The Effect of Sales Tax Holidays on Household Consumption Patterns

43 Pages Posted: 18 Aug 2010 Last revised: 1 Sep 2010

Leslie McGranahan

Federal Reserve Bank of Chicago

Nathan Marwell

University of Wisconsin - Madison

Date Written: July 27, 2010

Abstract

Sales tax holidays (STHs) are the temporary suspension of state (and some local) sales taxes on selected retail items for a brief period of time. The policy has gained popularity in recent years, beginning in one state in 1997and growing to twenty by 2008. Despite the increased frequency with which states use STHs, little research has been conducted to study how households respond to this temporary tax manipulation. Our paper offers the first household-level, microeconometric evaluation on the effect of STHs on household consumption patterns. We find that on STHs, households increase the number of clothing and shoes bought by over 49 percent and 45 percent, respectively, relative to what they buy on average. Further, we find that this increase in consumption is limited to children’s apparel and that the wealthiest households and households consisting of married parents and young children have the largest, statistically significant response to STHs; for example, households with incomes over $70,000 increase the number of children’s clothing items purchased by 136 percent, while households that consist of married parents and young children increase the amount spent on children’s clothing and shoes by 117 and percent and 295 percent, respectively.

Keywords: Sales Tax, Sales Tax Holiday, Household Consumption, Back to School Shopping

JEL Classification: H71, H24, D12

Suggested Citation

McGranahan, Leslie and Marwell, Nathan, The Effect of Sales Tax Holidays on Household Consumption Patterns (July 27, 2010). FRB of Chicago Working Paper No. 2010-06. Available at SSRN: https://ssrn.com/abstract=1661137 or http://dx.doi.org/10.2139/ssrn.1661137

Leslie McGranahan (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5023 (Phone)
312-322-2357 (Fax)

Nathan Marwell

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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