Tax-free holidays

Shoppers in North Carolina got a break earlier this month: During the first weekend in August no sales tax had to be paid on lower-priced clothing, school supplies and certain computers. What is the purpose of these tax breaks, and what is their impact? N.C. State University economist Mike Walden explains.

“The purpose is to increase shopping and spending and perhaps attract shoppers from other states who normally wouldn’t come to North Carolina except for the tax break. However, the problem … is that now all the states surrounding North Carolina have these tax breaks — most of them on the same weekend.

“And indeed research shows that these tax-free holidays actually don’t increase shopping that much. What they do is simply shift when people do their spending. That is, they wait and spend during the tax free weekend, or they move forward spending they would have done later to take advantage of the tax free weekend. And therefore states actually lose tax revenue because of this tax-free holiday.

“Now obviously the shoppers get a break, and the sellers if they do experience some increase in shopping get a break. But this is really now causing states to reevaluate whether they want to keep these tax-free holidays since most states are under such a budget crunch.”