You can learn a lot about what a government believes its citizens need based on what’s included in its sales tax holidays.
Consider the United States, where around 20 states hold them annually. Many suspend state taxes for a few days in August on back-to-school supplies such as pencils, notebooks, clothes and computers. A few extend it to guns for hunting season or energy-saving products such as furnaces and air conditioners. To encourage disaster preparedness, every February Alabama briefly removes its sales tax on flashlights, batteries, tarps, generators and other storm essentials.
So what did Ottawa decide Canadians needed a GST break on this winter? Puzzles, video games and alcohol, plus trips to McDonald’s and Swiss Chalet. (Yes, children’s clothing and toys, books, newspapers and Christmas decor, too.)
For many, the tax holiday, which began Dec. 14, has been one big meh. According to a Nanos poll conducted between Dec. 30 and Jan. 5, two-thirds of Canadians said the GST break would have no impact on their household finances.
At a time when many are still struggling to afford groceries, the estimated savings on taxed items at the supermarket amounted to just $4.51 per consumer over the holiday’s duration, according to Sylvain Charlebois, director of the Agri-Food Analytics Lab at Dalhousie University. That’s roughly enough to buy a few extra tins of tomato soup.
The question now is: How will consumers react when it ends on Feb. 15?
Nik Nanos, chief data scientist at Nanos Research, predicts the return of the GST (and HST in Ontario and Atlantic Canada) will bring the same letdown as going back to work after a long, restful vacation.
“It’s not likely that people will be outraged, because our research showed that only three out of 10 Canadians thought it was a good idea. So there wasn’t a lot of enthusiasm in the first place,” he says. “People saw it as a gimmick.”
Two factors, however, could make the end of the tax holiday feel more painful than any joy experienced when it began.
First, human behaviour. Imagine you find $100 one day. Great. Now, imagine losing $100 the next day. Even-steven, right? Not quite. Research consistently shows that losses hurt more than equivalent gains.
Now, consider the duration of the holiday. Typically, sales at retailers last only a few days to create consumer excitement and demand.
But if a sale lasts two months – like the GST holiday – consumer interest wanes and the discount may become the expected price, says Abigail Sussman, a professor of marketing at the University of Chicago’s Booth School of Business who studies consumer spending decisions.
For example, she says, “When the price of something is usually $10 and it’s reduced to $8 for several weeks, that $8 could become your expectation. When the price returns to $10, you’ll feel upset.”
This phenomenon may be the inherent flaw in Canada’s GST holiday. If the tax-free price has become what consumers expect, the return of the sales tax will feel like a loss. “And this loss is likely to be viewed as more painful than the prior tax reduction was beneficial,” Ms. Sussman says.
The impact will be especially noticeable for daily habits, such as going through a drive-thru for a coffee and breakfast sandwich every morning. That will be particularly true in Ontario and the Atlantic provinces where the return of the HST will push up prices overnight by 13 and 15 per cent, respectively.
Frances Woolley is a professor of economics at Carleton University and an expert on taxation and family economics. She says no studies have looked specifically at how people react emotionally to tax holiday endings. “But what we know about behavioural economics predicts that people will feel the end of the tax holiday more than they enjoyed the beginning of it,” she says.
As for what happens after Feb. 15, Ms. Woolley believes business groups could start lobbying for targeted sales tax holidays in their sectors.
One example, already, is Restaurants Canada, which reported an 18 per cent increase in dining nationally during the first two weeks of the tax holiday compared to a year earlier. The association is now urging a permanent suspension of the GST and HST on prepared food.
The holiday also highlighted a lack of transparency in grocery taxation. According to Mr. Charlebois, around 4,000 items in a typical supermarket are taxed, but it’s hard for people to identify which ones. “For consumers, it’s utter confusion,” he says. For example, a two-pack of muffins is considered a snack and therefore taxed but a four-pack isn’t.
Finally, research consistently shows that sales tax holidays don’t spur significant economic activity but merely shift the timing of spending. An RBC Consumer Spending Tracker report found that Canadians delayed some pre-Christmas purchases until after the start of the tax holiday. Now, there could also be a rush to stock up on items such as beer and wine before sales taxes are re-applied.
While consumers may twinge at the return of the GST/HST, the real cost of the holiday will be around for some time. The Parliamentary Budget Officer estimated the tax holiday would result in $1-46 billion in lost GST revenue and $1.26-billion in lost HST revenue.
That means it’s unlikely Ottawa will be able to follow in the footsteps of at least one American tax holiday. Last summer, Ohio decided to suspend state sales taxes on a wide range of consumer goods under $500 for about a week … but only if it reached a $60-million surplus fund target first, which it did. Ohio’s tax holiday is set to go again this year.
