This weekend, Arkansas shoppers get some tax relief: thanks to Act 757, passed earlier this year (link opens as PDF file) certain purchases of clothing and school supplies will be free from taxation on Saturday and Sunday.
Whenever we lift the burden of taxation from our citizens, that’s something to be celebrated. But if you look at the alternatives, a temporary sales tax holiday leaves a lot to be desired as tax policy.
I generally agree with the quote from Milton Friedman, free-market economist and Nobel laureate, above. But there’s more to sound tax relief policy than simply measuring how much money it puts back into the people’s pockets.
An excellent new report from the Tax Foundation demonstrates that sales tax holidays do not foster economic growth or increase consumption. Instead, all they do is shift the timing of purchases. The same point is made by Michael Pakko, an economic forecaster with the Institute for Economic Advancement at the University of Arkansas at Little Rock, in this story from Arkansas Business.
Instead of adding more exemptions into the tax code, I would recommend lowering rates year-round and getting rid of many of the special exemptions that lawmakers have written into the state tax code. (Earlier this year, I developed a fuller set of coherent guidelines that should be used when developing tax policy [link opens as PDF file].)
Max Brantley at the Arkansas Times, summarizing the Tax Foundation report, called the sales tax holiday a “gimmick.” Max and I don’t often see eye to eye, but on the sales tax holiday, I think I agree with him.