Sales tax holiday is poor policy

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This weekend, many Oklahomans flocked 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.

Sales tax holidays are good for consumers, good for businesses, good for the economy, and good for Oklahoma, right?

Actually, no.

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 across the political spectrum 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, there is little evidence that sales tax holidays lead to increased economic activity. Rather than stimulating an overall increase in sales, sales tax holidays simply shift the timing of sales that would have happened anyway, deferring purchases that would have been made earlier.

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 lowincome consumers, since the benefits are available to everybody. In fact, households with less discretionary income are less likely to be able to delay spending to take advantage of the holiday, leaving the tax break to be enjoyed by households that don’t need it.

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 right-leaning 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 athletic gear. 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 2017, the sales tax holiday cost Oklahoma $7.4 million, which includes reimbursement paid by the state to cities and counties to make up for their lost revenue.

Oklahoma’s tax system is regressive: that is, the state relies on lowincome individuals and families paying a greater share of their incomes in taxes than higher-income families. They deserve relief. Still, we would be better off to do away with this tax gimmick and find a better way to help low-income Oklahomans.

David Blatt is Executive Director at Oklahoma Policy Institute.