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!


Andy

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.

Chda

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...

Chad

This is why I am confused, see this supply/demand image:

http://upload.wikimedia.org/wikipedia/commons/4/48/Tax_incidence_%28consumer%29.svg

Chad

Nevermind, I see now that I had things backward.

Clancy

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.

Clifton Griffin

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.

Walter Wimberly

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.

Colin

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.

Wayne

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?

Brian

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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Mike

$8.25 saved for every $100 spent... Of course the stores are getting the benefit in this situation, at least comparatively. Shoppers are better off going to work that day than wasting the extra amount of time expended by shopping with the huddled masses in overly crowded stores. Maybe should be analyzed on a time value of money approach... Then we'd see who the real losers are.

Dave

Not at all. I live in Texas and there are massive and very real sales during tax holiday weekend. Commodity retail is an ultracompetitive segment, and shoppers wait for this weekend, thus crimping these same retailers' cash flow in the weeks preceding. No retailer would even think of raising prices.

Cb

Why do customers flock to what is technically a 8.25% off sale? I don't get interested until I hear 20% off sale. Amazing that people go for this "special".

Jack

Based on this and previous posts, it appears that you don't like Texas very much. Why don't you move?

Oh, wait. Tenure at UT.

JOHN B

Connecticut did this for years on clothing purchased just before school started. The result was the state lost several million $ a year in revenue. The sales tax holiday merely moved the date of the transaction from one week to another.

Every year the newspapers would have pictures of people buying their children expensive clothes or hundred dollar sneakers and saying how wonderful it was they didn't have to pay the tax.

The taxpayers who subsidized such purchases were not as enthused.

Warren

Ugh, this is the same misuse of "subsidy" that the Professor averred. Did the taxpayers provide cash to help people buy their children clothes and sneakers? Lost revenue to the state does not a subsidy make.

Warren

How is a tax holiday a "subsidy to business?" Is Texas providing some sort of financial or monetary assistance directly to stores and/or their customers on that weekend? No? Then the tax holiday is nothing more and nothing less than a transitory tax reprieve, but it is certainly not a subsidy. The state is not putting money into anyone's pocket; it's simply not taking out the money that it otherwise would.

FWIW, here in Virginia, there are a lot of sales on eligible items during the sales tax holiday on school supplies and clothing the first weekend of August. My vote is with the grandson.

Speed

How about Black Friday? Lots of shoppers. Lots of sales. Extended hours.

Derick

Your economics is probably correct, but the question is whether we should look at refraining from stealing from businesses as a "subsidy."

I hope you enjoy the car subsidy I'm giving you, Daniel, by not stealing your car this week.

James

Your economics is probably correct, but the question is whether we should look at refraining from stealing from businesses as a "subsidy."

I hope you enjoy the car subsidy I'm giving you, Daniel, by not stealing your car this week.