Association for Public Policy Analysis & Management

Sales Tax Holidays are temporary suspensions of tax rates applicable to certain types of goods that states frequently employ to realize a variety of objectives, including economic stimulus and arranging financial support to certain types of taxpayers. Critics of these policies often raise the concern that the intended benefits of these policies will be undermined if retailers respond to these policies with increases in pre-tax prices, but previous research has surprisingly found the opposite to be true and that retailers overshift the tax savings back to consumers. This paper investigates the tax incidence question using a dataset of high frequency scanner data on school supplies from 35,000 retailers across the US from 2006 to 2014. While the overshifting results of previous literature are replicated, the richer data allows us to uncover seasonal shifts in the market around school start dates that likely biases the findings into this result. When we focus instead on select cases where this seasonality does not occur, the results do indeed demonstrate retailers responding to tax holidays with pre-tax price increases, albeit the adjustment is still very small and the benefits largely accrue to the consumers.