August 3, 2023

Gimmicky Sales Tax Holidays to Cost States & Localities $1.6 Billion This Year

news release

Contact: Jon Whiten ([email protected])

This weekend 10 states – Arkansas, Florida, Iowa, Missouri, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, and West Virginia – will temporarily exempt a range of products from sales tax. Later this month, Connecticut, Maryland, Massachusetts, Mississippi, New Jersey, and Texas will do the same, while several other states have already done so or will offer this break later in the year.

While these temporary suspensions may have some surface appeal, they have many significant downsides, as we explain in our new brief.

The brief’s key findings:

  • Nineteen states had sales tax holidays on the books in 2023, down from 20 the previous year.
  • These suspensions will cost states and localities nearly $1.6 billion in lost revenue this year, up from an estimated $1 billion just a year ago.
  • Sales tax holidays are poorly targeted and too temporary to meaningfully change the regressive nature of a state’s tax system.
  • Overall, the benefits of sales tax holidays are minimal while their downsides are significant.

“At the end of the day, sales tax holidays are gimmicky tax policies that deliver very little for most working families but have a large and growing cost to state and local budgets,” said Marco Guzman, ITEP Senior Policy Analyst and author of the brief. “Lawmakers who are genuinely interested in creating a fairer tax code have many better options to choose from than these temporary suspensions.”

This year Florida takes the cake for the biggest and worst sales tax holidays. The Sunshine State is estimated to lose over $1 billion in sales tax revenue after expanding these breaks this year. Not only does the state lack an income tax—hindering one of the most effective ways to tax higher incomes and wealth—but it has, over the years, chopped up more and more of its sales tax structure to offer exemptions on purchases of arbitrary items like random toys, tickets to sporting events, boating supplies, and in a new culture-war salvo this year, gas stoves.

Overall, sales tax holidays are bad policies that have too often been used as a substitute for more meaningful, permanent reform. They are an inadequate substitute for several reasons:

  • Tax holidays leave a regressive tax system—one that asks more of low- and moderate-income families—unchanged and do little to benefit families most in need of support.
  • Sales tax holidays poorly target those who are disproportionately impacted by regressive sales taxes and wealthier families are more likely to be able to benefit.
  • Retailers are given leverage during sales tax holidays and can exploit consumers with higher prices or watered-down sales promotions.