Research shows that people respond to sales tax hikes
Taxes are incentives. Much public policy is based on this insight. If we tax something, like carbon emissions or cigarettes, it is because we want people to emit less CO2 or smoke less.
But all taxes are incentives, not just those we want to be. While the response to a cigarette tax hike might be intended, hikes in other taxes, like income taxes, will also generate responses that policymakers did not intend.
To see this, look at sales taxes. Since 2004, there have been more than 3,000 changes to sales tax rates in the United States. In a new paper for the American Economic Journal: Macroeconomics titled ‘Shopping for Lower Sales Tax Rates,’ economists Scott R. Baker, Stephanie Johnson and Lorenz Kueng examine detailed spending data for more than 150,000 households across 40 states and 3,000 local municipalities to see whether spending changed in response to hikes in sales taxes.
They find that shoppers actually do adjust their spending on all kinds of items — including those that are tax-exempt — when state or local taxes change. In the month before an increase, consumers stocked up on storable goods, like laundry detergent and alcohol, while they were less expensive. Households with a monthly grocery budget of $500, for example, typically increased spending by up to $20 before the tax increase, and then cut back spending the month after the higher tax rate went into effect.
But why would consumers stock up on tax-exempt items? This makes sense when you factor in the cost of the trip – if you are going to the supermarket to stock up on items that are affected by a tax increase, you might as well take care of the rest of their shopping while you’re at it, saving time and gas.
And, the researchers found, these behavioral effects linger well after these stocks have been run down. Some people go online to buy many of those goods or even travel to lower tax jurisdictions. “People do respond and pay attention to sales taxes in fairly sophisticated ways,” Baker said in an interview with the AEA. “These are fairly salient taxes to people.” (in a related paper, the researchers find that consumers also respond to sales tax hikes on more expensive goods like cars).
The lesson, again, is that taxes are incentives, even when you you don’t want them to be.