Follow the Money to See How Sales Tax Holidays Are Poor Policy

Sales tax holidays are wasteful, misguided policies that will drain more than $300 million of funding away from shared priorities like schools, roads, and health care this year in 16 states, while delivering little benefit to the families that could most use the help. Our newly updated brief reviews recent developments in sales tax holiday policy—including how online sales taxes are changing the picture—and explains why they are a misguided policy option for states. And the story below “follows the money” to show how sales tax holidays are a bad deal for families and communities alike.

Picture this: a typical family (Family A) in South Carolina hears about the state’s “Tax-Free Weekend” sales tax holiday coming up August 2-4 and sets aside some cash for back-to-school shopping during that weekend. When the weekend arrives, luckily they are able find time amid their work schedules and other commitments to get their shopping done then, and although the sales suspiciously don’t seem quite as good as they had been the weekend before, the family is able to get shoes, a few other clothes, and basic school supplies for their two children for $400. They would prefer to support local businesses but due to the time crunch they end up spending most of that amount at big-box stores. The combined 9 percent state and local sales tax rate in their community means they save $36 and are thankfully able to fill up their gas tank with the savings, only part of which was used driving around town to get this shopping done.

Meanwhile on the other side of town: a wealthy household (Family B) fills their online shopping carts with extravagant clothes, designer handbags, state-of-the-art computers and tablets, and an elegant gown for their dog. All of the items are ordered from out of state businesses. The purchases total over $11,000 and they pat themselves on the back for their frugality as they tell their assistant not to finalize the orders until the tax-free weekend comes, saving them around $1,000.

What happens next? Those two families’ purchases cost the state of South Carolina nearly $700 and the city government about $350. A tiny sliver of the profits from those sales stay in the community but the vast majority end up in the hands of owners of big-box corporations and online retailers outside of the state. State lawmakers cut back a bit on school funding. The city, which is not allowed to opt out of the holiday and is already at the maximum 3 percent local sales tax rate, is forced to forego the tax revenue while seeing no economic boost in the community to offset the loss, and decides to trim its budget for roads maintenance.

Fast forward one year: Family A makes the same plan and hopes to come out ahead even though they have a longer list of school supplies to purchase due to the state’s school funding cuts. But an unrepaired pothole causes a flat tire and costs them both the price of the repair and the opportunity to take advantage of the tax-free weekend, leaving the family “in the hole” literally and figuratively. Family B is on an exotic vacation when the weekend comes, but made sure to fill their carts before they left and to leave instructions for the assistant.

To be fair, although South Carolina’s sales tax holiday does not limit the purchase price of qualifying items, most states’ holidays do. Nonetheless, 16 states will hold sales tax holidays this year and they all share the same basic issues: they are not targeted to the people who need them most, they drain away funding needed for state and local priorities like schools and roads, and they are wasteful distractions compared to policy options that would truly benefit typical families while boosting state economies and improving upside-down tax codes. Sales tax holidays do none of these things, as our newly updated brief explains.

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