What is a Tax Holiday?

A tax holiday is a temporary suspension of normal tax schedules, most commonly sales taxes although corporate taxes, payroll taxes, and other types of taxes can be involved as well. In some cases, taxes are eliminated altogether during the tax holiday. In others, taxes are reduced. The purpose of a tax holiday is to provide an incentive for economic activity and in some cases, the temporary reduction or elimination of taxes is also designed to make certain products more affordable.

A common example can be seen in some US states like Virginia, North Carolina, Illinois, Connecticut, Iowa, and Texas, where tax holidays are held during specific weekends in August to make the purchase of back to school supplies more affordable. The holiday eliminates sales taxes on clothing, books, school supplies, and electronics like computers. Dropping the sales tax can help people with limited funds fit their children out for school.

In addition to making things more affordable for consumers, tax holidays may also be used to attract foreign investors or to stimulate job creation in a lagging economy. Lifting or reducing corporate taxes can be an incentive for companies considering foreign investment, as the tax benefits will reduce operating costs. In some nations, taxes are kept low year round specifically for this purpose, and financial regulations may be structured to promote foreign investment in other ways as well.

For job creation, a payroll tax holiday can be used as an incentive to encourage employers to add more people to the payroll or to increase wages for existing employees. This tactic may be used when unemployment is high. However, once the payroll tax holiday ends, employers may be forced to cut back employees, hours, or wages. As a result, such incentives provide only a temporary benefit, unless the economy recovers substantially during the temporary reduction or suspension of payroll taxes.

When a tax holiday is held, announcements are published to make people aware of the terms and the dates. It is important to read the fine print on such announcements, as certain activities may be excluded. For example, when sales taxes are suspended, purchases for a business are usually not included in the sales tax holiday. Likewise, only certain types of products may be included; people might not get a sales tax break on appliances or furniture in a tax holiday designed to help people prepare for going back to school.