Are Back-to-School Sales Tax Holidays Progressive or Regressive?

Abstract

Sales tax holidays are temporary suspensions of tax rates applicable to selected goods. In the United States, sales tax holidays are popular among states during “back-to-school” seasons for educational supplies and new clothing. One motivation for these policies is to provide state assistance to households with children for necessary goods. This paper investigates the distributional impact across income groups on school supplies’ and apparel purchases during these holidays for a panel of nearly 170,000 households from 2004 to 2016. Judging by conventional household income elasticities the tax savings are very progressively distributed. However, we demonstrate tax holidays to be poorly targeted if judged by the intention of arranging transfers to low income households or households with children. For instance, an equivalent cash transfer to households with children and less than $20,000 in income would have a revenue cost of five percent of what is waived by the sales tax holidays.

Keywords: tax holidays, sales taxation, tax incidence

JEL Classification: H2, H22, H71