Attack of the Grinch: Greenberg on Sales Tax Holiday

Milton Friedman tax cut quote

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.

Please follow and like us:
error

5 thoughts on “Attack of the Grinch: Greenberg on Sales Tax Holiday

  • August 5, 2011 at 11:04 am
    Permalink

    You mean like no alcohol sales on Sundays so we buy twice as much on Saturdays. Or dry counties where the surrounding counties seem to have great sales particularly at the border of the dry county. I seem to have a theme here.

    Reply
  • August 8, 2011 at 6:48 pm
    Permalink

    I got to sit in on some meetings of the Senate Revenue and Tax committee last session. I heard the same old argument of… for every dollar of a tax break, the state make that up in revenue because people are spending money. However, The book keepers at DFA repeatedly explained, $1 in tax breaks does not equal $1 in Revenue. It’s not a 1-to-1 ratio. Here is my own explanation… If you put $1 into the Arkansas Economy, the Max Income Tax is 7% then you have 93 cents left. State sales tax is about 6% so you get 6% of 93 cents. 7+6=13 cents. So for $1 in tax breaks the state made 13 cents.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *