Shopping for Lower Sales Tax Rates

Abstract

Using comprehensive high-frequency state and local sales tax data, we find that household spending responds strongly to changes in sales tax rates. Despite their complexity, such as the the fact that sales taxes are not observed in posted prices and have a wide range of rates and exemptions, households increase online and cross-border shopping and stock up on storable goods before taxes increase. Interestingly, households adjust spending similarly on both taxable and tax-exempt goods. We demonstrate that this seemingly irrational behavior is optimal in the presence of shopping complementarities and provide independent evidence in favor of this new mechanism. While our results demonstrate that salience of sales tax changes is high on average, we also show that upcoming tax changes that are more salient prompt larger responses.