Arkansas politicians who backed the law have begun touting the advent of the “sales tax holiday.” From the Department of Finance and Administration:
Beginning at 12:01 a.m. on Saturday August 3, 2013, and ending at 11:59 p.m. on Sunday August 4, 2013, the State of Arkansas will hold its sales tax holiday allowing shoppers the opportunity to purchase certain School Supplies, School Art Supplies, School Instructional Materials, and clothing free of state and local sales or use tax.
All retailers are required to participate and may not charge tax on items that are legally tax-exempt during the Sales Tax Holiday.
The exemption covers up to $100 in clothing, $50 in clothing accessories and unlimited amounts of school supplies.
The Times opposed this legislation for reasons too numerous to list, beginning with the fact that absence of a sales tax may or may not produce a lower price than a smart buyer could find elsewhere. Also, the promise of economic stimulus is meritless. Retail demand is finite. Time-shifting it from one day to another does not make people buy more socks.
This is one of those strange bedfellow issues. Here, we are in bed with the National Tax Foundation, whose computations and outlook on taxations we often have reason to dispute. Not this time. Here’s an update on their findings on sales tax holidays — largely a fad in Southern states. Some highlights:
Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.
Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale leads many larger businesses to lobby for the holidays.
Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating between products and across time, and distorting consumer decisions.
Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.