Sales Tax Holidays: Serious Savings or Serious Stunt?

This past Friday, consumers across Massachusetts were pleasantly surprised with news of the last-minute approval by the Baker administration of a weekend sales tax holiday. Despite local retailers griping about the eleventh hour prep involved with planning, stocking, staffing and marketing such an event, consumers were rewarded with savings of the 6.25% state tax normally applied to things like back to school supplies, appliances and consumer goods. Approximately 17 states across the country offer some form of a sales tax holiday, during which state and sometimes local sales taxes are waived on a host of items. However, a closer look into the economics of sales tax holidays reveals that the benefits are questionable for consumers, retailers, and states alike.

Consumers are lured with the shiny signs and a salesman’s pitch of “mega-savings!” and “once-annual discount!”, though in practice, consumers do not always save. The savvy consumer will evaluate closely which items are specifically included in the tax exemption (there are often many exceptions), prioritize items they actually need regardless of the savings, and purchase during the limited period in which the sales tax holiday is hosted (often only a one or two-day period). However, retailers will rely on the fact that most consumers are not so savvy. The data suggests that the real “winners” of a sales tax holiday are big-box stores. Why? We are all familiar with the “Target-Effect”, whereby running into Target just for laundry detergent turns into a $200 “what-did-I-just-buy” occurrence. Retailers are keenly aware of this phenomenon, and will often capitalize on it by placing non-tax-exempt impulse items along with those which are tax exempt. Additionally, the increase in demand for a particular item during the sales tax holiday will often encourage retailers to actually increase the price of items over what they otherwise would cost. 

While big-box retailers may see an increase in overall sales, they also have the benefits of an established and trusted store-name and resources like staff and inventory that easily support such a deviation from everyday business operations. Other retailers often lack these resources. Further, research suggests that rather than consumers buying more goods overall, they actually just shift the timing of their purchases to coincide with the holiday. So while retailers may generate more sales during the sales tax holiday itself, the surrounding weeks will often see a marked decrease.

Experts seem to agree, however, that the biggest harm of the sales tax holiday is to the state’s coffers. In 2015, Massachusetts lost an estimated $25.5 million in tax revenue from the tax holiday weekend. Invariably, the loss in revenue results in fewer dollars for much needed programs that are already facing tight budgets. Further, while granting a sales tax exemption for particular products can lead politicians to gain favor among those industries and their consumers alike, the inverse is true: those industries somewhat arbitrarily excluded from the tax exemption may feel slighted and unsupported. Finally, the de facto shift in the timing of consumer purchases to coincide with the sales tax holiday does not typically result in an overall annual increase in spending and sales, despite what advocates may say.

The forecast for sales tax holidays isn’t entirely grim: at a minimum, retailers can benefit from the sales tax holiday operating as “free marketing” of sorts, encouraging shoppers who otherwise might not make a purchase to swipe their credit cards. The prudent consumer can shift the purchase of those truly-needed big ticket items like refrigerators or generators to achieve significant savings. And as for the state, perhaps the loss in revenues from a temporary sales tax holiday is more palatable than bowing to pressure from retailers and consumers to lower the sales tax rate altogether.