Price Elasticities in Consumer Sales Tax Revenue

Abstract

If demand follows prices, income, and household characteristics, taxable spending by consumers also follows these variables, and a unique sales tax revenue elasticity should exist for each demand determinant. In this article, the author investigates whether price elasticities exist and how exemptions affect the price responses that should appear in consumer sales tax revenue. Consistent with microeconomic theory, the estimates in this study indicate that individual prices matter only when states exempt a large share of consumer purchases. For services, food, and residential utility exemptions, consumer price responses can affect revenue cycles. Within a revenue cycle, the pro-cyclical or countercyclical effect will depend on the relative price changes and the sales tax structure.