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Kiplinger
Kiplinger
Business
Kate Schubel

Sales Tax Holidays Are Going Away in Some States

Blue dollar sign in front of several pink question marks.

From now through August, 17 states are having sales tax holidays for back-to-school shopping. Tax-free days are times when shoppers don’t have to pay state sales tax on certain items up to a certain dollar amount. But what if your state isn’t offering this tax relief? 

It turns out that some states have pulled the plug on sales tax holidays; we’ll dive deep into this issue, cover whether sales tax-free periods help or hurt, and explore some other ways to save you and your family money. 

Sales tax holiday history

Georgia, New Jersey, and Illinois have officially discontinued their tax-free holidays, yet for states that still have them, it may be impossible for residents to imagine them gone. But the sales tax holiday as we know it, is a modern trend. 

New York was the first state to hold a sales tax holiday on clothing. The idea was to stop cross-border shopping. As one of the states with the highest sales tax in the country, New York was losing revenue to its adjacent competitor — New Jersey. New Yorkers were driving across state lines to take advantage of the Garden State’s lower tax rate.

To combat this, New York offered its first sales tax holiday 27 years ago — and it was an immediate success. In fact, it was so successful that then New York City Mayor Rudy Giuliani announced a second sales tax holiday that same year. 

In a release, the former Mayor’s office stated, “This surge in retail activity is proof that the elimination of the sales tax is a success. The permanent elimination of the tax will save New York City families hundreds of dollars each year, increase retail sales, and add thousands of jobs to our local economy.” 

Local franchisees like TJ Maxx and Old Navy submitted their approval. 

However, what if Giuliani’s goals weren’t transferable to other states? He wanted a permanent end to sales tax in NYC, yet his policy stayed temporary and spread. Does a temporary tax holiday hold merit? 

Through a modern-day lens, data and some studies suggest sales tax holidays may not effectively promote economic growth nor significantly help families in need. 

Are tax holidays effective? 

Critics of sales tax holidays argue that the events don’t promote an overall increase in sales. According to the nonprofit policy organization, Institute of Taxation and Economic Policy (ITEP), households earning more than $30,000 in income were likely to shift the timing of their purchases to coincide with a tax holiday. 

This finding is backed by a study by the Federal Reserve which concluded there was a shift in the timing of purchases, rather than an increase in purchases. So what does that mean? While a few individual households may splurge more during the holiday, tax-free weekends generally shift the timing of purchases that would have occurred anyway.  

Cancelled sales tax holidays in some states

Sales taxes are typically a regressive tax (one flat rate regardless of individual income), meaning folks who make less income cannot take advantage of a sales tax holiday as much as their higher-income counterparts. In other words, households with lower incomes don’t have the flexibility to shift the timing of their purchases. 

Additionally, sales tax holidays are expensive — expensive for states to administer, expensive for states to hold, and potentially more expensive for shoppers. One research institute in Ohio finds that this year’s expanded tax holiday will cost the state $740 million. 

Lost revenue is one of the reasons Louisiana repealed its sales tax holiday in 2018, while states like Wisconsin and Illinois only held their tax-free periods for one year. 

Other reasons states might cancel their tax holidays include: 

  • Shoppers “border hopping” from neighboring states to take advantage of a sales tax holiday in another state (ironic, we know) 
  • Retailers hiking prices in response to the expected increase in sales, diminishing consumer benefit in the sale 
  • The administrative costs of holding the holiday becoming significant to the state

Taking advantage of potential tax credits  

So if state lawmakers decide a tax-free holiday is not worth the cost in your state, what other options do you have? One way your family can potentially save on taxes is by claiming eligible tax credits and deductions. Some of these are available at the state and federal levels. Talk with a trusted tax professional to see if you qualify for the following, or other, tax breaks.

Earned Income Tax Credit. This is a refundable tax credit for low- to middle-income taxpayers. To claim this credit, you cannot make investment income over a specified amount and must meet other income qualifications.

Child Tax Credit and the Child and Dependent Care Tax Credit. These are two separate tax credits. The Child Tax Credit is a tax break for qualifying taxpayers with children under 17. The Child and Dependent Care Tax Credit is for qualifying taxpayers with children under 13. 

American Opportunity Tax Credit. This is an education tax credit designed to help students or parents of students pay for four years of higher education. This credit is partially refundable.

How to save on taxes

Purchase items that are sales tax-free. Many states have some form of sales-tax-exempt product, and it’s good to know yours. For instance, in North Dakota, digital products like music and video can be purchased sales tax-free. Other states are sales tax-exempt on items like textbooks, clothing, livestock, diapers, and chocolate. Yes, you heard that right - chocolate

Another great way to save is by downloading an app or browser extension to help manage money. For example, there are investment apps like Acorns, which invests spare change on purchases you make. Or, you can try Honey — a free extension that will scan your webpage and offer coupons it finds across the internet. 

Lastly, keep tabs on your local legislation. With property tax rates rising, you may be eligible for a tax break. 

Staying abreast of new proposals can help you determine the next best move for your family. After all, that is why sales tax holidays began in the first place - border-hopping.  

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