Sales Tax holidays: evidence on incidence

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Sales Tax holidays: evidence on incidence
Thursday 6 July 2017, 12.15 - 1.30pm
Justin M. Ross, Indiana University

Sales tax holidays are temporary suspensions of tax rates applicable to certain types of goods. States frequently employ these tools to realize a variety of objectives, including economic stimulus and providing financial support to certain types of taxpayers. Critics of these policies often raise the concern that the intended benefits of these policies will be undermined if retailers respond with increases in pre-tax prices. Surprisingly, previous research has found the opposite trend: retailers over-shift the tax savings back to consumers. This paper investigates the tax incidence question using a dataset of high-frequency scanner data on school supplies from 35,000 retailers across the US from 2006 to 2014. While the over-shifting results of previous literature are replicated on a long panel covering 117 sales tax holidays, the richer data allow us to uncover seasonal shifts in the market around school start dates that likely bias the findings toward over-shifting. When we focus on cases where this seasonality does not occur, the over-shifting does not manifest, and pre-tax prices either increase or remain stable. Ultimately, we conclude that the concern that retailers capture the tax holiday savings is not substantiated by the data: the holidays’ market weighted average effect on pre-tax prices is zero. However, complementary data demonstrates that tax holidays are poorly targeted if judged by the intention to arrange transfers to low-income households or households with children. These findings should be helpful to policymakers in weighing the tax holidays’ trade-offs.

Justin Ross is a public finance economist at Indiana University’s School of Public and Environmental Affairs (SPEA). His primary research interests are in state and local topics in taxation and intergovernmental regulation.

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