NM Should Eliminate Back to School Tax Holiday

I just went shopping for some office supplies including copy paper. As I walked out the door, I realized that at least some of the purchases should be tax-free since this is the start of the New Mexico’s gross receipts tax holiday. In reality, none of the items I purchased including copy paper were tax free…and that is part of the problem.

A lack of transparency is one reason such tax holidays are bad tax policy and they should be eliminated. As the Tax Foundation points out in a recent policy brief on the issue:

Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.

Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale leads many larger businesses to lobby for the holidays.

Most sales tax holidays involve politicians picking products and industries to favor with exemptions, arbitrarily discriminating between products and across time, and distorting consumer decisions.

While sales taxes are somewhat regressive, this is often exaggerated to sell the idea that sales tax holidays are an effective way of providing relief to the poor. To give a small amount of tax savings to low-income individuals, holidays give a large amount to others.

Political gimmicks like sales tax holidays distract policymakers and taxpayers from genuine, permanent tax relief. If a state must offer a “holiday” from its tax system, it is a sign that the state’s tax system is uncompetitive. If policymakers want to save money for consumers, then they should cut the sales tax rate year-round.

The Tax Foundation notes that such holidays are “politically-expedient,” but that is not good enough. New Mexico policymakers should do what they can to reduce rising GRT rates. One way to do this would be to eliminate the silly tax holiday.