Week 10 Discussion 2 “General Taxes” Please respond to the following:
Review the following scenario and then analyze the impact of tax holidays on the budget.
(a) Scenario: Several states have declared sales tax holidays for which the state does not collect sales tax on selected items for those day or days. In most instances, the holiday has applied to purchases of clothing and the period has been a week to 10 days in August. The primary reason is to provide a “back-to-school” discount as families get ready for the upcoming year. However, in recent years, some states have proposed or enacted holidays for hurricane survival supplies, gasoline, Energy Star appliances, and guns and ammunition.
(b) Impact Analysis: Analyze the impact of tax holidays of up to 10 days in your state. Create a table with two (columns. The first column should list Yield, Equity, Administration and Compliance, and Economic Impact. The second column should explain the impact of tax holidays in each area.
Sales tax holidays are designated periods when selected products are exempt from state (and sometimes local) sales taxes. The state of North Carolina repealed its tax-free weekend event when Governor Pat McCrory signed legislation in 2013 that also reduced corporate and personal income taxes. As a result, the state held no tax-free events during 2014, 2015 and 2016.
The move was unpopular with businesses and shoppers, and a bill calling for its return was introduced in April 2016, but it did not pass.
This means that there will be no sales tax-free shopping in the state in 2017.
Sales tax holidays don’t make sense as tax policy. While ostensibly a tax break to help working families afford the costs of sending kids back to school, the holidays are more beneficial to affluent shoppers, who have the means to change the timing and amount of their purchases. And because consumers are mostly shifting (rather than increasing) their purchases, the holidays do little (if anything) to boost economic growth.
But there are two reasons why sales tax holidays might not be all bad.
First, as policy-makers search for ways to make their states more competitive, a sales tax holiday might be the least-bad option. Sales tax holidays don’t cost much revenue because they last only a few days and the prices of eligible items are typically capped. North Carolina recently eliminated its holiday but deeply cut its income and corporate taxes in a tax reform package. The sales tax holiday cost the state $14.5 million in 2011, a fraction of the half-billion-dollar price tag of the tax cuts this fiscal year. And if the economy goes south or adequate revenue does not materialize, holidays are far easier to change than other tax policies.
Second, shifting the timing of consumer’s purchases is sometimes worthwhile. That’s not likely the case for back-to-school holidays—families buy clothing throughout the year, not just in late summer—but encouraging residents to stock up on emergency supplies before hurricane season could help when storms hit.
In some situations, sales tax holidays can make sense. But generally, they’re bad tax policy unless the alternative is large tax cuts with dubious growth assumptions, and not just for a weekend but for the whole year.
17 states, primarily in the southeastern U.S., will hold a sales tax holiday in 2016, down from a peak of 19 states in 2010.
Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.
Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent discount leads many larger businesses to lobby for the holidays.
Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating among products and across time, and distorting consumer decisions.
While sales taxes are somewhat regressive, this does not make sales tax holidays an effective tool for providing relief to low-income individuals. In order to give a small amount of tax savings to those with lower incomes, holidays give a large amount of savings to higher income groups as well.
Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is an implicit recognition that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.
North Carolina officials found that repealing their sales tax holiday in 2013 would save the state $16.3 million the next year, and put those dollars toward individual and corporate income tax cuts. Other states would be wise to follow D.C.’s and North Carolina’s lead and reevaluate the costs and benefits of sales tax holidays.
Sales tax experts and economists widely agree that there is little evidence of increased economic activity as a result of sales tax holidays. Politicians claim that sales tax holidays largely pay for themselves through increased economic activity and new collections. But experience shows that the claims of economic stimulus, increased revenue, and consumer savings are greatly exaggerated. States see little net economic activity as a result of sales tax holidays; the holidays instead represent a costly-to-administer revenue loss for the government.