Alabama's Sales Tax Holiday: Good For Business, Bad Tax Policy

Aug 2, 2012

Alabama's seventh annual sales tax holiday for school-related items starts Friday. Items from pencils to computer equipment are exempt from the state's four percent sales tax as well as sales tax in participating counties and cities.

The holiday is expected to help businesses and customers alike but a new report says such holidays are poor tax policy. Joseph Henchman is vice president for legal and state projects for The Tax Foundation. He says when you get down to it, customers aren't really saving that much money.

"It's only about an eight percent reduction, which as far as sales go is not very dramatic. I mean just imagine you were seeing a sign that said eight percent off sale. It really shouldn't encourage that many people to stampede into the stores as happens during sales tax holidays."

But the tax holidays do draw a lot of business, that is to say what may not be good tax policy is still good for business.

"It depends on who you talk to certainly the CEOs and the public relations people who work for retailers are very enthusiastic about sales tax holidays because it's essentially a sale for them paid for by the government," Henchman says. "Meanwhile it's more work for sale people, clerks and managers for what Henchman says to what amounts to not much of boost in sales."

And it's not just sales people who can get the short stick on these holidays.

"When you have very high demand and very limited supply that means prices go up," Henchman says. "I'm not saying that that's the case in all sales-tax holidays but there's certainly the potential there that a lot of the savings are reduced below what people think they might be."

Henchman says tax holidays distract people from more permanent tax reforms, and that if the tax is so prohibitive to warrant a tax holiday then maybe the sales tax needs to be reduced. For those partaking in the sales tax holiday remember there are restrictions on what can and cannot be purchased. Alabama's sales tax holiday ends at midnight Sunday.