The Effect of Local Option Sales Taxes on Local Sales

Gary C. Cornia, Scott Grimshaw, Ray Nelson and Lawrence Walters
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Gary C. Cornia: Marriott School of Management, Brigham Young University, Provo, UT, USA, gary_cornia@byu.edu
Scott Grimshaw: Department of Statistics, Brigham Young University, Provo, UT, USA
Ray Nelson: Department of Finance, Brigham Young University, Provo, UT, USA
Lawrence Walters: Romney Institute of Public Management, Brigham Young University, Provo, UT, USA

Public Finance Review, 2010, vol. 38, issue 6, 659-681

Abstract: Because retail sales taxes generate substantial revenue for many local governments, public officials contemplating differential local option tax rates must carefully assess the potential impacts of such decisions on purchasing decisions. The authors use a unique pooled time series to examine these impacts and apply a methodology that permits an analysis of the effects on purchasing decisions of sales tax rate differences across numerous consumer goods. The results indicate that the response to sales tax rate differences depends on the general characteristics of the goods being purchased. A unique variable that controls for the distance to the next significant alternative for making a purchase also provides key insights. The observed significance for this variable and its interaction with tax rates has significant public policy implications.

Keywords: local options sales taxes; retail sales; consumer behavior; restricted maximum likelihood estimation; panel data (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:38:y:2010:i:6:p:659-681

DOI: 10.1177/1091142110378596

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