The Texas Tax Holiday: A Business Subsidy Even a Kid Can See Through

Photo: M Glasgow

The 13-year-old grandson and his 11-year-old sister are discussing the Texas tax holiday—for one weekend in August there will be no sales tax on school-related items. The grandson says stores will cut prices to compete for customers.  The granddaughter, already an inveterate shopper, says no: With the tax holiday there will be so many customers that the stores will be able raise prices.

While prices won’t rise compared to the previous weekend, the granddaughter seems to understand that an inelastic demand means the incidence of (gain from) the tax cut will be on the sellers—the customers are unlikely to get much of a bargain. A subtle, Texas-style subsidy to business; but one that even an 11-year-old can see through!

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  1. Andy says:

    Maybe more states should do this. More and more businesses are coming to Texas because of the tax friendly environment. More business mean more jobs.

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  2. Chda says:

    I don’t follow– people ‘have’ to buy school supplies, so shouldn’t they have the inelastic demand? And the person with the inelastic demand pays the most incidence of the tax (which is being removed), so this would benefit consumers…

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  3. Clancy says:

    Shouldn’t we wait and see what the data have to say before we assume who is right? By economic standards this should be a pretty easy thing to measure.

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  4. Clifton Griffin says:

    Many states have similar tax holidays.

    In my experience, retailers do make a big sales push during tax holiday weekends and do compete for shoppers on the basis of sales.

    Now whether those sales are actually saving customers money (and not just tricky pricing) is anyone’s guess.

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  5. Walter Wimberly says:

    In Florida we’ve had these tax holidays in the past. When times were good, stores ran huge sales trying to get additional shoppers and compete with other stores. When economic times started to hurt, the sale prices weren’t as good, but there were just as many of them.

    I think there is a third psychological component however. At least in Florida, the tax holiday (which at one point was for a whole week) was announced well in advance. Therefore, I personally new a lot of people who held off on purchasing school supplies until the holiday was in effect – so I would argue that stores saw a decrease in natural demand for a few weeks before the holiday, thus they had a larger than expected supply – and they then needed to lower prices further to compete and thus reduce their supply abundance.

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  6. Colin says:

    Your granddaughter’s theorizing would seem to fly in the face of observable reality. Here in DC we also have such tax holidays and stores seem to hold sales at the same time — the opposite of raising prices.

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  7. Wayne says:

    Assuming the prices stay the same, the businesses get more business and the buyer gets a discount over his normal total cost by not paying the tax. If by “inelastic demand” you mean that these purchases would be made in any case, tax holiday or no, I don’t see how that makes the retailers the sole winner. It’s as much a subsidy to the buyer as the seller, no?

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  8. Brian says:

    I’m sorry, but this is just plain bad analysis. If prices don’t rise, consumers will benefit from not having pay sales tax. How does that equate to “not much of a bargain”?

    The tax holiday won’t be the boon to retailers you think. There’s a certain amount of demand in the back-to-school season. Sure, sales numbers will spike that weekend, but the vast majority of the marginal increase in sales is robbed from other shopping days. Consumers will simply do whatever shopping they were going to do that particular weekend rather than another day. I’ll bet there is a significant drop-off in retail sales immediately prior to and after the holiday. So on net, the vast majority of the benefit accrues to the consumer.

    And even if there are more purchases because of the holiday, don’t sellers and buyers both benefit from a transaction? It is voluntary, right? If someone buys an extra pair of shoes that weekend that he otherwise wouldn’t have bought at all, he benefits not only from the tax holiday, but also from the additional consumer surplus of having the shoes.

    Lastly, this is not something peculiar to Texas, as Daniel would have us believe. Lots of states do this. If I had to guess, Daniel doesn’t particularly care for Texas and its politics (“Texas-style subsidy to business” that can be “seen through,” as if it’s some kind of nefarious kickback to fat-cats.

    This is the kind of nonsense I expect from mainstream reporters, not from PhD economists. I realize Freakonomics != economics, but let’s get the Econ 101 right before getting freaky. This is the kind of biased, poorly-thought-out economic analysis even a 40-year old engineer can see through!

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