Local Sales Tax, Cross-Border Shopping, and Distance

Abstract

This paper, using Nebraska sales tax data, estimates the magnitude of cross-border shopping in response to a traveling cost when a local sales tax changes. The paper exploits the fact that, in Nebraska, only cities levy local sales taxes, which enables this study to measure a point-to-point distance between two jurisdictions (i.e. cities), who may have different sale tax rates. This measurement allows the coefficient to be interpreted as the elasticity of cross-border shopping in terms of the cost to travel that are varying by distance between cities. First, I test the hypothesis that consumers do not have an incentive to cross a city border to shop when a tax changes. Then, I specify the elasticity of a local sales tax as a function of a traveling cost. The results demonstrate that a one percent point increase in a local sales tax would create cross-border shopping at the border by 3.32 to 4.42 %; 1.15 to 2.35% in a city that is 20 miles away from other cities (i.e. shopping areas). The results also imply that the influence of cross-border shopping would virtually disappear in a city that is more than 50 miles away from other cities.