Consumer Incidence in Sales Tax Holidays: Evidence from Tennessee

34 Pages Posted: 15 Jun 2017 Last revised: 6 Nov 2018

See all articles by Justin M. Ross

Justin M. Ross

Indiana University - School of Public & Environmental Affairs

Felipe Lozano-Rojas

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Date Written: Nov 2, 2018

Abstract

Policymakers frequently employ tax holidays to stimulate spending and transfer state revenues to favored groups. Perhaps the most common form of this policy in the United States are “Back to School” tax holidays where states waive the retail sales tax on selected school supplies in the fall. Surprisingly, the empirical research of this policy has found that tax savings are overshifted to households. This paper argues that tax holiday dates should be assumed to be selected endogenously so as to minimize forgone revenue and maximize consumer incidence by targeting periods where prices are lowest. Causal evidence is considered in a natural experiment out of Tennessee, where legislation for a spring sales tax holiday in 2006 and 2007 for school supplies was reauthorized as part of a broader series of tax cuts. We conclude from the evidence of these Tennessee events suggest that households, on average, receive the full tax savings during these programs. However, consumer incidence is heterogeneous with some retailers recapturing the tax savings with higher pre-tax prices.

Keywords: Tax Holidays, Sales Taxation, Tax Incidence

JEL Classification: H2, H22, H71

Suggested Citation

Ross, Justin M. and Lozano-Rojas, Felipe, Consumer Incidence in Sales Tax Holidays: Evidence from Tennessee (Nov 2, 2018). Available at SSRN: https://ssrn.com/abstract=2986456 or http://dx.doi.org/10.2139/ssrn.2986456

Justin M. Ross

Indiana University - School of Public & Environmental Affairs ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Felipe Lozano-Rojas (Contact Author)

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

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