Sixteen states will hold at least one sales tax holiday this year. Is Iowa one of them?
In the midst of the coronavirus crisis, some states are hoping that a sales tax holiday might help restart struggling industries by stimulating the economy. Tennessee, for instance, has created a second sales tax holiday, targeted specifically at food and drink purchases from restaurants.
But states should note that the sudden economic halt was caused by a public health crisis—not a lack of desire for consumer spending.
According to our research, sales tax holidays:
- Fail to promote economic growth or significantly increase purchases
- Discriminate arbitrarily among products and across time
- Can mislead consumers about savings
- Cause costly complexity and instability for tax code compliance, efficient labor allocation, and inventory management
- Are not an effective means of relief for low-income consumers
Unfortunately, political gimmicks like sales tax holidays are not real tax cuts and distract from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is an implicit recognition that the state’s tax system is uncompetitive.