Last weekend many Texans took advantage of the sales tax holiday on clothes and school supplies. In 2014, 16 states administered some form of a sales tax holiday throughout the year.

The Lone Star State has administered no sales tax on clothing and school supplies in early/mid-August since 1999 and on Energy Star appliances in late May since 2008. The goal is to help families purchase discounted items and give a boost to the state’s economy.

However, the Tax Foundation’s recent in-depth report on sales tax holidays shows there are more costs than benefits.

These very short-term tax rate cuts simply shift expenditures from one period to another and pick winners and losers in the process, thereby creating little to no economic boost from the holiday. Further, many retailers raise their price during the holiday to earn a higher profit margin reducing the gains to customers, according to the report.

The report concludes by noting the following:

“Sales tax holidays neither promote economic growth nor increase purchases. They create complexities for all involved, while inserting the political process into consumer decisions. By distracting high-tax states from addressing real problems with their tax system, holidays undermine efforts to provide legitimate relief to consumers in general and the poor in particular. Sales tax holidays are no part of sound tax policy.”

Critics of the Sales Tax Relief (STaR) Fund might argue that these conclusions pertaining the sales tax holiday indicate it’s not beneficial either. They will be wrong. The main purpose of the STaR Fund is to reduce the bottom line of the budget by appropriating money into the fund and then returning it to the taxpayers by temporarily reducing the state sales tax rate.

Given that the STaR Fund will likely not be available this session, unless the Governor calls for emergency action to put it in place, it could be a valuable tool for the 85th Texas Legislature after creating it in the 2015 Legislative Session.

Let’s consider its similarities and differences with the sales tax holiday:

  • First, we notice that Texas’ sales tax holiday doesn’t affect large or small firms from running their day-to-day cash register operations-the STaR Fund wouldn’t affect them either;
  • Second, though the STaR Fund works similar to the sales tax holiday, it is substantially different because it lowers the state sales tax rate on all goods and services, eliminating the cost of picking winners and losers; and
  • Third, the duration of the sales tax reduction is longer under the STaR Fund compared with the sales tax holiday, avoiding much of the cost to consumers of shifting the timing of purchases.

 

The Tax Foundation’s identified costs of a sales tax holiday  do not apply to the STaR Fund’s gains of reducing the bottom line of the budget and boosting the economy over an extended period.     

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