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The political economy of sales taxes and sales tax exemptions

Abstract

I analyze the choice politicians face when seeking votes from groups that lobby for sales tax rate decreases or tax exemptions, given the constraint that politicians want to raise a certain amount of revenue. Using data on sales taxes, I develop a model predicting a positive relationship between the number of exemptions and the sales tax rate. The estimation results provide support for this prediction. Each additional exemption is associated with an increase of between 0.10 and 0.25 percentage points in the tax rate.

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Notes

  1. 1.

    To test this hypothesis, I assume that cross-border shopping or any online shopping that might give rise to an erosion of tax and exemption differences across states is quantitative small, relative to all sales within the state.

  2. 2.

    The states are: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

  3. 3.

    I chose 2009 for revenue data because it falls within the 2008-to-2012 period, for which I have data on sales tax exemptions. Owing to recessionary conditions in that time frame, sales tax revenues might have been below average; however, if the revenue reduction was similar across all states, it should not affect my estimates of the equilibrium relationship between sales tax rates and exemptions.

  4. 4.

    I kept Colorado in the sample because if politicians there decide to reduce the number of sales tax exemptions, they are unable to raise sales tax rates to offset the narrower sales tax base. The constitutional constraint on raising the state sales tax rate may lead to less significant results if exemptions are reduced, and the sales tax cannot be raised.

  5. 5.

    Tax Facts 96-1, General Excise vs. Sales Tax http://www6.hawaii.gov/tax/taxfacts/tf96-01.pdf.

  6. 6.

    Sales tax rates are from 2012, while data on exemptions come primarily from earlier years, starting with 2008. This fact mitigates concerns that the error term in Eq. (1) is correlated with exemptions.

  7. 7.

    This is done because California has the highest sales tax rate in the United States and allows one of the largest number of exemptions.

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Acknowledgements

This paper is based on a my co-authored working paper with (Militaru and Stratmann 2014).

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Correspondence to Thomas Stratmann.

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Stratmann, T. The political economy of sales taxes and sales tax exemptions. Public Choice 171, 207–221 (2017). https://doi.org/10.1007/s11127-017-0434-z

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Keywords

  • Sales taxes
  • Tax exemptions
  • State politics
  • Interest groups