The Institute on Taxation and Economic Policy (ITEP) made a lot of noise (and news, news, news) about sales tax holidays during the recent back to school season. Seventeen states offer sales tax holidays. The rules vary widely, but in most cases they mean consumers don’t have to pay sales taxes on back to school supplies, clothes, etc. for a few days. This past August for the first time, Arkansas offered a sales tax holiday of its own. While the sales tax revenue figures are still coming in, it’s now clear that holiday cost the state about $2.1 million in lost revenues and an additional $710,000 loss in revenues for cities and counties that collect their own local sales taxes.
Naïve state officials hoped to see an increase in sales tax revenue based on the assumption that consumers would go out and purchase more taxable items. Indeed, sales tax holiday proponents often argue that sales tax holidays actually generate new sales tax revenue, as in this report from the Florida Retail Association.
But so far the Arkansas revenue figures aren’t showing much offsetting revenue generated. The Deputy Director of the Department of Finance and Administration, Tim Leathers has admitted they “couldn't detect any increase in consumers spending more money while they were in there buying school supplies." Revenue officials have yet to tally September’s sales tax revenues to see if there were shifts in consumption by month, but either way it seems that the sales tax holiday didn’t provide a real and needed boost for state coffers.
John Shelnutt, an economist with the Department of Finance and Administration said, “If it did shift consumption from month to month, we'll have to see…. Even then, it's not a clear story. We were below forecast for the first two months of the fiscal year, which begins July 1."
Another reason that Arkansas jumped on the sales tax bandwagon was lawmakers’ belief it would lure shoppers from neighboring states to take advantage of the holiday, but again, the numbers don’t show any evidence for this. The economist, Shelnutt, sees no “growth rate to suggest there was a cross-border rush to take advantage of the holiday.”
Myths about the utility of sales tax holidays abound. Lawmakers too often believe these events are helpful to cash-strapped consumers, result in increased revenues and add out of state dollars to the economy. But too often, like in Arkansas, the costs to the state as a whole far outweigh the modest benefit a handful of consumers enjoy.
We also know that not collecting sales tax on specific items for just a couple of days does nothing to help make a state’s overall tax structure more fair. Lawmakers interested in really helping the most hard-pressed families and boosting their states’ economies have other tax reform options that offer long term and widespread benefits. Sales tax holidays, however, are more boondoggle than good policy. For more on what they do and don’t accomplish, read ITEP’s brief.