Expert Commentary

Do state sales tax holidays help retailers and consumers with lower incomes? Here’s what the research says

Sales tax holidays are a perennial occurrence in many states. But do they stimulate economic growth? We take a look at what the research says about four common claims about them.

sales tax holiday
(Towfiqu Barbhuiya / Unsplash)

Sales tax holidays are a yearly rite in many states. Lawmakers use them to pause sales tax for all or select retail items, usually for several days. In some states, municipalities have to opt-in. Tax holidays often happen in August, to coincide with back-to-school shopping season.

They are also used to encourage a range of other purchases. Alabama held a sales tax holiday in February on generators costing up to $1,000, in advance of hurricane season. Texas held a tax holiday in April on energy-saving appliances. In August, Mississippi paused its sales tax on hunting supplies.

Sales tax holidays remain consistently popular with state policymakers. Seventeen states have held sales tax holidays in 2021, with no more scheduled this year, according to the Federation of Tax Administrators, a nonprofit trade group.

Since 2015, between 16 and 18 states have held at least one sales tax holiday each year. That means roughly 37% of states that collect sales tax usually hold a yearly holiday. Alaska, Delaware, Montana, New Hampshire and Oregon do not collect state sales tax. In the 45 states that do collect sales tax, rates range from 2.9% in Colorado to 7.25% in California.

The average length for the 2021 holidays was four days. That’s excluding Tennessee, which is holding a yearlong tax holiday on gun safes and gun safety devices from July 2021 through June 2022. Geographically, tax holiday states are located in the Northeast, Midwest, South and Mountain regions.

Details vary, but in practice sales tax holidays don’t necessarily eliminate sales taxes for an entire state. In Alabama, for example, cities and counties can pass ordinances exempting covered items from local sales tax, in addition to the state sales tax, during the period the state specifies. Some localities there have passed ordinances that automatically suspend local sales taxes during the state holiday. Others have to pass legislation to join their state’s holiday. The Prattville, Alabama city council in April passed an ordinance joining the state’s 16th annual back-to-school sales tax holiday.

State sales tax holidays in the U.S. date back to at least the early 1980s. “Tax holidays were first offered by Michigan and Ohio for automobile purchases in 1980 to boost sagging sales,” according to a March 2021 paper in the National Tax Journal.

The idea didn’t catch on until New York in January 1997 held what is considered the first modern sales tax holiday on clothing items less than $500. One reason for the holiday was to discourage New Yorkers from buying clothing in New Jersey, which exempts most clothing from sales tax. Most counties in New York participated. Florida held a back-to-school holiday the following year. Texas followed suit in 1999.

Those were some of the earliest state-level sales tax holidays. But the phrase dates to the 1930s — to an accidental sales tax holiday in Philadelphia that led to the demise of the city’s sales tax altogether, according to contemporaneous reports from The Philadelphia Inquirer and The Associated Press.

In December 1938, the Philadelphia City Council voted to raise the local tax from 2% to 3%. The 2% tax was set to expire at midnight of New Year’s Eve — it had been in effect only for the past year. The mayor, Samuel Davis Wilson, opposed the increase. By law, he had nine days to veto or sign the bill. The city council had the votes to override his expected veto. Wilson waited to take action, allowing the 2% tax to expire with no sales tax yet on the books.

Retailers used the week-plus “sales tax holiday” for advertising, as they do today in states that hold holidays. On Jan. 8, 1939, one used car dealer boasted within the classified pages of The Philadelphia Inquirer: “Today and tomorrow — NO SALES TAX. Choose your car now from more than 1,000 here, and save.”

During the first week of 1939, the mayor encouraged business and industry groups to organize a public demonstration at City Hall to oppose sales taxes in Philadelphia. With public sentiment against them, the city council acquiesced.

Despite some councilmembers issuing dire warnings of cuts to fire and police services, the council upheld Wilson’s veto with an 18-to-3 vote on Jan. 9. The sales tax expired. The city had no general sales tax from then until Oct. 1, 1991.

For years, critics of sales tax holidays have variously claimed that:

  • Consumers buy more during a sales tax holiday but buy less before and after the holiday expires, meaning no net sales increase for retailers.
  • Sales tax holidays don’t do much to benefit consumers with lower incomes.
  • Retailers reap the benefits of sales tax holidays by raising pretax prices.
  • Administration of sales tax holidays puts an undue burden on retailers.

This article explores the academic research on those four claims. The research here reflects the overall state of research on the issue — there are peer-reviewed investigations, working papers (which have not yet undergone peer review), and much of the research is years or even decades old. That said, the more recent research, much of it dating to 2017, still carries value because it uses large datasets covering thousands of transactions before, during and after years’ worth sales tax holidays.

While those four arguments are among the most common, there are others that are unexplored in the academic research, so they are not covered here. Though sales tax holidays remain politically popular, one argument against them is that they do not typically result in huge savings for customers. A working paper detailed below finds an average household savings of 77 cents per tax holiday targeting school supplies across an eight-year period covering 15,000 households. More than half of those households had no children.

The value here — for journalists in particular — is in providing grounded, fact-based knowledge of whether certain goals and reasons politicians put forward to justify state sales tax holidays hold up. And, to add a healthy dose of skepticism and context for reporters asked to cover think tank reports on the policy. Read on to learn more about what the research says on the pros and cons of state sales tax holidays.

1. Do retailers benefit from sales tax holidays?

“The annual sales tax holiday is an opportunity for us to support small businesses and consumers, and this year, it’s a great way to support our economy that’s been impacted by COVID-19.” — Massachusetts Governor Charlie Baker, June 2020.  

What the research says: Studies suggest retailers can benefit from sales tax holidays, though the scale of that benefit may be linked to the range of types of products the holiday covers.

Sales tax holidays are “political catnip,” as Scott Drenkard, then-director of state projects at the Tax Foundation think tank, told the New York Times in 2018.

Put another way, politicians view sales tax holidays as an easy win. They’re simple to understand — unlike tax codes in general. A $100 purchase that normally comes to $108 with tax? During a holiday, that $8 stays in a potential voter’s pocket. For retailers, the oft-touted benefit is they will see an overall increase in sales — people will buy things they otherwise wouldn’t have.

But, one common criticism of sales tax holidays is that, in the long run, they do not spark economic growth.  

“Rather than stimulating new sales, sales tax holidays simply shift the timing of sales,” according a 2020 report from the Tax Foundation. The think tank has produced a version of the report several times going back at least to 2006. Reporters have cited different editions of the report over the years.

For its 2020 report, the foundation relies on a 2009 University of Michigan doctoral dissertation to uphold the claim that “sales tax holidays simply shift the timing of sales.” The 2006 report also cites an analysis from the New York State Department of Taxation and Finance on the 1997 tax exemption for clothing there.

The New York analysis finds clothing sales jumped by $174 million more than expected in a typical year — but, that increase was possibly due to a mild winter and a national upswing in retail sales at the time.

“Based on this analysis, it appears that much of the $174 million in ‘additional’ clothing sales during the exemption week were not new sales generated by the exemption but were sales that would normally have occurred during prior or later weeks in the sales tax quarter,” the New York state report concludes.

The 2009 doctoral dissertation has been cited beyond Tax Foundation reports. For example, a 2019 article, “Sales Tax Holidays are Inefficient Tax Gimmicks,” from The Heartland Institute, a think tank that advocates for limited government intervention in economic markets, points to the dissertation as evidence that sales tax holidays don’t lead to sales gains for retailers.

The dissertation’s author, Adam Cole, now runs the Individual Taxation Division in the Office of Tax Analysis at the U.S. Department of the Treasury. In his dissertation, Cole uses retail scanner data on 30,885 individual computer sales from May to December 2007 across nine states that held tax holidays that year. Eight of the holidays fell during the first week of August.

Overall, Cole finds between 5.76 and 16.53 more computers per 10,000 people were purchased than would have been expected without the tax holidays. That means the tax holidays likely spurred more computer purchases. Do those purchases represent a net gain for retailers over time? Or did the tax holidays “simply shift the timing of sales”?

Cole finds consumers who timed their computer purchases to coincide with the tax holidays account for “between 37% and 90% of the increase in purchases in the tax holiday states over the 30-week horizon.”

It’s an instructive finding — some portion of sales during the tax holidays appear due to people timing their purchases to line up with the holidays. But the magnitude of that effect is wide, from roughly one-third to almost all.  

Cole does not state that his results definitively show that tax holidays do not stimulate new sales. His purpose, as he writes, is to uncover the extent that tax holidays spur new economic activity compared with the extent that they cause consumers to shift their purchase timing.

In other words, he seeks a proportion, not a firm answer. Furthermore, for the eight states that held their holidays in early August, desktop sales were 9.3% higher and laptop sales were 7.5% higher than during the week that included Black Friday and the Saturday after Thanksgiving. Cole notes the week of Thanksgiving is “routinely regarded as one of the year’s busiest shopping weeks.” States without tax holidays didn’t see an upturn in sales in early August compared with Thanksgiving week.

It is also important to note that this dissertation explores a high-ticket item, and that the timing effect holds only for laptops, which make up 69% of the purchases studied. Cole writes that the “purchases of desktops during the tax holidays are likely to be purchases that otherwise would not have occurred in the absence of the tax holiday.”

One potential reason, as Cole explains in his dissertation, has to do with extensive margins. Here’s a way to conceptualize that phrase: Think of a group of people on a hot day waiting to use a public pool. The pool walls physically limit the number of people who can cool down at any given time. By next summer, the pool is widened. More people can use the pool at once. In Cole’s dissertation, the extensive margin refers to the walls surrounding a pool of people willing to buy a computer at a certain price. Lower the price and the walls widen, inviting a larger number of potential buyers into the pool.

The average sales tax savings across the nine states with sales tax holidays in 2007 was 4.8%. Desktops during the period studied were hundreds of dollars less expensive, on average, than laptops. Cole also finds that retailers slightly reduced the pretax price of desktops, though pretax laptop prices remained unchanged.

Cole speculates in his dissertation that tax holidays could push people on the verge of buying a computer into making that purchase. Because desktops are usually cheaper than laptops, people just outside the extensive margins of a computer purchase before the tax holiday are more likely to end up buying a desktop during the tax holiday. Buyers on the hunt for a laptop are already willing or able to spend more on a computer. They’re less likely to be swayed by a tax holiday into making a computer purchase.

Cole’s results describe consumer responses to sales tax holidays on specific, high-priced products. Because the dissertation does not explore less expensive products, such as clothing, blanket statements based on this research about whether retailers do or do not reap economic benefits from tax holidays should be read with skepticism. More recent, peer-reviewed research explores apparel purchases exempt from sales tax during tax holidays and does find an economic boost for retailers.

In the November 2017 paper, “Consumption Responses to Temporary Tax Incentives: Evidence from State Sales Tax Holidays,” published in the American Economic Journal: Economic Policy, authors Sumit Agarwal, Nathan Marwell and Leslie McGranahan find that “there are substantial increases in spending on covered goods during [sales tax] holidays that are not offset by declines in spending before or after the holidays.”

Agarwal is a professor of economics and real estate at the National University of Singapore. Marwell was a doctoral student at the University of Wisconsin-Madison when the paper was published. McGranahan is vice president and director of regional research at the Federal Reserve Bank of Chicago.

The authors analyze diary entries from the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey covering 65,000 households from 1997 to 2011. The survey asks households to track their purchases over two one-week periods each year. Respondents lived in 15 states and Washington, D.C., all of which held sales tax holidays over those 14 years.

The authors also used purchase information for part of 2003 from consumers who used Bank of America credit cards. “The sample covers over 75,000 consumers representing all states,” from Feb. 6 to Oct. 24, 2003, they write. There were nine state sales tax holidays during that time, most of them held for a few days in early August.

Looking at one week, two weeks and one month before and after apparel sales tax holidays, Agarwal, Marwell and McGranahan conclude that “while critics of [sales tax holidays] have suggested that the holidays might serve to alter the timing of purchases rather than the total amount purchased, we do not find evidence of this in our data. This implies that retailers benefit from the holiday via increased sales.”

Cole provided comments to the authors before the paper was published and his dissertation is cited several times — another indication of its continuing influence.

Agarwal, Marwell and McGranahan write that their results are “broadly consistent” with Cole’s findings that “the total increase in the number of computers purchased during the 30 weeks surrounding a [sales tax holiday] … is larger than the increase during the two weeks containing the holidays.”

Another piece of research from 2017, a research note by Federal Reserve economists, explores tax holidays in Massachusetts. Almost every year since 2004, the state has held among the broadest tax holidays in the country. In 2014 and 2015, Massachusetts held a tax holiday in August covering almost all products priced $2,500 or less. In 2016, the state skipped a tax holiday altogether.

Comparing furniture, electronics, clothing, general merchandise, restaurant and gas station sales across those years, the authors find evidence that this “natural experiment in Massachusetts … provided a net boost to retail spending over the month as a whole, as opposed to only a re-timing of spending within the month.”

The authors note their timeframe is limited to one month, similar to the Agarwal, Marwell and McGranahan research. They can’t draw conclusions about longer-term spending in relation to sales tax holidays. Massachusetts is also unique in the breadth of its sales tax holidays, since they cover almost every product and purchase. For example, the authors find very little effect on clothing spending in Ohio during a back-to-school sales tax holiday held there in 2015 and limited to clothing and school supplies.

But, during Louisiana’s 2015 “Second Amendment” sales tax holiday, which covered firearms and ammunition, spending at sporting goods stores there rose considerably compared with sporting goods spending in Texas and Arkansas, the Federal Reserve economists find.  

Finally, Marwell and McGranahan find in a 2010 Federal Reserve Bank of Chicago working paper that households increase their clothing purchases by 49% and their shoe purchases by 45% during sales tax holidays, with little evidence consumers dramatically shifted their purchases to coincide with the holidays.

Using the federal consumer diary data from 1997 to 2008 covering about 50,000 households, Marwell and McGranahan also find that sales tax holidays are a blunt tool for providing cost savings to Americans with low incomes.  

The households studied making more than $70,000 a year spend $12, on average, during sales tax holidays.

Households making less than $30,000 a year spend $4, on average, they find.

“As a policy that aims to accomplish multiple goals for disparate parties, the [sales tax holiday] falls short of satisfying all of the policymakers’ stated intentions,” Marwell and McGranahan conclude.

2. Do sales tax holidays help consumers with lower incomes save money?

“While this was designed to help put food on the table for the families who need it most, all Tennesseans will benefit from reduced grocery bills during this tax holiday.” — Tennessee State Rep. Vincent Dixie, March 2021.

What the research says: Individual consumers with lower incomes may here and there benefit from sales tax holidays. But, on the whole, the available research indicates consumers with higher incomes take more advantage of them.

Economists and think tank analysts often describe tax holidays as an inefficient way to help people with low incomes save money. “Inefficient” in this context means that if sales tax holidays are supposed to help people with low income save money, there are better, more targeted ways to do that. Everyone has the opportunity to buy the products covered by state sales tax holidays. There has never been a sales tax holiday in the U.S. only available to people who make below or above a certain income threshold.

“Many low-income taxpayers spend most or all of their income just getting by, which means that they also have less disposable income than wealthier taxpayers to spend when the holiday arrives,” according to a 2021 report from the Institute on Taxation and Economic Policy, a think tank.

Most states hold sales tax holidays for specific products. Some consumers will have no use for those products. The 2020 Tax Foundation report notes that “a low-income elderly or childless couple may not have a need for school supplies, a computer, or sports equipment, but presumably they are as deserving of tax cuts as a consumer purchasing any of the exempt products.”

Meanwhile, the 2017 Federal Reserve research suggests that sales tax holidays timed to coincide with back-to-school shopping “tend to be especially beneficial to low-income households, since necessities comprise a relatively large share of their overall spending.”

The Federal Reserve economists cite 2014 research from the Federal Reserve Bank of Cleveland to support that claim. That Cleveland Fed research upholds the assertion that Americans with lower incomes spend a disproportionate amount on necessities. It does not explore that finding in relation to sales tax holidays.

Other research supports the suggestion that sales tax holidays tend to benefit households with higher incomes more than those with lower incomes.

“If households were not to increase their spending in any way during a [sales tax holiday], the wealthiest households would save over twice as much in sales taxes as the poorest households,” write Marwell and McGranahan in their 2010 Chicago Fed paper.

Likewise, the 2017 “Consumption Responses” research finds households making over $70,000 annually consume more “in both dollar and percentage terms,” compared with households making less than $30,000. They also find households with lower incomes don’t disproportionately increase their share of spending during sales tax holidays.

3. Do retailers raise pretax prices to absorb the sales tax benefits themselves?

“I own a small company and, admittedly I am not a retailer. But I will tell you that any retailer — and I don’t care how big they are or how small they are — would leap at this opportunity to provide their customers with a discount.” — Kathy Gornik, former vice chair, Consumer Electronics Association, November 2001, during a Congressional hearing on a proposed national sales tax holiday.

What the research says: Retailers, on a case-by-case basis, may raise pretax prices. But studies do not indicate that retailers generally increase pretax prices during sales tax holidays.

In an early study on the topic, the authors of “Price Effects around a Sale Tax Holiday: An Exploratory Study,” published in 2003 in the journal Public Budgeting and Finance, examine a 2001 sales tax holiday in Florida. They recorded the prices of several men’s, women’s and children’s clothing items in the week before, during and after the holiday. Student shoppers canvassed five department stores, four specialty stores and one large national discount retailer, all with locations in Pensacola and nearby Mobile, Alabama.

Think tanks opposed to sales tax holidays regularly cite the study as evidence that retailers adjust prices to absorb tax benefits that are supposed to go to consumers.

But the title of the paper indicates its purpose: The research is exploratory, not conclusive. The authors urge more research, and they do not claim a breakthrough. Based on a limited number of items — 74 for each of the three weeks studied — the authors find a roughly 1% increase in pretax prices for those items in Pensacola during the statewide holiday, compared with the week before.  

In the week before the holiday, the 74 items garnered $125 in sales tax. If a consumer had bought those exact items during the holiday week, that $125 is what the authors expected the consumer would save. Instead, the observed savings totaled $100. The retailers studied apparently absorbed some of the benefit of the sales tax holiday.

Notably, while pretax prices increased 1% in Pensacola during Florida’s 2001 sales tax holiday, pretax prices for the items studied increased by nearly 4% in Mobile during Florida’s holiday.

The paper was among the first to examine pretax prices. It used a relatively small dataset in a limited geographic region, making it is impossible to draw meaningful conclusions from this research. Subsequent, more expansive studies indicate retailers do not by and large increase prices during sales tax holidays.

The Cole dissertation, for example, found that retailers slightly reduced the pretax price of desktop computers, while pretax laptop prices were unchanged. A working paper presented at the National Tax Association’s 2017 annual conference by Indiana University public finance professor Justin Ross and University of Georgia assistant professor of administration Felipe Lozano-Rojas looks at another large panel of scanner data from 2006 to 2014 covering 117 state sales tax holidays.

In analyzing school supply sales from 35,000 retailers in the lower 48 states plus Washington, D.C., reflecting 175 million item scans each week, Ross and Lozano-Rojas find that for “every percentage point decrease in the states sales tax rate caused by the holiday, the pretax price decreases by something in the range of 0.4% to 2%.”

Ross and Lozano-Rojas conclude that “the concern of retailers capturing the tax holiday savings to be unsubstantiated by the data,” with the holidays having no widespread effect on pretax prices.

But they find the type of retailer matters. Grocery and drug stores lowered pretax prices the most, while mass merchandisers and convenience stores slightly raised their prices.  

A follow-up working paper from 2018 by Ross and Lozano-Rojas examines back-to-school sales tax holidays in Tennessee held in 2006 and 2007. They conclude that households, rather than retailers, “on average receive the full tax savings during these programs.”

4. Are there administrative costs for retailers?

“With a sales tax holiday, you can help jumpstart our economy just by buying things for school or work or home. It’s also easy.” — U.S. Sen. Patty Murray, October 2001, referring to the proposed national sales tax holiday.

What the research says: A small body of research, in addition to complex states sales tax holiday legislation, indicates that sales tax holidays can be a hassle for retailers to implement.

In 1998, Florida coffers were flush with a state budget surplus of $185 million. Legislators decided a back-to-school sales tax holiday was in order, covering clothing and shoe sales. An editorial published that summer in the Sarasota Herald Tribune proclaimed that “what sounded simple” was “becoming an administrative nightmare” because of the complex list of exempted items.

According to the July editorial, the state Department of Revenue sent a letter to retailers listing 270 items, “about 130 of which will be tax-exempt. Regular shoes will be exempt, but not specialty ones (for sports and dance); jogging suits are exempt, but track shoes are not; diapers are exempt, but crib blankets are not. Garden gloves are exempt but surgical gloves are not. Two-for-the-price-of-one items will not count, if the first item costs more than $50. If one item in a gift set is taxable, then the entire set must be taxed.”

The editorial’s refrain continues today. The Urban-Brookings Tax Policy Center, The Tax Foundation and the Institute on Taxation and Economic Policy have all called out tax holidays as creating undue administrative burdens for governments and retailers.

“Even experienced tax professionals find it nearly impossible to stay on top of the plethora of sales tax holidays, which occur in some states, on a limited number of days, on specific products, once or twice a year,” write University of Wisconsin-Oshkosh accounting professors Christopher Jones and YuYun Sejati in researched commentary published in October 2018 in the peer-reviewed CPA Journal.

Jones and Sejati point to the variety of ways states design sale tax holidays as evidence that they can be confusing for retailers to implement. In some states, like Alabama, municipalities can opt in or out. In others, like Arkansas, the holiday automatically applies to localities, according to their commentary. Florida lets some retailers opt out, if they don’t sell much of the covered items.

In 2019, Ohio’s exemption was capped at $75 per clothing item, including beach capes but not sunglasses, according to the article. Shipping and handling charges can bump the price of an item over a state’s cap. In some states, the item would still be tax-free; in others, it might not qualify for the holiday.

“It can be quite easy to accidentally include an item that is excluded,” Jones and Sejati write, adding that retailers need to carefully check their state’s list of exempted goods.

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