August 5, 2025 • 17 mins
They’re popular, highly visible, and marketed as tax relief—but research shows sales tax holidays are inefficient, create compliance headaches, and often miss the mark for the taxpayers they’re meant to help.
Kyle Hulehan is joined by Katherine Loughead, Senior Policy Analyst and Research Manager at the Tax Foundation. Together, they break down why these policies persist—and what better alternatives might look like.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kyle Hulehan (00:00):
Hello and welcome to the Deduction of Tax
Foundation podcast.
I'm your host, Kyle Houlahan,and we are back with another
episode.
Today we are joined by KatherineLawhead, senior Policy Analyst
and research manager here at theTax Foundation.
And today we're gonna talk aboutsales tax holidays.
So.
Are, are sales tax holidaysreally helping consumers save
money or just maybe making themfeel like they are.
Katherine Loughead (00:22):
I would say that for consumers who actually
have the time and make theeffort to participate in sales
tax holidays, those consumers dosave a little bit of money.
But sales tax holidays are notalways as good of a deal as they
may seem.
Many sales tax holidays areactually fairly narrow in scope,
and so they only apply tocertain things.
(00:43):
And so you need school suppliesor computers or hunting supplies
or clothes, that might be goodfor you.
But if you're not in the marketfor those things, you don't
really benefit from your statesales tax holiday.
And a lot of state sales taxholidays have per item limit.
So for instance, you can onlyspend up to a hundred dollars
(01:04):
per item on certain things, oryou have to buy a computer
that's less than$1,000.
Some states have perhaps a weeklong period, or even a month
long period, or sometimes a fewmonths, but for the most part,
sales tax holidays in a lot ofstates are only two or three
days, and so you're having todeal with potentially sharp
spikes in demand.
During that period of time, butthat also usually comes along
(01:26):
with a drop off in demand beforeand after the sales tax holiday.
So really a lot of folks aredoing a lot of their shopping
that they would normally doother times during a very narrow
window of time.
And consumers, sometimes seehigher prices as a result of
that.
And they may not always noticeit.
But retailers and.
(01:46):
To spikes in demand.
It's normal to raise prices alittle bit to try to make sure
that they don't run out ofstock, And so price increases
are certainly part of thechallenge here, and they can
make sales tax holidays lessbeneficial than they may see.
Kyle Hulehan (02:02):
What about low income families?
Does this help them hurt them?
Katherine Loughead (02:06):
I think that's a really important
question and something that'sdefinitely worth keeping in mind
because theoretically sales taxholidays sound like they would
be a great way to help lowerincome consumers save money.
but really they're not always ashelpful as they may seem.
A lot of lower incomeindividuals may be asked to work
on weekends.
They may have hourly jobs.
They're probably going to becalled on to work during these
(02:28):
sales tax holidays if they workin retail.
And so that's one reason a lotof them might not be able to
benefit as much as say, middleor higher income families.
And then another factor toconsider is that.
A lot of middle and higherincome families, if you're being
strategic about it, can reallygame the sales tax holiday and
save up a lot of money, in orderto spend a lot during those
(02:50):
sales tax holidays for lowerincome individuals who don't
have as much discretionaryincome, who don't have as much
savings in the bank, are lesslikely to be able to save up a
lot of money in order to.
Spend a lot of money during theholidays and those who spend
more during the holidays are theones who are saving more.
While those who spend less aregetting far less of a benefit.
(03:12):
So really, while it might soundgood on paper and sound good,
theoretically for a lot offamilies, sales tax holidays
aren't as valuable as they mayseem.
And I think you also have toconsider too, just going back to
the value of holidays foroverall.
But a lot of states say it'sjust the state sales tax that,
is being exempted during thisperiod of time.
(03:35):
And so really the benefit isactually fairly small.
I live in Tennessee now.
Um, we had a sales tax holidaylast weekend, the weekend of
July 25th.
And I considered going out totry to buy some clothes that I
was planning to buy otherwise,um, but ended up not really
having time.
It was a three day window of soI didn't participate in the
(03:55):
sales tax holiday, but I heardfrom my mom that she ended up
going to Walmart for somethingcompletely unrelated.
All she needed was a nine voltbattery from Walmart during the
sales tax holiday.
She didn't realize it was theholiday, and so she ended up
going to Walmart at 9:00 PM on aSunday night, on the last day of
the holiday, and she said shedoes not recommend it.
(04:16):
The lines were so long.
She ended up kind of waitingaround in the store before she
got in line kind of browsing,just to not have to wait in line
for so long to buy her nine voltbattery.
That wasn't even part of theholiday.
Now she's pretty into arts andcraft supplies.
She could have perhaps boughtsome, uh, watercolors or some
paper, and maybe she would'vebought like$30 worth of that to
(04:39):
be able to take advantage of theholiday.
But even in a high sales taxstate like Tennessee, that would
have only saved her$2 and 93cents if she had bought like$30
worth of arts and craftsupplies.
So not really a great deal for alot of people.
Kyle Hulehan (04:55):
First off, I, I cannot stand waiting in line, so
I would not have done that.
And also, maybe it's a littlebit of a rookie move to go late
on a Sunday.
I feel like places, grocerystores on Sundays are like the
worst thing.
I try to go to Trader Joe'ssometimes and it's like, oh my
God.
It's like overwhelming, um, withhow many people are there.
But it, it's interesting to methat.
It's crammed into such a smallwindow.
I feel like that makes it reallyhard and, and a little bit like,
(05:19):
yeah, like you couldn't takeadvantage of it.
Or a lot of people, like you'resaying, can't take advantage of
it and, and all of these limitsthat are placed on it.
I don't know.
It it, it makes me wonder aboutthe design of all of this and,
and if it works as well as wethink it could.
Katherine Loughead (05:31):
it creates a situation where you're having to
make decisions about if you wantperhaps a lesser quality good.
Say a computer that's.
not quite what you want, butit's under that$1,000 limit
versus a computer that might be$1,100 and it's more of what you
want.
but it doesn't qualify at allfor the sales tax holiday.
So this is what we call economicdistortions.
(05:53):
And so it's forcing people tomake decisions for tax reasons
that they wouldn't necessarilymake otherwise.
And so really that just createsdistortions, it creates
inefficiency.
You are spending a lot of moneyon these sales tax holidays, but
for a very targeted set ofpeople who are able to actually
go shopping during those periodsof time.
(06:15):
So not really the most efficientway to do things.
Kyle Hulehan (06:18):
No, it, it doesn't seem so, but.
Why are they so popular?
Katherine Loughead (06:23):
I think there are several reasons sales
tax holidays are popular, and Ithink it really comes down to
the fact that consumers,politicians, and businesses are
all fairly enthusiastic aboutsales tax holidays.
So that's kind of the perfecttrifecta of stakeholders that
would need to be.
Pretty engaged in order to makethese happen.
From a consumer's perspective,who doesn't love a discount?
(06:45):
Everyone likes to feel likethey're getting more value for
less money.
A lot of people right now arefeeling really stretched thin
financially, especially comingoff a period of years of high
inflation.
And so people are really lookingfor ways they can make their
money go further.
tax holidays do seem like a wayfor consumers to save some money
(07:06):
on things that they usually wereplanning to buy anyway.
Many politicians like sales taxholidays because they tend to
generate a lot of publicenthusiasm.
They get people talkingpositively about something the
government did, and it's a loteasier for politicians across
the political spectrum to gettogether and offer a temporary.
(07:27):
One year sales tax holiday, fortwo days during that year, then
it is for them to actually sitdown, work across the aisle, try
to get things done, to actuallyreform their tax system in a way
that helps grow the economy.
Hopefully provide some relieffor taxpayers across the board.
Reform requires a lot of harddecisions that sales tax
(07:49):
holidays don't really require.
then also from a businessperspective, if your industry is
included in the sales taxholiday, it's, that's free
advertising for your industry,and that's government run
advertising.
So that gets people in the doorsand.
For a lot of businesses, you aregoing to support, at least
publicly, anything that getspeople in your doors.
(08:10):
Now there are a whole host of,uh, internal kind of behind the
scenes, costs for businesses andburdens on businesses associated
with these, but look good and Ithink also too.
tax holidays kind of subtly havea way of tapping into people's
desire for a stronger sense ofpride in their states and their
local communities.
(08:30):
They're headly advertised, bylocal media.
They kind of get people togetherand a feel good community
centric type of event.
So I think people kind of wantsomething like that, and so this
is an easy way of doing that,but does it actually provide
real value in a lasting way thatalso grows the economy?
(08:51):
The evidence shows that itreally doesn't.
The vast majority of theconsumption that occurs during
sales tax holidays isconsumption that would've
occurred anyway, but was shiftedinto that very narrow window of
time.
So not ultimately.
The best way of going about taxreform and true tax reform if
folks really sat down to try tomake it happen, could be just as
(09:15):
popular as sales tax holidays,but it's difficult to get there
because sales tax holidays arean easier lift.
Kyle Hulehan (09:23):
You know, it, it's sort of the low hanging fruit
and, and it kind of like pleaseseveryone, well, not us at the
tax foundation, but, um, I, I,and I would say, you know what,
it, it maybe has a selling pointthat feels a little bit like.
You know, like shop local or buylocal, but it doesn't really
have that effect or, or createor help local businesses maybe
in the same exact way.
So I think that, that, that'skind of an interesting part of
(09:45):
this where you're saying it doeskind of create this, this, um,
there's these ads around it,there's sort of this publicity
around it.
You mentioned something, um,about like costs for businesses.
So what, what are some of thehidden costs for, for small
businesses during sales taxholidays?
Katherine Loughead (09:59):
So a lot of people assume that sales tax
holidays are really helpingbusinesses, but in reality, they
put a lot of additional strainon many businesses, especially
smaller businesses, because theythe normal sales tax code out of
the window for a very small,limited window of time.
And so businesses are forced tocomply with a completely
(10:21):
different set of rules.
There's legal implications forthis, so they have to be careful
about not accidentallycollecting sales taxes on things
that are supposed to be tax freeduring the holidays not failing
to Collect sales tax onsomething that is still taxable
during the holidays.
So that requires combing throughstate statutes, rules and
regulations.
large corporations tend to haveentire teams of people dedicated
(10:44):
to compliance, but that's notthe case with most small family
businesses.
Mom and pop shop.
that are also forced to complywith these, because businesses
don't have a choice.
They have to participate inthis.
If you sell a good, that is partof the holiday, even if you only
sell one good, that's part ofthe holiday.
You have to offer an exemptionfor that.
(11:06):
And so you have to adjust yourcash register settings, um, make
sure that you're doing this theright way, and that can be
really complicated.
I think one interesting exampleis New Mexico.
So they have a sales tax holidaythis year on to school things,
so that includes a lot of whatyou would traditionally think of
as back to school, you know,your backpacks, your I think
(11:28):
computers and some clothes arepart of this holiday.
But I was looking at the 16 pagefact sheet on what is and isn't
included, and there's a wholebreakdown of individual things
that are taxable versus not.
And chalk and chalkboards, forinstance, like chalk and
chalkboard erasers are tax free,but chalkboards themselves are
taxable.
(11:48):
And then if you wanna buy ane-reader.
As long as it has computingfunctions that is tax free.
But if it's an e-reader thatdoesn't have computing
functions, so probably more of akid e-reader or something like
that, that's actually taxable.
And so a lot of folks go out anddon't read the fine print, and
they think they're gonna get adeal on something and then they
might be disappointed to, oncethey get there, realize that as
(12:13):
they're at the cash register,that it actually.
Is taxable and they're not goingto get a good deal.
They also, of course, inducesharp spikes in demand, and
that's something that smallerbusinesses aren't able to deal
with as well either.
They oftentimes don't have asmuch capacity to hire additional
short-term staff for a coupledays or a couple weeks of the
year.
Kyle Hulehan (12:32):
Hmm.
Katherine Loughead (12:33):
larger businesses can sometimes do a
little bit better.
if you're a small business, youmight not have more than say,
five or 10 employees.
You're stretched thin and thatcan look bad for businesses too
if they're not able toaccommodate all these extra
customers.
So definitely lots of burdensfor businesses.
Kyle Hulehan (12:49):
And, and that's really interesting.
'cause like I, you know, youwouldn't have thought about
maybe that the.
The difficulty on, on thebusiness side, like you're
saying, like having this, youknow, long sheet of things that
are and are not taxable.
It doesn't make any sense thatit seems like the kitty reader
should be the one that's, youknow, uh, tax free.
It doesn't, it feels a littlebackwards actually.
Um, so, so some of that's reallyconfusing and I, and I think you
(13:10):
did a great job pointing thatout.
Um, so what do you know salestax holidays maybe reveal as
like a, a bigger problem in ourtax system?
Katherine Loughead (13:19):
So sales tax holidays are a net revenue loser
for states.
So when states offer sales taxholidays, they're actually
admitting that the sales taxbrings in more revenue
throughout the rest of the yearthan the state actually needs to
fund government services.
And so.
That means that the sales taxrate throughout the rest of the
year on all the other things youbuy is a little bit higher than
(13:42):
it needs to be if your stateoffers a sales tax holiday.
So instead of offering a salestax holiday, that creates a
very, temporary set ofexemptions for only a favored
set of products.
It would make a lot more senseif more states revisited these
and said that they would rathertrim the sales tax rate
throughout the rest of the yearin order to provide relief no
(14:05):
matter who you are, what youbuy, whether you're able to get
time off during a certain, youknow, period of time or not.
If your sales tax rate is even alittle bit lower throughout the
rest of the year, everyone'sgoing to benefit from that.
And so it might not be assplashy of a thing, it might not
generate as much short termexcitement, but that can really.
(14:26):
Uh, help create more long-termgrowth, uh, over time as states
consider, you know, thinkingabout ways to make their tax
codes make more sense, and thateliminates that whole
administrative burden too.
You're not creating two separatesales tax codes based on what
day of the year it is.
Um, just thinking about ways toreform your one sales tax code
(14:49):
or your one tax code to make it.
Simpler, more neutral, easierfor individuals and businesses
to comply with.
That really would make a lotmore sense.
And we've seen some states moveaway from sales tax holidays
over time.
So several places like DC, NorthCarolina, Georgia's another one.
there's several others that usedto have sales tax holidays year
(15:12):
after year, but have eliminatedthem and haven't gone back.
and a lot of those states didactually enact.
reform and relief instead.
North Carolina has adopted a lotof pro-growth reforms, and so I
think some states are startingto lead the way and say, Hey,
this doesn't really make a lotof sense.
We'd rather be a leader in termsof reform all year round instead
(15:34):
of just offering this gimmickyholiday.
Kyle Hulehan (15:36):
I really never thought about it that way, that
you just explained it whereYeah, they're admitting that
they, they don't need the rateto be as high because they,
they're already getting.
Enough money.
And that's super fascinating andI think really points out, you
know, something that you saidearlier where it's just like.
When we see this a lot with allof our recent podcasts on the
one big beautiful Bill, how hardit is to get tax reform done and
(15:57):
good tax reform done.
And, and I think it's justreally, really tricky to like,
pull this off and, and, and yougo for the gimmicky thing.
You go for the easy thing, thething that sounds like you're
getting a deal, but you're,you're really not.
Um, and, and, and I, I don'tknow.
And that's a little bit likepsychological honestly, but
yeah.
Um.
You know, before we, we sign offhere, I, I want to give you a
(16:18):
chance is, is there anythingelse on sales tax holidays you'd
wanna mention or anything thatyou're working on right now that
you'd like to plug?
Katherine Loughead (16:24):
You know, I think sales tax holidays are
well intended and they dogenerate a lot of enthusiasm, so
I understand why states.
Think that this is a good idea,but I think if policymakers
really sat down and thoughtabout it and really looked at
the economic evidence and thestudies that have been done on
this, they would see thatthey're not an efficient way of
(16:46):
enacting tax relief, and thatthere are far better ways to go
about accomplishing the goalthat they actually want to
accomplish.
Kyle Hulehan (16:54):
Katherine, thank you for being on the show today.
I really appreciate you breakingdown sales tax holidays for us.
And before we sign off, if youhave any burning questions on
taxes, you can send them our wayor drop a comment on YouTube.
You can email us atpodcast@taxfoundation.org or
slide into our dms at DeductionPod on Twitter.
Thanks for listening.
Hello and welcome to the Deduction of Tax
Foundation podcast.
I'm your host, Kyle Houlahan,and we are back with another
episode.
Today we are joined by KatherineLawhead, senior Policy Analyst
and research manager here at theTax Foundation.
And today we're gonna talk aboutsales tax holidays.
So.
Are, are sales tax holidaysreally helping consumers save
money or just maybe making themfeel like they are.
Katherine Loughead (00:22):
I would say that for consumers who actually
have the time and make theeffort to participate in sales
tax holidays, those consumers dosave a little bit of money.
But sales tax holidays are notalways as good of a deal as they
may seem.
Many sales tax holidays areactually fairly narrow in scope,
and so they only apply tocertain things.
(00:43):
And so you need school suppliesor computers or hunting supplies
or clothes, that might be goodfor you.
But if you're not in the marketfor those things, you don't
really benefit from your statesales tax holiday.
And a lot of state sales taxholidays have per item limit.
So for instance, you can onlyspend up to a hundred dollars
(01:04):
per item on certain things, oryou have to buy a computer
that's less than$1,000.
Some states have perhaps a weeklong period, or even a month
long period, or sometimes a fewmonths, but for the most part,
sales tax holidays in a lot ofstates are only two or three
days, and so you're having todeal with potentially sharp
spikes in demand.
During that period of time, butthat also usually comes along
(01:26):
with a drop off in demand beforeand after the sales tax holiday.
So really a lot of folks aredoing a lot of their shopping
that they would normally doother times during a very narrow
window of time.
And consumers, sometimes seehigher prices as a result of
that.
And they may not always noticeit.
But retailers and.
(01:46):
To spikes in demand.
It's normal to raise prices alittle bit to try to make sure
that they don't run out ofstock, And so price increases
are certainly part of thechallenge here, and they can
make sales tax holidays lessbeneficial than they may see.
Kyle Hulehan (02:02):
What about low income families?
Does this help them hurt them?
Katherine Loughead (02:06):
I think that's a really important
question and something that'sdefinitely worth keeping in mind
because theoretically sales taxholidays sound like they would
be a great way to help lowerincome consumers save money.
but really they're not always ashelpful as they may seem.
A lot of lower incomeindividuals may be asked to work
on weekends.
They may have hourly jobs.
They're probably going to becalled on to work during these
(02:28):
sales tax holidays if they workin retail.
And so that's one reason a lotof them might not be able to
benefit as much as say, middleor higher income families.
And then another factor toconsider is that.
A lot of middle and higherincome families, if you're being
strategic about it, can reallygame the sales tax holiday and
save up a lot of money, in orderto spend a lot during those
(02:50):
sales tax holidays for lowerincome individuals who don't
have as much discretionaryincome, who don't have as much
savings in the bank, are lesslikely to be able to save up a
lot of money in order to.
Spend a lot of money during theholidays and those who spend
more during the holidays are theones who are saving more.
While those who spend less aregetting far less of a benefit.
(03:12):
So really, while it might soundgood on paper and sound good,
theoretically for a lot offamilies, sales tax holidays
aren't as valuable as they mayseem.
And I think you also have toconsider too, just going back to
the value of holidays foroverall.
But a lot of states say it'sjust the state sales tax that,
is being exempted during thisperiod of time.
(03:35):
And so really the benefit isactually fairly small.
I live in Tennessee now.
Um, we had a sales tax holidaylast weekend, the weekend of
July 25th.
And I considered going out totry to buy some clothes that I
was planning to buy otherwise,um, but ended up not really
having time.
It was a three day window of soI didn't participate in the
(03:55):
sales tax holiday, but I heardfrom my mom that she ended up
going to Walmart for somethingcompletely unrelated.
All she needed was a nine voltbattery from Walmart during the
sales tax holiday.
She didn't realize it was theholiday, and so she ended up
going to Walmart at 9:00 PM on aSunday night, on the last day of
the holiday, and she said shedoes not recommend it.
(04:16):
The lines were so long.
She ended up kind of waitingaround in the store before she
got in line kind of browsing,just to not have to wait in line
for so long to buy her nine voltbattery.
That wasn't even part of theholiday.
Now she's pretty into arts andcraft supplies.
She could have perhaps boughtsome, uh, watercolors or some
paper, and maybe she would'vebought like$30 worth of that to
(04:39):
be able to take advantage of theholiday.
But even in a high sales taxstate like Tennessee, that would
have only saved her$2 and 93cents if she had bought like$30
worth of arts and craftsupplies.
So not really a great deal for alot of people.
Kyle Hulehan (04:55):
First off, I, I cannot stand waiting in line, so
I would not have done that.
And also, maybe it's a littlebit of a rookie move to go late
on a Sunday.
I feel like places, grocerystores on Sundays are like the
worst thing.
I try to go to Trader Joe'ssometimes and it's like, oh my
God.
It's like overwhelming, um, withhow many people are there.
But it, it's interesting to methat.
It's crammed into such a smallwindow.
I feel like that makes it reallyhard and, and a little bit like,
(05:19):
yeah, like you couldn't takeadvantage of it.
Or a lot of people, like you'resaying, can't take advantage of
it and, and all of these limitsthat are placed on it.
I don't know.
It it, it makes me wonder aboutthe design of all of this and,
and if it works as well as wethink it could.
Katherine Loughead (05:31):
it creates a situation where you're having to
make decisions about if you wantperhaps a lesser quality good.
Say a computer that's.
not quite what you want, butit's under that$1,000 limit
versus a computer that might be$1,100 and it's more of what you
want.
but it doesn't qualify at allfor the sales tax holiday.
So this is what we call economicdistortions.
(05:53):
And so it's forcing people tomake decisions for tax reasons
that they wouldn't necessarilymake otherwise.
And so really that just createsdistortions, it creates
inefficiency.
You are spending a lot of moneyon these sales tax holidays, but
for a very targeted set ofpeople who are able to actually
go shopping during those periodsof time.
(06:15):
So not really the most efficientway to do things.
Kyle Hulehan (06:18):
No, it, it doesn't seem so, but.
Why are they so popular?
Katherine Loughead (06:23):
I think there are several reasons sales
tax holidays are popular, and Ithink it really comes down to
the fact that consumers,politicians, and businesses are
all fairly enthusiastic aboutsales tax holidays.
So that's kind of the perfecttrifecta of stakeholders that
would need to be.
Pretty engaged in order to makethese happen.
From a consumer's perspective,who doesn't love a discount?
(06:45):
Everyone likes to feel likethey're getting more value for
less money.
A lot of people right now arefeeling really stretched thin
financially, especially comingoff a period of years of high
inflation.
And so people are really lookingfor ways they can make their
money go further.
tax holidays do seem like a wayfor consumers to save some money
(07:06):
on things that they usually wereplanning to buy anyway.
Many politicians like sales taxholidays because they tend to
generate a lot of publicenthusiasm.
They get people talkingpositively about something the
government did, and it's a loteasier for politicians across
the political spectrum to gettogether and offer a temporary.
(07:27):
One year sales tax holiday, fortwo days during that year, then
it is for them to actually sitdown, work across the aisle, try
to get things done, to actuallyreform their tax system in a way
that helps grow the economy.
Hopefully provide some relieffor taxpayers across the board.
Reform requires a lot of harddecisions that sales tax
(07:49):
holidays don't really require.
then also from a businessperspective, if your industry is
included in the sales taxholiday, it's, that's free
advertising for your industry,and that's government run
advertising.
So that gets people in the doorsand.
For a lot of businesses, you aregoing to support, at least
publicly, anything that getspeople in your doors.
(08:10):
Now there are a whole host of,uh, internal kind of behind the
scenes, costs for businesses andburdens on businesses associated
with these, but look good and Ithink also too.
tax holidays kind of subtly havea way of tapping into people's
desire for a stronger sense ofpride in their states and their
local communities.
(08:30):
They're headly advertised, bylocal media.
They kind of get people togetherand a feel good community
centric type of event.
So I think people kind of wantsomething like that, and so this
is an easy way of doing that,but does it actually provide
real value in a lasting way thatalso grows the economy?
(08:51):
The evidence shows that itreally doesn't.
The vast majority of theconsumption that occurs during
sales tax holidays isconsumption that would've
occurred anyway, but was shiftedinto that very narrow window of
time.
So not ultimately.
The best way of going about taxreform and true tax reform if
folks really sat down to try tomake it happen, could be just as
(09:15):
popular as sales tax holidays,but it's difficult to get there
because sales tax holidays arean easier lift.
Kyle Hulehan (09:23):
You know, it, it's sort of the low hanging fruit
and, and it kind of like pleaseseveryone, well, not us at the
tax foundation, but, um, I, I,and I would say, you know what,
it, it maybe has a selling pointthat feels a little bit like.
You know, like shop local or buylocal, but it doesn't really
have that effect or, or createor help local businesses maybe
in the same exact way.
So I think that, that, that'skind of an interesting part of
(09:45):
this where you're saying it doeskind of create this, this, um,
there's these ads around it,there's sort of this publicity
around it.
You mentioned something, um,about like costs for businesses.
So what, what are some of thehidden costs for, for small
businesses during sales taxholidays?
Katherine Loughead (09:59):
So a lot of people assume that sales tax
holidays are really helpingbusinesses, but in reality, they
put a lot of additional strainon many businesses, especially
smaller businesses, because theythe normal sales tax code out of
the window for a very small,limited window of time.
And so businesses are forced tocomply with a completely
(10:21):
different set of rules.
There's legal implications forthis, so they have to be careful
about not accidentallycollecting sales taxes on things
that are supposed to be tax freeduring the holidays not failing
to Collect sales tax onsomething that is still taxable
during the holidays.
So that requires combing throughstate statutes, rules and
regulations.
large corporations tend to haveentire teams of people dedicated
(10:44):
to compliance, but that's notthe case with most small family
businesses.
Mom and pop shop.
that are also forced to complywith these, because businesses
don't have a choice.
They have to participate inthis.
If you sell a good, that is partof the holiday, even if you only
sell one good, that's part ofthe holiday.
You have to offer an exemptionfor that.
(11:06):
And so you have to adjust yourcash register settings, um, make
sure that you're doing this theright way, and that can be
really complicated.
I think one interesting exampleis New Mexico.
So they have a sales tax holidaythis year on to school things,
so that includes a lot of whatyou would traditionally think of
as back to school, you know,your backpacks, your I think
(11:28):
computers and some clothes arepart of this holiday.
But I was looking at the 16 pagefact sheet on what is and isn't
included, and there's a wholebreakdown of individual things
that are taxable versus not.
And chalk and chalkboards, forinstance, like chalk and
chalkboard erasers are tax free,but chalkboards themselves are
taxable.
(11:48):
And then if you wanna buy ane-reader.
As long as it has computingfunctions that is tax free.
But if it's an e-reader thatdoesn't have computing
functions, so probably more of akid e-reader or something like
that, that's actually taxable.
And so a lot of folks go out anddon't read the fine print, and
they think they're gonna get adeal on something and then they
might be disappointed to, oncethey get there, realize that as
(12:13):
they're at the cash register,that it actually.
Is taxable and they're not goingto get a good deal.
They also, of course, inducesharp spikes in demand, and
that's something that smallerbusinesses aren't able to deal
with as well either.
They oftentimes don't have asmuch capacity to hire additional
short-term staff for a coupledays or a couple weeks of the
year.
Kyle Hulehan (12:32):
Hmm.
Katherine Loughead (12:33):
larger businesses can sometimes do a
little bit better.
if you're a small business, youmight not have more than say,
five or 10 employees.
You're stretched thin and thatcan look bad for businesses too
if they're not able toaccommodate all these extra
customers.
So definitely lots of burdensfor businesses.
Kyle Hulehan (12:49):
And, and that's really interesting.
'cause like I, you know, youwouldn't have thought about
maybe that the.
The difficulty on, on thebusiness side, like you're
saying, like having this, youknow, long sheet of things that
are and are not taxable.
It doesn't make any sense thatit seems like the kitty reader
should be the one that's, youknow, uh, tax free.
It doesn't, it feels a littlebackwards actually.
Um, so, so some of that's reallyconfusing and I, and I think you
(13:10):
did a great job pointing thatout.
Um, so what do you know salestax holidays maybe reveal as
like a, a bigger problem in ourtax system?
Katherine Loughead (13:19):
So sales tax holidays are a net revenue loser
for states.
So when states offer sales taxholidays, they're actually
admitting that the sales taxbrings in more revenue
throughout the rest of the yearthan the state actually needs to
fund government services.
And so.
That means that the sales taxrate throughout the rest of the
year on all the other things youbuy is a little bit higher than
(13:42):
it needs to be if your stateoffers a sales tax holiday.
So instead of offering a salestax holiday, that creates a
very, temporary set ofexemptions for only a favored
set of products.
It would make a lot more senseif more states revisited these
and said that they would rathertrim the sales tax rate
throughout the rest of the yearin order to provide relief no
(14:05):
matter who you are, what youbuy, whether you're able to get
time off during a certain, youknow, period of time or not.
If your sales tax rate is even alittle bit lower throughout the
rest of the year, everyone'sgoing to benefit from that.
And so it might not be assplashy of a thing, it might not
generate as much short termexcitement, but that can really.
(14:26):
Uh, help create more long-termgrowth, uh, over time as states
consider, you know, thinkingabout ways to make their tax
codes make more sense, and thateliminates that whole
administrative burden too.
You're not creating two separatesales tax codes based on what
day of the year it is.
Um, just thinking about ways toreform your one sales tax code
(14:49):
or your one tax code to make it.
Simpler, more neutral, easierfor individuals and businesses
to comply with.
That really would make a lotmore sense.
And we've seen some states moveaway from sales tax holidays
over time.
So several places like DC, NorthCarolina, Georgia's another one.
there's several others that usedto have sales tax holidays year
(15:12):
after year, but have eliminatedthem and haven't gone back.
and a lot of those states didactually enact.
reform and relief instead.
North Carolina has adopted a lotof pro-growth reforms, and so I
think some states are startingto lead the way and say, Hey,
this doesn't really make a lotof sense.
We'd rather be a leader in termsof reform all year round instead
(15:34):
of just offering this gimmickyholiday.
Kyle Hulehan (15:36):
I really never thought about it that way, that
you just explained it whereYeah, they're admitting that
they, they don't need the rateto be as high because they,
they're already getting.
Enough money.
And that's super fascinating andI think really points out, you
know, something that you saidearlier where it's just like.
When we see this a lot with allof our recent podcasts on the
one big beautiful Bill, how hardit is to get tax reform done and
(15:57):
good tax reform done.
And, and I think it's justreally, really tricky to like,
pull this off and, and, and yougo for the gimmicky thing.
You go for the easy thing, thething that sounds like you're
getting a deal, but you're,you're really not.
Um, and, and, and I, I don'tknow.
And that's a little bit likepsychological honestly, but
yeah.
Um.
You know, before we, we sign offhere, I, I want to give you a
(16:18):
chance is, is there anythingelse on sales tax holidays you'd
wanna mention or anything thatyou're working on right now that
you'd like to plug?
Katherine Loughead (16:24):
You know, I think sales tax holidays are
well intended and they dogenerate a lot of enthusiasm, so
I understand why states.
Think that this is a good idea,but I think if policymakers
really sat down and thoughtabout it and really looked at
the economic evidence and thestudies that have been done on
this, they would see thatthey're not an efficient way of
(16:46):
enacting tax relief, and thatthere are far better ways to go
about accomplishing the goalthat they actually want to
accomplish.
Kyle Hulehan (16:54):
Katherine, thank you for being on the show today.
I really appreciate you breakingdown sales tax holidays for us.
And before we sign off, if youhave any burning questions on
taxes, you can send them our wayor drop a comment on YouTube.
You can email us atpodcast@taxfoundation.org or
slide into our dms at DeductionPod on Twitter.
Thanks for listening.
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