Sales Tax Holidays: Evidence on Incidence

Abstract

Policymakers frequently employ tax holidays to stimulate spending and transfer state revenues to favored groups. Perhaps the most common form of this policy in the United States are “Back to School” tax holidays where states waive the retail sales tax on selected school supplies in the fall. Surprisingly, the empirical research of this policy has found that tax savings are overshifted to households. This paper argues that tax holiday dates should be assumed to be selected endogenously so as to minimize forgone revenue and maximize consumer incidence by targeting periods where prices are lowest. Causal evidence is considered in a natural experiment out of Tennessee, where legislation for a spring sales tax holiday in 2006 and 2007 for school supplies was reauthorized as part of a broader series of tax cuts. We conclude from the evidence of these Tennessee events suggest that households, on average, receive the full tax savings during these programs. However, consumer incidence is heterogeneous with some retailers recapturing the tax savings with higher pre-tax prices.