The "tax-free weekend": A temporary solution to a long-term problem

By David Pilley on August 17, 2012

From August 3 to August 5, North Carolina had a “tax-free weekend.” During these days, people were able to purchase school supplies without paying the 4.75 to 7.75% sales tax. (While the minimum is 4.75%, most NC counties have a 6.75% sales tax.) Other sales tax-exempt items were clothing and footwear under $100, sports equipment under $50, computers under $3,500, and computer equipment retailing less than $250. One of my family members was able to save over 7 percent on an $800 computer he will be using for college, and millions of people across the state were able to save a little on their back-to-school purchases. I thought every state had a tax-free weekend at the beginning of August, but I was surprised to find only 20 states and DC have a tax holiday during the year, and not all of them deal with just school supplies. I was also surprised to find out the origin and politics involved in these holidays.

Tax holidays were created to stimulate the economy during certain times of the year. The first sales tax holiday occurred in 1980, when Ohio and Michigan offered lower taxes on automobile purchases. The first “tax-free weekend” as we now call it began in New York in 1997, when stores temporarily eliminated sales tax for clothing. New York adopted the idea as a way to stop “border shopping,” the phenomenon of people travelling to neighboring states to take advantage of lower sales tax. Since then, 20 states and the District of Columbia have also adopted tax-free weekends, most of which happen during the first week of August. Maryland has a tax-free week, going on right now until August 20, where tax is eliminated from clothing and footwear under $100. Texas will have a tax-free holiday this weekend, and Connecticut will have a tax-free week from the 19th to the 25th—on clothes and shoes under $300! Some states, like Virginia and Louisiana, also have tax holidays for hurricane supplies, and many states also have a second tax holiday for Energy Star items. North Carolina’s Energy Star Sales Tax Holiday is November 2-4, and items like refrigerators, air conditioners, geothermal heat pumps, and thermostats will have reduced sales tax.

The tax holiday in North Carolina seems like a great way to get more people shopping, therefore injecting more money into the economy. It started way back in the mid-2000s, when I was in high school, and I thought its main purpose was simply for school supplies. However, the main reason many states, especially the smaller states in the Northeast, have tax-free weekends is the same reason New York adopted its tax holiday in 1997; to prevent locals from going out-of-state for purchases! Some of the moves have been drastic. In 2007, New York actually eliminated sales tax year-round on all footwear and articles of clothing under $110. This move was made to keep people from travelling to Connecticut, whose sales tax of 6.35 percent is less than New York’s 7 percent. Another example, Massachusetts, has to deal with neighbor New Hampshire, one of five states who applies sales tax only to prepared foods. (Alaska and Delaware also apply sales tax solely to prepared foods. Montana applies a sales tax just to prepared foods and prescription drugs, and non-prescription drugs and clothing are tax-free year-round in Oregon.) During its tax-free weekend, Massachusetts eliminates sales tax on all items under $2,500.

In fact, a recent study says tax holidays are actually bad for the economy. The Tax Foundation has recently stated that sales tax holidays try to sell the idea of providing relief to the poor, but they distract from actual tax reform. Individual states discriminate between arbitrary products. For example, during New Mexico’s tax holiday, computer microphones and backpacks are tax-exempt, but headsets and duffel bags are not. Virginia’s tax holiday excludes shipping, but includes handling as sales tax exemptions. And, because demand is higher during the tax holidays, retailers often raise their prices. New York’s Department of Taxation and Finance studied its tax holiday in 1997 and found that sales for the year was only 2.9 percent higher than the previous year. Consumers did not purchase more goods overall; they simply shifted the timing of their purchases, as there was reduced consumer activity before and after the holiday. If policymakers really want to help consumers, the Tax Foundation concludes they should reduce sales taxes year-round. This would especially help during times of increased consumer activity, most notably the month of December.

Tax holidays are arbitrary, but this is the result of states’ rights, as each state’s tax laws are different. Personally, I do like to save a little bit when I can, but I would like to save on more items and at more times. I find myself more willing to make purchases during the tax holiday and less willing before and after. There is no net gain, and states should consider tax changes if they want to see any economic growth in these tough times.