Note: This post originally ran in August 2016.
This weekend, many Oklahomans will flock to the stores to take advantage of the state’s annual three-day sales tax holiday weekend. Since 2007, shoppers are allowed to buy clothing items under $100 free of state and local sales tax during the first weekend in August. Many retailers report a major boost in business over the weekend that can rival Black Friday. “It will take all of our available staff to handle those three days,” said the President of Drysdale’s Western Wear in a news article last year.
Sales tax holidays are good for consumers, good for businesses, good for the economy, and good for Oklahoma, right?
Oklahoma is one of 17 states that provides a break on paying tax on specified purchases over a temporary annual period. Yet tax policy experts from the Tax Foundation on the right to the Institute for Taxation and Economic Policy on the left oppose state sales tax holidays like Oklahoma’s, arguing that they provide few real benefits and significant costs. Here’s why.
What sales tax holidays don’t do
A main argument for sales tax holidays is that they provide an economic boost by encouraging customers to go out and shop. Unquestionably, sales tax holiday weekends are busy times for many retailers. However, as the Tax Foundation notes, “sales tax experts and economists widely agree that there is little evidence of increased economic activity as a result of sales tax holidays.” Rather than stimulating an overall increase in sales, studies have tended to find that sales tax holidays simply shift the timing of sales that would have happened anyway, deferring purchases that would have been made earlier.
“Rather than stimulating an overall increase in sales, studies have tended to find that sales tax holidays simply shift the timing of sales that would have happened anyway.”
Sales tax holidays are also supported as a means to help hard-pressed families save on back-to-school purchases. There’s no questions that the sales tax is regressive, which means it hits low- and moderate-income households hardest. But the holiday is an ineffective means of relief for low-income consumers, since the benefits are available to everybody. In fact, since low-income households have less discretionary income, they may have less ability to shift their spending to take advantage of the timing of the sales tax holiday. A study for the Federal Reserve Bank of Chicago found that “households that earn more than $30,000 were likely to shift the timing of their clothing purchases to coincide with a sales tax holiday, but households earning less than $30,000 were not.”
What sales tax holidays do
Proponents of the free market criticize sales tax holidays because they distort consumer behavior by providing arbitrary incentives for the sale of certain products at certain times. “Consumers should make consumption decisions for economic reasons, not tax reasons,” the Tax Foundation argues.
Sales tax holidays also impose costs and add complexity for businesses. The Oklahoma Tax Commission devotes sixteen questions to the sales tax holiday on its website in an attempt to ensure proper compliance. Their instructions cover such topics as which items are included and excluded from the exemption; how to handle coupons, exchanges, and discount programs; and how to properly report exempt sales to the Commission. Exempt clothing items include bathing suits and capes, diapers, girdles, and rubber pants, but not jewelry, umbrellas, or “any special clothing or footwear that is primarily designed for an athletic activity or protective use that is not normally worn except when used for athletic activity or protective use for which it is designed.” Stores must temporarily reprogram their registers and computers to account for three days of activity that differ from all the other days in the year. Stores must also change staffing patterns and inventory to account for the temporary surge in business.
Finally, sales tax holidays deprive the state of crucial tax revenue, which means that either other taxes must be raised or services must be cut. In 2014, the sales tax holiday cost Oklahoma $7.3 million, which includes reimbursement paid by the state to cities and counties to make up for their lost revenue.
In recent years, several states have jumped off the sales tax holiday bandwagon, with Illinois, New York, North Carolina, West Virginia, and Vermont repealing their holidays and other states making their holidays shorter or narrower. Several states have suspended sales tax holidays when facing significant budget shortfalls, including Massachusetts this summer.
The sales tax holiday is only a small piece of the numerous misguided tax policies that are drowning our state in red ink. Still, we would be better off to do away with this tax gimmick and find a better way to help Oklahoma consumers. For example, we could provide much better targeted help that doesn’t distort consumer behavior by increasing the Sales Tax Relief Credit.