When a state moves away from sound tax policy, even if it does so with the best of intentions, unintended consequences inevitably follow.
If you have kids in Iowa, you probably know that Iowa’s tax-free weekend always begins the first Friday in August. That means for 2024, the shopping holiday will start at midnight Friday, August 2 and run through Saturday, August 3. Businesses that reside in Iowa are required to participate if they are open these days.
During this time, Iowans can purchase specific items without the state’s 6% sales tax and the 1% local option sales tax that exists in many cities. For a complete list of items that are exempt from the tax during this time, click here.
At first glance this seems like a good policy from a tax-skeptical, pro-consumer perspective. It gives people a break — especially when times are tough, as they are now with high inflation. However, sales tax holidays create complexities for tax code compliance, do not promote economic growth or increase consumer purchases, and distract lawmakers from truly beneficial sales tax reforms.
While there are many arguments in support of sales tax holidays (which have all been debunked by economists on both sides of the aisle), the existence of a sales tax holiday is an admission that the sales tax is overly burdensome throughout the rest of the year. Why not eliminate unnecessary exemptions and lower the rate for everyone 365 days a year?
Additionally, large population centers just over the state line in the Quad Cities, Omaha/Council Bluffs, and Sioux City raise the question of how much of the tax break goes to those living in Illinois, Nebraska, and South Dakota. None of these bordering states offer a sales tax holiday. In fact, Omaha media advertises the Iowa holiday encouraging people to go over the river to shop.
Currently, 19 states have held or will be holding sales tax holidays in 2024. Some offer multiple holidays a year, like Florida, whereas other states have different types of sales tax holidays like Louisiana for firearms and ammunition or Texas for EnergyStar appliances. Iowa first started its sales tax holiday in 2000 and has not changed it since its inception.
Economists and public finance scholars commonly agree that a well-structured sales tax should extend to all final consumer purchases, whether goods or services, building up a solid sales tax base. Each exemption erodes that base, often delivering political benefits and little else. Exempting certain goods and services from taxation is a direct example of government “picking winners and losers.”
When a state moves away from sound tax policy, even if it does so with the best of intentions, unintended consequences inevitably follow. Tax reforms enacted over the last few years have put Iowa on a good path forward. The state should continue its momentum by focusing on a tax code with more beneficial reforms: a broader base with fewer exemptions, more certainty and less complexity, and of course, across-the-board tax rate reductions.
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