John Locke Update / Research Newsletter (Archive)

The Last Sales Tax Holiday for North Carolina

posted on in Fiscal Insight

View in your browser.

The sales tax holiday has been around for a while, starting in 1980 when Ohio and Michigan offered a tax holiday for automobile purchases.  Until 1997 the holiday was not very popular, but New York was trying to find a way to stop citizens from border shopping — traveling to nearby states to take advantage of lower sales tax rates, like North Carolinians driving to South Carolina to buy gas due to a lower gas tax there.  So in 1997 New York created a sales tax holiday to motivate residents to shop in their own state.  Since that time, many states have adopted similar sales tax holidays, including North Carolina starting in 2002.

North Carolina along with 16 other states will have a sales tax holiday this year.  The holidays will cover a wide range of items and some are more popular than others.  Sixteen of the states will include a clothing holiday, eleven will include school supplies, seven will include computers, and six will have Energy Star products exemption holidays.  Three states will offer an additional hurricane supply and generator holiday focused around hurricane season.  North Carolina will exempt clothing, school supplies, computers, computer supplies, and sports equipment on the first weekend of August.  On the first weekend of November the state will have its Energy Star appliance holiday.  If you have ever seen a license plate from Louisiana, you know the state promotes being called a sportsman’s paradise, maybe one of the reasons for this state being the only one to offer a sales tax holiday on firearms, ammunition, and hunting supplies.

>

One might ask, if all these other states offer the holiday, why is North Carolina stopping?  North Carolina approved tax reform legislation that will end future sales tax holidays and will use the revenue for broad tax relief through a cut to the personal and corporate income tax along with the elimination of the estate tax.  Over time, if legislators can rework the state’s tax code for lower sales tax than neighboring states, then residents of those states  will border shop in North Carolina without the need for a sales tax holiday.  Lowering the sales tax rate in North Carolina will benefit all citizens, as opposed to offering a one-time special sales tax holiday on specific items that targets only certain residents.  According to the N.C. Department of Revenue, the tax-free weekend cost the state $13.6 million last year and is forecasted to cost around $13.4 million this year. 

Sales Tax Rates as of January 1, 2013


State Rate

Combined State & Average Local Rate

North Carolina

4.75%

6.87%

Virginia

5.0%

5.0%

South Carolina

6.0%

7.08%

Tennessee

7.0%

9.44%

Georgia

4.0%

6.99%

In conclusion, here are some quick facts from a study the Tax Foundation released earlier this week.  The study, Sales Tax Holidays: Politically Expedient but Poor Tax Policy, explains why sales tax holidays are poor tax policy and do not help states, even though critics claim they are necessary.  North Carolina can use this as a starting point to enact more fiscally responsible tax policy and eventually make North Carolina the lowest sales tax state in the southeast.

  • 17 states, primarily in the southeastern U.S., will hold a sales tax holiday in 2013, down from a peak of 19 states in 2010.
  • Sales tax holidays do not promote economic growth or significantly increase consumer purchase; 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.

Click here for the Fiscal Update archive.

 

Sarah Curry is Director of Fiscal Policy Studies at the John Locke Foundation. Previously, she worked for the North Carolina State Senate as a research assistant for the chairs of the Senate Agricultural Committee and headed the research efforts for… ...

Donate Today

About John Locke Foundation

We are North Carolina’s Most Trusted and Influential Source of Common Sense. The John Locke Foundation was created in 1990 as an independent, nonprofit think tank that would work “for truth, for freedom, and for the future of North Carolina.” The Foundation is named for John Locke (1632-1704), an English philosopher whose writings inspired Thomas Jefferson and the other Founders.

The John Locke Foundation is a 501(c)(3) research institute and is funded solely from voluntary contributions from individuals, corporations, and charitable foundations.