Tax Holidays

I am simultaneously amused and disgusted with politicians who do verbal gymnastics to support a particular position while ignoring its implications. Tax holidays are one example.

Fifteen states and the District of Columbia now offer tax holidays in the weeks leading up to the start of the school year. The tax break applies to most clothing and school supplies. According to one tax analyst:

Although states are facing serious budget issues, they seem to be reluctant to cancel their tax holidays as a way to increase revenue. In fact, ‘hard times’ may be seen as a justification for these holidays, both as ‘relief’ for hard-pressed consumers and ‘stimulus’ for hard-pressed retailers.

This is a common justification for tax holidays–they give a break to consumers and stimulate economic activity. If these claims are true, and I have no reason to doubt that they are, why are they limited to a few days of the year, and only to specific items? If tax holidays are good for businesses and consumers, then why not create more good by expanding the tax holidays?

Part of the reason is that some people don’t think that tax holidays are good.

During the Presidential primaries in 2008 John McCain and Hillary Clinton proposed a gas tax holiday. CNN quoted Tom Kloza, chief oil analyst at the research firm Oil Price Information Service:

It’s a quick fix for people who believe cheap gas is their birthright. It’s not a prudent thing to do.

Kloza said the amount of money motorists would save would do little to stimulate economic growth. The revenue from the gas tax is much needed for road repairs, he added.

This response is typical of critics of tax holidays, and ironically, it is based on the same premise embraced by many advocates of tax holidays.

Tax holidays, whether it is for school supplies, or gasoline, or guns (South Carolina has such a tax holiday), the purpose is the same–to encourage consumers to spend money on certain items. It is a state mandated sale of sorts, albeit a rather marginal sale (in Houston the sales tax is 8.125%).

Tax holidays are used to manipulate consumers; they are an incentive–or more accurately, the removal of a penalty–to engage in activities the government desires. They advocates of tax holidays want to control the behavior of individuals, and they use the carrot of tax holidays–rather than the stick of regulations and prohibitions–to achieve that control.

Critics of tax holidays, such as Tom Kloza, also want to control individual behavior, but to different ends. He prefers to take money from taxpayers to use for specific purposes, like building roads. Rather than dangle carrots, he prefers to use the stick of taxation.

I am certainly in favor of virtually any plan that allows individuals to keep more of their money, and tax holidays are no exception. But I would much prefer to see a general reduction in taxation–and indeed its eventual elimination–rather than the manipulation inherent in tax holidays.