Sales tax holidays ineffective compared to real tax reform, report says

(The Center Square) – A new report is critical of temporary sales tax holidays similar to the school supply tax holiday underway in Illinois.

For ten days, the state sales tax on school supplies drops from 6.25% to 1.25%. State officials say the tax holiday will save Illinois families $50 million.

During a news conference Thursday, Gov. J.B. Pritzker said the initiative is part of the $1.8 billion Illinois Family Relief Plan.

“Our back to school sales tax holiday is one of the many policies that we are deploying to put hundreds of dollars back in the pockets of Illinois residents,” said Pritzker.

But Marco Guzman with the Institute on Taxation and Economic Policy said sales tax holidays are too temporary to meaningfully change the regressive nature of a state’s tax system.

“Really, when you dig deep into them, they are ineffective and poorly targeted,” said Guzman. “Wealthier taxpayers are able to take advantage of the same benefit that lower income people are.”

Guzman notes that wealthier taxpayers have more flexibility to shift the timing of their purchases to take advantage of the tax break while that option isn’t available to families living paycheck to paycheck.

The report notes that retailers sometimes exploit the holiday by increasing their prices or watering down their sale promotions. One study of retailers’ behavior during a sales tax holiday in Florida found that retailers reclaimed up to 20% of the price cut consumers thought they were receiving from the state’s sales tax holiday.

According to the report, tax holidays will cost states and local governments more than $1 billion in lost revenue, up from an estimated $550 million a year ago. Revenue lost through sales tax holidays will eventually have to be made up elsewhere, either through spending cuts or increasing other taxes.

“Anytime that revenue is being spent on something as ineffective as a sales tax holiday, I think politicians would be wise to ditch these and implement more effective and meaningful policies to help people deal with inflation,” said Guzman.

Twenty states are set to hold sales tax holidays this year.

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