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Tuesday, September 28, 2010

More data on sales tax holidays

I think that one of the "oddities" of the tax law are sales tax holidays used in some states. The holiday typically makes some specific item, such as children's clothing, tax-exempt for one weekend or week (such as before the start of the school year).

They are odd because they are an odd and ineffective way to provide a benefit to low income individuals. They end up providing a greater benefit to higher income buyers because they can afford to spend more during the holiday and perhaps better plan their purchases to make them during the holiday. A better approach would be to provide low-income individuals with a refundable income tax credit. Or state welfare agencies could sell qualified taxpayers special gift cards that are priced to eliminate sales tax. So, for example, in a state with a 6% sales tax, a $50 gift card only costs the low-income buyer $47.17 so the state pays the sales tax.

A preliminary study released in July 2010 by the Federal Reserve Bank of Chicago - The Effect of Sales Tax Holidays on Household Consumption Patterns by Marwell and McGranahan, evaluated the holidays to see if they were meeting their commonly cited benefits. These benefits were helping low-inocme families, helping retailers who compete with nearby retailers across state lines, and encouraging certain purchases deemed beneficial such as computers. The report notes that the first sales tax holiday was in 1997 in New York.

The researchers found that certain sales tax holidays did lead to higher sales of children's clothing. Yet, they found that there was no " statistically significant change in consumption for the lowest-income households" (page 17). The authors conclude: "As tool for providing economic relief to certain households, STH has fared quite poorly."

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