The Distributional Impacts of Taxes on Health Products: Evidence from Diaper Sales Tax Exemptions

Abstract

Sales taxes that are uniform across products are traditionally seen as more efficient than good-specific taxes, but broad-based taxes can be regressive for low income households. We examine taxation of diapers, an inelastic health product, and find substantial income variation in responsiveness to taxes using retail scanner data. Exploiting changes to sales tax exemptions for diapers in New York State and Connecticut, we find that sales of diapers rise by 5.4% in low income areas when taxes are removed, accompanied by a 6.2% fall in spending on children's pain medications. These results imply that sales tax exemptions for diapers can have positive spillover effects on health and well-being.

Keywords: sales tax, children

JEL Classification: H71, I1