Tax-Free Weekends: When Popular Policy Meets Poor Economics

They’re popular, highly visible, and marketed as tax relief—but research shows sales tax holidays are inefficient, create compliance headaches, and often miss the mark for the taxpayers they’re meant to help. 

Kyle Hulehan is joined by Katherine Loughead, Senior Policy Analyst and Research Manager at the Tax Foundation. Together, they break down why these policies persist—and what better alternatives might look like. 

Transcript

Kyle Hulehan: 0:00

Hello and welcome to the Deduction of Tax Foundation podcast. I'm your host, Kyle Houlahan, and we are back with another episode. Today we are joined by Katherine Lawhead, senior Policy Analyst and research manager here at the Tax Foundation. And today we're gonna talk about sales tax holidays. So. Are, are sales tax holidays really helping consumers save money or just maybe making them feel like they are.

Katherine Loughead: 0:22

I would say that for consumers who actually have the time and make the effort to participate in sales tax holidays, those consumers do save a little bit of money. But sales tax holidays are not always as good of a deal as they may seem. Many sales tax holidays are actually fairly narrow in scope, and so they only apply to certain things. And so you need school supplies or computers or hunting supplies or clothes, that might be good for you. But if you're not in the market for those things, you don't really benefit from your state sales tax holiday. And a lot of state sales tax holidays have per item limit. So for instance, you can only spend up to a hundred dollars per item on certain things, or you have to buy a computer that's less than$1,000. Some states have perhaps a week long period, or even a month long period, or sometimes a few months, but for the most part, sales tax holidays in a lot of states are only two or three days, and so you're having to deal with potentially sharp spikes in demand. During that period of time, but that also usually comes along with a drop off in demand before and after the sales tax holiday. So really a lot of folks are doing a lot of their shopping that they would normally do other times during a very narrow window of time. And consumers, sometimes see higher prices as a result of that. And they may not always notice it. But retailers and. To spikes in demand. It's normal to raise prices a little bit to try to make sure that they don't run out of stock, And so price increases are certainly part of the challenge here, and they can make sales tax holidays less beneficial than they may see.

Kyle Hulehan: 2:02

What about low income families? Does this help them hurt them?

Katherine Loughead: 2:06

I think that's a really important question and something that's definitely worth keeping in mind because theoretically sales tax holidays sound like they would be a great way to help lower income consumers save money. but really they're not always as helpful as they may seem. A lot of lower income individuals may be asked to work on weekends. They may have hourly jobs. They're probably going to be called on to work during these sales tax holidays if they work in retail. And so that's one reason a lot of them might not be able to benefit as much as say, middle or higher income families. And then another factor to consider is that. A lot of middle and higher income families, if you're being strategic about it, can really game the sales tax holiday and save up a lot of money, in order to spend a lot during those sales tax holidays for lower income individuals who don't have as much discretionary income, who don't have as much savings in the bank, are less likely to be able to save up a lot of money in order to. Spend a lot of money during the holidays and those who spend more during the holidays are the ones who are saving more. While those who spend less are getting far less of a benefit. So really, while it might sound good on paper and sound good, theoretically for a lot of families, sales tax holidays aren't as valuable as they may seem. And I think you also have to consider too, just going back to the value of holidays for overall. But a lot of states say it's just the state sales tax that, is being exempted during this period of time. And so really the benefit is actually fairly small. I live in Tennessee now. Um, we had a sales tax holiday last weekend, the weekend of July 25th. And I considered going out to try to buy some clothes that I was planning to buy otherwise, um, but ended up not really having time. It was a three day window of so I didn't participate in the sales tax holiday, but I heard from my mom that she ended up going to Walmart for something completely unrelated. All she needed was a nine volt battery from Walmart during the sales tax holiday. She didn't realize it was the holiday, and so she ended up going to Walmart at 9:00 PM on a Sunday night, on the last day of the holiday, and she said she does not recommend it. The lines were so long. She ended up kind of waiting around in the store before she got in line kind of browsing, just to not have to wait in line for so long to buy her nine volt battery. That wasn't even part of the holiday. Now she's pretty into arts and craft supplies. She could have perhaps bought some, uh, watercolors or some paper, and maybe she would've bought like$30 worth of that to be able to take advantage of the holiday. But even in a high sales tax state like Tennessee, that would have only saved her$2 and 93 cents if she had bought like$30 worth of arts and craft supplies. So not really a great deal for a lot of people.

Kyle Hulehan: 4:55

First off, I, I cannot stand waiting in line, so I would not have done that. And also, maybe it's a little bit of a rookie move to go late on a Sunday. I feel like places, grocery stores on Sundays are like the worst thing. I try to go to Trader Joe's sometimes and it's like, oh my God. It's like overwhelming, um, with how many people are there. But it, it's interesting to me that. It's crammed into such a small window. I feel like that makes it really hard and, and a little bit like, yeah, like you couldn't take advantage of it. Or a lot of people, like you're saying, can't take advantage of it and, and all of these limits that are placed on it. I don't know. It it, it makes me wonder about the design of all of this and, and if it works as well as we think it could.

Katherine Loughead: 5:31

it creates a situation where you're having to make decisions about if you want perhaps a lesser quality good. Say a computer that's. not quite what you want, but it's under that$1,000 limit versus a computer that might be$1,100 and it's more of what you want. but it doesn't qualify at all for the sales tax holiday. So this is what we call economic distortions. And so it's forcing people to make decisions for tax reasons that they wouldn't necessarily make otherwise. And so really that just creates distortions, it creates inefficiency. You are spending a lot of money on these sales tax holidays, but for a very targeted set of people who are able to actually go shopping during those periods of time. So not really the most efficient way to do things.

Kyle Hulehan: 6:18

No, it, it doesn't seem so, but. Why are they so popular?

Katherine Loughead: 6:23

I think there are several reasons sales tax holidays are popular, and I think it really comes down to the fact that consumers, politicians, and businesses are all fairly enthusiastic about sales tax holidays. So that's kind of the perfect trifecta of stakeholders that would need to be. Pretty engaged in order to make these happen. From a consumer's perspective, who doesn't love a discount? Everyone likes to feel like they're getting more value for less money. A lot of people right now are feeling really stretched thin financially, especially coming off a period of years of high inflation. And so people are really looking for ways they can make their money go further. tax holidays do seem like a way for consumers to save some money on things that they usually were planning to buy anyway. Many politicians like sales tax holidays because they tend to generate a lot of public enthusiasm. They get people talking positively about something the government did, and it's a lot easier for politicians across the political spectrum to get together and offer a temporary. One year sales tax holiday, for two days during that year, then it is for them to actually sit down, work across the aisle, try to get things done, to actually reform their tax system in a way that helps grow the economy. Hopefully provide some relief for taxpayers across the board. Reform requires a lot of hard decisions that sales tax holidays don't really require. then also from a business perspective, if your industry is included in the sales tax holiday, it's, that's free advertising for your industry, and that's government run advertising. So that gets people in the doors and. For a lot of businesses, you are going to support, at least publicly, anything that gets people in your doors. Now there are a whole host of, uh, internal kind of behind the scenes, costs for businesses and burdens on businesses associated with these, but look good and I think also too. tax holidays kind of subtly have a way of tapping into people's desire for a stronger sense of pride in their states and their local communities. They're headly advertised, by local media. They kind of get people together and a feel good community centric type of event. So I think people kind of want something like that, and so this is an easy way of doing that, but does it actually provide real value in a lasting way that also grows the economy? The evidence shows that it really doesn't. The vast majority of the consumption that occurs during sales tax holidays is consumption that would've occurred anyway, but was shifted into that very narrow window of time. So not ultimately. The best way of going about tax reform and true tax reform if folks really sat down to try to make it happen, could be just as popular as sales tax holidays, but it's difficult to get there because sales tax holidays are an easier lift.

Kyle Hulehan: 9:23

You know, it, it's sort of the low hanging fruit and, and it kind of like pleases everyone, well, not us at the tax foundation, but, um, I, I, and I would say, you know what, it, it maybe has a selling point that feels a little bit like. You know, like shop local or buy local, but it doesn't really have that effect or, or create or help local businesses maybe in the same exact way. So I think that, that, that's kind of an interesting part of this where you're saying it does kind of create this, this, um, there's these ads around it, there's sort of this publicity around it. You mentioned something, um, about like costs for businesses. So what, what are some of the hidden costs for, for small businesses during sales tax holidays?

Katherine Loughead: 9:59

So a lot of people assume that sales tax holidays are really helping businesses, but in reality, they put a lot of additional strain on many businesses, especially smaller businesses, because they the normal sales tax code out of the window for a very small, limited window of time. And so businesses are forced to comply with a completely different set of rules. There's legal implications for this, so they have to be careful about not accidentally collecting sales taxes on things that are supposed to be tax free during the holidays not failing to Collect sales tax on something that is still taxable during the holidays. So that requires combing through state statutes, rules and regulations. large corporations tend to have entire teams of people dedicated to compliance, but that's not the case with most small family businesses. Mom and pop shop. that are also forced to comply with these, because businesses don't have a choice. They have to participate in this. If you sell a good, that is part of the holiday, even if you only sell one good, that's part of the holiday. You have to offer an exemption for that. And so you have to adjust your cash register settings, um, make sure that you're doing this the right way, and that can be really complicated. I think one interesting example is New Mexico. So they have a sales tax holiday this year on to school things, so that includes a lot of what you would traditionally think of as back to school, you know, your backpacks, your I think computers and some clothes are part of this holiday. But I was looking at the 16 page fact sheet on what is and isn't included, and there's a whole breakdown of individual things that are taxable versus not. And chalk and chalkboards, for instance, like chalk and chalkboard erasers are tax free, but chalkboards themselves are taxable. And then if you wanna buy an e-reader. As long as it has computing functions that is tax free. But if it's an e-reader that doesn't have computing functions, so probably more of a kid e-reader or something like that, that's actually taxable. And so a lot of folks go out and don't read the fine print, and they think they're gonna get a deal on something and then they might be disappointed to, once they get there, realize that as they're at the cash register, that it actually. Is taxable and they're not going to get a good deal. They also, of course, induce sharp spikes in demand, and that's something that smaller businesses aren't able to deal with as well either. They oftentimes don't have as much capacity to hire additional short-term staff for a couple days or a couple weeks of the year.

Kyle Hulehan: 12:32

Hmm.

Katherine Loughead: 12:33

larger businesses can sometimes do a little bit better. if you're a small business, you might not have more than say, five or 10 employees. You're stretched thin and that can look bad for businesses too if they're not able to accommodate all these extra customers. So definitely lots of burdens for businesses.

Kyle Hulehan: 12:49

And, and that's really interesting.'cause like I, you know, you wouldn't have thought about maybe that the. The difficulty on, on the business side, like you're saying, like having this, you know, long sheet of things that are and are not taxable. It doesn't make any sense that it seems like the kitty reader should be the one that's, you know, uh, tax free. It doesn't, it feels a little backwards actually. Um, so, so some of that's really confusing and I, and I think you did a great job pointing that out. Um, so what do you know sales tax holidays maybe reveal as like a, a bigger problem in our tax system?

Katherine Loughead: 13:19

So sales tax holidays are a net revenue loser for states. So when states offer sales tax holidays, they're actually admitting that the sales tax brings in more revenue throughout the rest of the year than the state actually needs to fund government services. And so. That means that the sales tax rate throughout the rest of the year on all the other things you buy is a little bit higher than it needs to be if your state offers a sales tax holiday. So instead of offering a sales tax holiday, that creates a very, temporary set of exemptions for only a favored set of products. It would make a lot more sense if more states revisited these and said that they would rather trim the sales tax rate throughout the rest of the year in order to provide relief no matter who you are, what you buy, whether you're able to get time off during a certain, you know, period of time or not. If your sales tax rate is even a little bit lower throughout the rest of the year, everyone's going to benefit from that. And so it might not be as splashy of a thing, it might not generate as much short term excitement, but that can really. Uh, help create more long-term growth, uh, over time as states consider, you know, thinking about ways to make their tax codes make more sense, and that eliminates that whole administrative burden too. You're not creating two separate sales tax codes based on what day of the year it is. Um, just thinking about ways to reform your one sales tax code or your one tax code to make it. Simpler, more neutral, easier for individuals and businesses to comply with. That really would make a lot more sense. And we've seen some states move away from sales tax holidays over time. So several places like DC, North Carolina, Georgia's another one. there's several others that used to have sales tax holidays year after year, but have eliminated them and haven't gone back. and a lot of those states did actually enact. reform and relief instead. North Carolina has adopted a lot of pro-growth reforms, and so I think some states are starting to lead the way and say, Hey, this doesn't really make a lot of sense. We'd rather be a leader in terms of reform all year round instead of just offering this gimmicky holiday.

Kyle Hulehan: 15:36

I really never thought about it that way, that you just explained it where Yeah, they're admitting that they, they don't need the rate to be as high because they, they're already getting. Enough money. And that's super fascinating and I think really points out, you know, something that you said earlier where it's just like. When we see this a lot with all of our recent podcasts on the one big beautiful Bill, how hard it is to get tax reform done and good tax reform done. And, and I think it's just really, really tricky to like, pull this off and, and, and you go for the gimmicky thing. You go for the easy thing, the thing that sounds like you're getting a deal, but you're, you're really not. Um, and, and, and I, I don't know. And that's a little bit like psychological honestly, but yeah. Um. You know, before we, we sign off here, I, I want to give you a chance is, is there anything else on sales tax holidays you'd wanna mention or anything that you're working on right now that you'd like to plug?

Katherine Loughead: 16:24

You know, I think sales tax holidays are well intended and they do generate a lot of enthusiasm, so I understand why states. Think that this is a good idea, but I think if policymakers really sat down and thought about it and really looked at the economic evidence and the studies that have been done on this, they would see that they're not an efficient way of enacting tax relief, and that there are far better ways to go about accomplishing the goal that they actually want to accomplish.

Kyle Hulehan: 16:54

Katherine, thank you for being on the show today. I really appreciate you breaking down sales tax holidays for us. And before we sign off, if you have any burning questions on taxes, you can send them our way or drop a comment on YouTube. You can email us at podcast@taxfoundation.org or slide into our dms at Deduction Pod on Twitter. Thanks for listening.