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January 6th, 2009

Where’s the Benefit in a Sales-Tax Holiday?

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On December 23, the National Retail Federation (NRF) asked President-elect Obama to include three separate sales-tax holidays as part of his upcoming stimulus package. Obama held several meetings in Washington yesterday to discuss his stimulus plan with bipartisan lawmakers. While the plan is still being formulated, little was mentioned about sales-tax holidays.

“Retailers’ considerable experience with sales tax holidays has shown that they provide a substantial inducement for people to shop,” the letter said. “To this end, we suggest a series of three national sales tax holidays that would cover a very broad range of goods.”

Here’s where the skepticism begins to filter in. As Obama continues to receive increased criticism for the sheer size of his stimulus package, supporting three separate sales-tax holidays would require the government to both reimburse and compensate all 50 states:

The federal government would reimburse states for lost sales tax, which would cost between $20 billion and $25 billion, the National Retail Federation estimates based on existing tax holiday data. Five states, including Oregon, do not charge sales tax. Those states should get federal money to distribute to their populations in a way that would stimulate spending, the proposal says.

What’s the chance that sales-tax holidays could make their way into the stimulus? As Justin Lahart of the Wall Street Journal points out, the idea is nothing new. “The original idea comes from work a young Harvard economist did in the 1980s. His name? Lawrence Summers.”

A commenter raises a very interesting point: the “assumption would be that removing sales tax would generate more taxable sales… The automakers have slashed pricing by more than the amount of sales tax plus offer free financing and their collective sales are down 35%.”

Of course, that might be due to the fact that vehicles aren’t exactly something you’d buy on a whim — as opposed to, say, a new TV. Another point against a sales-tax holiday is that some percentage of people would defer larger purchases in anticipation of the holiday.

Would you take advantage of a sales-tax holiday?

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2 Responses to “Where’s the Benefit in a Sales-Tax Holiday?”

  1. Adam J. Says: January 6th, 2009 at 6:52 pm

    The only thing a sales tax holiday would do for me is cause me to put off my regular purchases (like periodic clothes purchases and such) until the next sales tax holiday. I would also ignore any sales that were occuring in the meantime because I know that often stores put special sales on during sales tax holidays.

  2. Tim Manni Says: January 7th, 2009 at 1:45 pm

    Adam,

    We agree all the way — millions of Americans share your mindset. That’s why it’s one of the major concerns among critics of this program.

    What about big purchases? Would you be more inclined to go for a big-ticket item during a sales tax holiday?

    Thanks for reading and commenting. Please share your thoughts with us again soon,

    Tim

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