Consumption Responses to Temporary Tax Incentives: Evidence from State Sales Holidays

53 Pages Posted: 20 Nov 2012 Last revised: 14 Jun 2013

Sumit Agarwal

Georgetown University - Department of Finance

Nathan Marwell

University of Wisconsin - Madison

Leslie McGranahan

Federal Reserve Bank of Chicago

Date Written: May 1, 2013

Abstract

Every year many states offer sales tax holidays (STHs) temporarily exempting items like clothes, shoes and school supplies from the state sales tax. We use two data sets, the Diary portion of the Consumer Expenditure Survey and a unique data set of credit cards transactions, to investigate the spending response to these temporary tax changes. Using a diff-in-diff methodology, we find substantial increases in spending on covered goods during these holidays that are not offset by declines in either spending on other goods or spending before or after the holidays. These spending responses are larger among households with children and limited to children’s apparel. Robustness checks suggest that these findings are not driven by unobserved seasonal demand shocks. Further, our computed price elasticities are orders of magnitude larger than those found previously in the literature, suggesting a behavorial response motivated by additional incentives than the small price changes resulting from the STH.

Keywords: Consumption, State Sales Tax Holidays, Back to School, Credit Cards, Household Finance, Shopping, Spending

JEL Classification: D12, E21, E51, G21, H20, H71, L81

Suggested Citation

Agarwal, Sumit and Marwell, Nathan and McGranahan, Leslie, Consumption Responses to Temporary Tax Incentives: Evidence from State Sales Holidays (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2178753 or http://dx.doi.org/10.2139/ssrn.2178753

Sumit Agarwal (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Nathan Marwell

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Leslie McGranahan

Federal Reserve Bank of Chicago ( email )

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

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