North Carolina is a model for ending state sales tax holidays in favor of better policy, a Tax Foundation study finds.
The study, released July 25, criticized the exemptions.
“Sales tax holidays neither promote growth nor increase purchases,” the study says. “They create complexity and insert the political process into consumer decisions.”
The Tax Foundation says its research proves the periodic tax exemptions on certain products don’t work as promised. Rather, they cause an unnatural shift in economic activity and are poorly managed by politicians.
The study praised North Carolina for ditching its sales tax holiday.
“Other states would be wise to follow [Washington] D.C.’s and North Carolina’s lead and re-evaluate the costs and benefits of sales tax holidays,” the study said.
North Carolina repealed its back-to-school tax-free weekend in 2013. Legislators and fiscal researchers predicted it would save $16.3 million in revenue the next year.
A spokesman for state Rep. David Lewis, R-Harnett, presented the move as an improvement.
“This study shows that Republican tax reforms have created an efficient, fair tax system that is growing our state’s economy,” Neal Inman said. “By ending tax gimmicks and lowering rates, we’ve been able to give hardworking families over a billion dollars in tax relief while creating tax system that has supercharged North Carolina’s job growth.”
The District of Columbia canceled its holiday in 2009 after eight years, finding it failed to boost the economy enough to offset the lost tax revenue. The holiday repeal saved $640,000.
The Tax Foundation cautioned against implementing the tax holidays.
“Lawmakers should avoid creating temporary tax laws like sales tax holidays,” researchers said. “From the perspective of a business trying to operate at maximum efficiency, the extra administrative and labor costs associated with a sales tax holiday are an unjustifiable burden, considering the unlikelihood that sales tax holidays increase overall sales. “
The study cited research from New York, which found the purchase of tax-exempted goods spiked during the state holiday yet overall sales for the year failed to increase. Economic activity before the holiday slowed as shoppers waited for the exemptions.
Joseph Coletti, senior fellow at the John Locke Foundation, explained the temporary spike in sales.
“Sales tax holidays are a bad idea to provide a small respite from the general tax burden,” Coletti said. “People who can manage shift their major purchases to save a few dollars, but the economic effect is negligible. Those with more limited means who cannot time their purchases to match up with the tax holiday have to buy their goods at the higher rate, while some rush decisions to not miss the tax savings.”
The study promoted other tax reforms, similar to the North Carolina strategy.
“Instead of creating a subset of tax laws that apply only temporarily and then creating ambiguity about whether those very laws will even be implemented on a year-to-year basis, lawmakers should focus on enacting real and permanent tax relief,” the study said.
Coletti supported the spirit of the study’s suggestion, saying that businesses and families can make better economic decisions in a stable tax environment.
Nationally, 16 states had or will hold a tax holiday this year. That’s down from an all-time high of 19 in 2010, though North Carolina’s neighbors have mostly kept the practice.
Virginia, South Carolina, and Tennessee have sales tax holidays during the summer. Georgia dropped its sales tax holiday this year after deciding the special day failed to spur noticeable economic growth.