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!


Derick

Your economics may or may not be 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.

mike

Why speculate about effects? Why not look at the research that has already been done? See Harper, Hawkins, Martin, and Sjolander, "Price Effects around a Sales Tax Holiday," PUBLIC BUDGETING & FINANCE, December 2003.

The article looks at Florida experience and finds before-tax prices in Florida retail establishments somewhat higher during the holiday. I won't spoil the reading by telling you more.

Ray

The (stated) reason states do this is to make back-to-school shopping more affordable to low- to middle-class families. (In fact, when New York used to do this they had a cap on the price of the item around $250 IIRC.) If stores raised prices that would defeat the purpose of the tax-holiday and states would stop doing it.

Jeff Smith

Recent Michigan economics Ph.D. Adam Cole wrote his dissertation about tax holidays. You can find the related papers here:

http://sitemaker.umich.edu/adamjcole/home

Ian M

Your arguement is flawed because school supplies are not an inelastic demand. What do kids really need other than some pens and paper each new school year?

If prices are high, last year's backpack may have to do for this year.

John R

Maybe stores will catch on eventually (I doubt it because it is too much effort to raise prices 5% inconspicuously for just one day), but historically this hasn't been the case. Stores know that there will be large crowds and therefore compete for those crowds with big sales. I've been buying most all my clothes on these days since they began and can tell you that while the sales are less robust than they were at the beginning they still exist.

Stephan Kinsella

A tax is a penalty; failure to impose a penalty is not a subsidy.

Melissa

You apparently don't have kids. Schools today send parents a very long checklist of new materials that students must bring to school. It can add up to hundreds of dollars in some districts. I'm not sure what enforcement mechanism the schools really have, but everyone knows that the public shame brought on a child whose parents don't comply is itself a strong enough motivator to get parents to buckle under.

Melissa

Sorry, this was supposed to be a reply to Ian M.

Melissa

Two comments:
1. I was under the impression that most economists accept that a flat sales tax is in its effect highly regressive, because poor people spend a much higher percentage of their income on the taxable goods than the wealthy. I am also under the less sure impression that poor people tend to have more young children than wealthy. So a tax holiday designed specifically to exempt sales tax on goods for school-aged children should be highly progressive at best, and neutral at worst (if businesses raise prices to absorb all of the benefits).
2. I live in a province of Canada with a sales tax of 15.5% (yeah, yeah, but you should see my health benefits!). A local major supermarket routinely offers tax-free weekends, with all taxable goods (non-food stuff) in the store supposedly tax-exempt. Of course, this is really just offering a 15.5% discount on those goods since the store actually does have to pay the tax, but in many cases that 15.5% discount comes on top of prices for individual items already on sale. And I monitor prices for "dry goods" in this store well enough to know that they are NOT jacking up prices on everything eligible right before these weekends. If an individual for-profit business sees a net business benefit enough to keep doing this in the absence of govt support behind it like the US holidays, there must be a huge business benefit in the US model even if the prices aren't jacked up there. Presumably people in the US spend that saved tax money on more stuff in the same store, thus increasing profits (but also goods in the hands of the consumer) at the govt's expense.

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