The seminal argument against tax holidays is that the simply shift purchases that would have taken place at other periods in the month or year. There is no net gain in sales activity.
More damning appears to be the fact that retailers don’t leave anything on the table. Chapman suggests retailers in Florida raised their prices, although evidence for this in Massachusetts is scant.
In reality, the exemption doesn’t increase overall economic activity. It merely induces people to delay or accelerate purchases to fit into the time window. When New York had a sales tax holiday for clothing in 1997, sales jumped during the week it was in effect-but for the full quarter, it was a wash.
Nor is this alleged favor necessarily of much benefit to the ordinary family. A 2003 study found that Florida retailers responded to the incentive by setting prices higher during the tax holiday than after. In other words, they grabbed the “savings” for themselves.
All the claims about boosting revenue amount to castles in the air. Massachusetts canceled its holiday after feeling remorse about squandering nearly $15 million in sales taxes in 2008. The offsetting increase in income and corporate tax collections, by contrast, added up to less than $1.8 million.
Massachusetts didn’t enact a sales tax holiday last year because state revenues were hurting. This year proponents are arguing that the holiday will serve as a stimulus even though revenue is still down.
The best policy will be to return the sales tax rate to 5%.
Anyone have any insight on whether prices are higher in Massachusetts during sales tax holidays? Does the consumer lose in the long-run?[poll id=”