The Effects of the Sales Tax on Prices, Sales, and Employment

Pankov, Danila, Economics - Graduate School of Arts and Sciences, University of Virginia
Friedberg, Leora, Department of Economics, University of Virginia
Pepper, John, Department of Economics, University of Virginia
Johnson, William, Department of Economics, University of Virginia

I study how sales tax policy influences prices, sales, and retail employment. I focus on apparel and food markets because of considerable variation in sales tax policy over time and across locations. In the first and second papers, I estimate tax incidence from short-term and long-term sales tax exemptions. I am the first to use restricted access Consumer Price Index micro data on item-level price quotes in this literature. In addition, I find a negative impact of sales taxes on employment in the retail apparel industry; to my knowledge, no other paper has convincingly established this link between sales taxes and inputs. In my third paper, I use Nielsen Scanner Data to explore how the discrepancy between sales tax on restaurant meals and groceries affects the expansion of the pre-prepared meals market.

In Chapter 1, I use frequent state/local policy revisions of apparel tax exemptions in Connecticut, New York, and Vermont and find that consumers bear the burden of a sales tax. In addition, a sales tax hike lowers retail service employment. Unlike the previous literature on this topic, I employ confidential item-level price data, use larger changes in the tax rate, and control for price trends within states. I find that the pass-through on pre-tax apparel prices is small and negative, implying that consumers pay the sales tax, with some exceptions. The almost full shifting onto consumers is surprising given the well-documented fact that the demand for apparel at local stores is quite elastic. This lack of response suggests even more elastic supply, and also that equilibrium output and, hence, inputs should decrease in response to a tax. I use data from the Quarterly Census of Employment and Wages and estimate that county employment in the apparel retail sector increases by 0.33% following a one percentage point drop in sales tax. Finally, using the Consumer Expenditure Survey data, I find that a 5\% sales tax rate generates on average a 13 cent deadweight loss for every tax dollar collected.

In Chapter 2, I estimate how short-term apparel tax exemptions, tax holidays, affect retail prices on apparel. Theory shows that a large spike in demand, which tax holidays induce, may result in either a price increase or decrease, depending on the competitive structure of the market. Because the Consumer Price Index micro data reports the exact date of price observation, I obtain precise estimates and find, again, that retailers do not alter prices. Thus, retail apparel sales are competitive, and consumers fully enjoy the benefits of tax holidays.

In Chapter 3, I explore whether the differential taxation of close substitutes influences the equilibrium set of products in supermarkets, i.e. product bunching, by studying sales taxes on food. In a number of US cities, the sales tax on restaurants meals, the service tax, exceeds that on groceries by 5-10 percentage points. This creates a clear incentive for supermarkets to invest in supplying pre-prepared meals, if households prefer these lower-taxed alternatives to highly taxed restaurant meals. Theory suggests that such an investment should lead to substantial deadweight losses. My results show that households do respond to the tax differential. Low-income households increase expenditures on dry groceries by 1.6% in response to a one percentage point increase in the differential between service tax and groceries tax. High-income households increase the expenditures on meat products by 1.9%.

PHD (Doctor of Philosophy)
tax incidence, pass-through, tax exemptions, employment, product bunching
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