Political Expediency

The White House and Congressional Democrats are considering a tax holiday on gasoline to appease voters that are angry about high gas prices. Tax holidays are laws that exempt specific goods and services from taxation for a limited time. They aren’t new—17 states had sales tax holidays last year. Legislators like tax holidays because they think it’s an easy way to influence voters. Unfortunately, it also serves to distract legislators from profound tax reform.

Debunking Myths

Tax holiday proponents make numerous claims that don’t hold against scrutiny. Let’s examine some of these

They Increase Economic Growth

This is often the most frequently used point by tax holiday supporters. Economic research doesn’t support this. A 2017 Federal Reserve study that examined state-level sales tax holidays found no increase in purchases of the exempted goods. Instead, consumers adjusted when they purchased goods they already intended on purchasing. Consequently, government revenue declines, exacerbating deficits and worsening public services. Other studies find the same result.

They Aid Poor People

Sales taxes are often slightly regressive (on gross), but tax exemptions of any kind benefit rich consumers more than poor ones. This is because rich consumers usually consume more, and thus pay more tax. They also have more flexibility to time purchases because of their higher savings rates. If legislators want to give economic relief to low income households, a flat tax credit is much simpler and more effective.

They’re Simple

Sales tax holidays add unnecessary complexity to the tax code and distort economic decision making. This is because most tax holidays typically discriminate against particular goods, and all of them discriminate against time. Long exemption lists with highly specific goods in particular impose large administrative costs on business and government.

Conclusion

Simple direct cash aid is the best way to deliver economic relief for lower income households. If state legislators feel that they must have perennial tax holidays, it’s a sign they must reform their tax code. My previous post on ideal taxation is a great place to start.