive, this does not make sales tax holidays an effective tool for providing relief to low-income individuals. In order to give a small amount of tax savings to those with lower incomes, holidays give a large amount of savings to higher-income groups as well.
  • 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 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.

“Sales tax holidays have enjoyed political success, but recently, policymakers are reevaluating them,” the report says. “Rather than providing a valuable tax cut or a boost to the economy, sales tax holidays impose serious costs on consumers and businesses without providing offsetting benefits.”

  • Click here to view the full report.

John Buhl is manager of media relations for the Tax Foundation, an independent tax policy nonprofit that has offered research and analysis since 1937.  He is based in Washington, D.C.

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