Shopping for Lower Sales Tax Rates

Scott R. Baker, Stephanie Johnson, Lorenz Kueng

NBER Working Paper No. 23665
Issued in August 2017
NBER Program(s):Economic Fluctuations and Growth, Industrial Organization, Monetary Economics, Public Economics

Using comprehensive high-frequency state and local sales tax data, we show that household spending responds strongly to changes in sales tax rates. Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, households adjust in many dimensions, stocking up on storable goods before taxes rise and increasing online and cross-border shopping. Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this seemingly irrational behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities with a reasonable implied reservation wage of $7-10. We provide additional empirical evidence in favor of this new shopping-complementarity mechanism. While our results reject non-salience of sales tax changes, on average, we also show that upcoming tax changes that are more salient prompt larger responses.

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Document Object Identifier (DOI): 10.3386/w23665

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