Consumption Response to Temporary Tax Incentives: Evidence from State Sales Tax Holidays

Every year many states offer sales tax holidays (STHs) temporarily exempting items like clothes, shoes and school supplies from the state sales tax. We use two data sets, the Diary portion of the Consumer Expenditure Survey and a unique data set of credit cards transactions, to investigate the spending response to these temporary tax changes. Using a diff-in-diff methodology, we find substantial increases in spending on covered goods during these holidays that are not offset by declines in either spending on other goods or spending before or after the holidays. These spending responses are larger among households with children and limited to children’s apparel. Robustness checks suggest that these findings are not driven by unobserved seasonal demand shocks. Further, our computed price elasticities are orders of magnitude larger than those found previously in the literature, suggesting a behavorial response motivated by additional incentives than the small price changes resulting from the STH.

Agarwal, Sumit and Marwell, Nathan and McGranahan, Leslie, Consumption Responses to Temporary Tax Incentives: Evidence from State Sales Holidays (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2178753 or http://dx.doi.org/10.2139/ssrn.2178753