Asymmetric Incidence of Sales Taxes

Abstract

This paper investigates the shifting of sales taxes to consumers through retail prices. Retail data on gasoline prices are used at the station level within the U.S., including observations from all fifty states and the District of Columbia. A difference-in-difference approach is employed to identify the effects of the changes in state taxes as of January 1st, 2015, when five states have increased their gasoline sales taxes, while five other states have decreased theirs. States experiencing such changes in sales taxes (between December 31st, 2014 and January 1st, 2015) are analyzed as the treatment group of a natural policy experiment, where the control group consists of states with no changes in their sales taxes. The results show that increased sales taxes are shifted forward to consumers, while reduced sales taxes are shifted backward. The pass-through measures differ significantly across states, showing the importance of having a nationwide analysis. When we search for a systematical explanation for the heterogeneity of tax shifting across retailers, it is shown through a threshold analysis that the initial retail price is an important determinant: while pass-through of an increase in sales taxes goes down with initial prices, pass-through of a reduction in sales taxes goes up with initial prices, showing evidence for an asymmetric incidence of sales taxes interacting with initial retail prices. The results are robust to the consideration of retailer characteristics, wholesale prices, retail brand effects and hourly price changes within each day.