Twenty states will forgo more than $1 billion in revenue this year to enact a variety of sales tax exemptions that ultimately provide poorly targeted benefits and undermine funding for public services, according to a new Institute brief. on Taxation and Economic Policy (ITEP). The updated ITEP tax holiday research brief, Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform, highlights the flaws of this misguided policy approach.
Lawmakers are increasingly turning to sales tax exemptions of unprecedented scope and duration. For example, Florida added five tax-free holidays, ranging from tools for home improvement projects to Energy Star appliances, that will cost the state about $630 million this year. In 2022, sales tax exemptions are also available for hunting season in Mississippi, small businesses in New Mexico, and National Guard members and their families in Nevada.
“In a year of record revenue surpluses, state legislators had the opportunity to enact meaningful reforms for their residents. Instead, they doubled down on their flashy but ineffective vacations that do little to improve state tax systems or families’ financial security,” said Marco Guzman, State Policy Analyst at ITEP.
Sales tax exemptions come with issues such as:
- Poorly targeted approaches. Wealthier taxpayers may receive the same benefit and have more flexibility to change the timing of their purchases to take advantage of these tax breaks. Additionally, sales tax holidays are not limited to state residents or local businesses, as online retailers from other states are included.
- Reduction in state and local government revenues. The cost of sales tax exemptions nearly doubles in 2022, from an estimated $550 million just a year ago. Revenue lost through sales tax exemptions will ultimately have to be compensated elsewhere, either through budget cuts or increases in other taxes.
- Retailer Operation. Retailers can raise their prices or water down their sales promotions during a tax break. A study of retailer behavior during a Florida sales tax holiday found that retailers recouped up to 20% of the price drop consumers thought they would receive from the Florida sales tax holiday. State.
Combined with the recent trend of states approving gas tax holidays, lawmakers continue to use these policy measures as a substitute for more meaningful and permanent reform while weakening states’ ability to invest in critical priorities such as infrastructure and education.