The Sales Tax Holiday Is Not Great Policy

Missouri had its back-to-school sales tax holiday last weekend. Friday through Sunday, Missouri waived the state sales tax on a handful of back-to-school items. While it’s nice if you were able to save a few bucks on school supplies, schemes such as these complicate the tax landscape and distort the market.

Generally, taxes should be low and broad. Low tax rates mean people can keep most of their hard-earned money. A broad tax base lessens distortions in the market from people trying to avoid taxes and mitigates volatility in the revenue stream. A low sales tax rate with a broad tax base would mean a simple tax code that collects stable revenue while minimizing economic distortions.

Missouri is nowhere near that ideal sales tax.

The plethora of special taxing districts in the state certainly plays a large part in Missouri’s complicated sales tax landscape, but sales tax holidays and other exemption schemes do too. The holiday adds tax complexity, which means additional tax compliance costs as consumers and businesses try to figure out what is best for them. Allowing municipalities to opt out of the sales tax holiday makes it even more complex.

The holiday also distorts the market by only lasting one weekend and discriminating among products. This causes consumers to change their normal behavior, shifting their spending from other weekends to the holiday weekend and shifting purchases to products that qualify from products that (often arbitrarily) do not.

Show-Me Institute researchers have recognized the sales tax holiday for what it is for years—a taxing scheme that complicates the tax landscape while doing very little to actually give taxpayers a break. Saving a few bucks one weekend a year is nothing compared to permanently lowering tax rates. It takes real tax reform, not a weekend gimmick, to help taxpayers. While it’s great if you were able to save last weekend, I hope that holidays and other tax schemes become a less frequent occurrence in Missouri.