Sales Tax Holidays Take a Hit, Even as Some States Expand Them

Fewer states will offer sales tax “holidays” this year, a sign of how some of them are grappling with tighter budgets as federal pandemic relief runs dry.

Lawmakers created several new sales tax holidays in 2022, when budget surpluses allowed the start or expansion of the politically popular opportunities for tax relief and the addition of others, like gas tax suspensions and property tax rebates. But some states are clawing back their tax-free perks, as state tax collections show signs of softening after years of record growth.

New Jersey, which instituted a tax-free event for back-to-school supplies in 2022, repealed it last month to raise $35 million, as the state braces for a slowdown in sales tax collections, its second-largest source of tax revenue.

Illinois also allowed its tax holiday for clothing and educational materials, created in 2022, to expire last year because it relied on one-time funding. Other kinds of tax-free events created in the wake of the pandemic—such as temporary sales tax holidays for restaurants in Connecticut and New Mexico—have also ended. Even Florida, which maintains a large number of tax-free events every year, didn’t renew post-pandemic holidays for gas ranges and Energy Star appliances this year.

Scott Peterson, vice president of government relations at tax software company Avalara Inc., said it’s uncommon for states to get rid of sales tax holidays, but when they do it’s because “their budget just sucked and they couldn’t with a straight face continue that, because at the same time they’re looking to raise taxes somewhere else.” He said lawmakers face a difficult road reviving the events once they wind up on the chopping block.

“Normally when holidays end, they end forever,” Peterson said.

Georgia and North Carolina ended sales tax holidays altogether in 2016 and 2013, respectively, after nearly a decade, because of budget shortfalls. New Jersey’s sales tax repeal comes as the state hikes taxes on major corporations to fund public transportation.

While shoppers may have fewer tax holidays to take advantage of this year, some lawmakers continue to pursue new ones. Ohio’s holiday will include restaurant purchases for the first time this year, and elected officials in Kansas, Kentucky, and Rhode Island have introduced measures to bring the tax-free promotions to their states.

Louisiana last year created a “Second Amendment” sales tax holiday for certain ammunition, firearms, and hunting supplies. Mississippi and South Carolina also offer tax-free events for outdoor sporting goods, and Georgia lawmakers attempted to institute one earlier this year.

Launched in New York

New York started the holiday trend in 1997 when it created a week-long sales tax exemption for clothing and footwear, and by 2001 the event had spread to seven other states and Washington, D.C. New York has since gotten rid of its holiday but waives sales tax all the time on clothing items under $110.

This year, 19 states will hold sales tax holidays. The events are typically geared to back-to-school shopping, but in recent years have expanded to include items like hurricane shutters, gas-powered chain saws, and bedding. Most events run for a few days or weeks, but Florida has created some that last longer, likes its “Freedom Summer” month waiving sales tax on certain tickets, fishing supplies, and pool toys. Five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—don’t have a sales tax.

Tax policy experts have criticized the dizzying amount of sales tax holidays as a drain on state resources and an unclear benefit to average consumers. The events aren’t geared toward low-income consumers, who already spend a disproportionate amount of their income on sales tax and may not be able to shift the timing of shopping trips as easily as wealthier taxpayers, according to the Institute on Taxation and Economic Policy. The holidays cost states and localities nearly $1.6 billion in lost revenue last year, the group reported.

The holidays are also difficult for retailers to manage, with states imposing specific rules on the kinds of items that qualify for tax breaks.

Florida has at least four different tax-free events, including a week long one for power tools and two separate holidays for disaster preparedness. The list of items that fall under the state’s preparedness holidays is broad, from generators to coolers to pet food, but must meet certain requirements to qualify. For example, only dry dog and cat food that doesn’t exceed 50 pounds and costs less than $100 qualifies for the sales tax exemption.

Other states have similar conditions attached to their tax-free events, like Maryland, which has one covering backpacks and bookbags, but only waives sales tax for the first $40.

“Holidays are a wonderful way of giving money back to consumers,” Peterson said. “The problem is that’s all the effort states put into it—99% of the work of the holiday is absorbed by the businesses that have to deal with it.”