RETAIL PRICE REACTIONS TO CHANGES IN STATE AND LOCAL SALES TAXES

Abstract

This paper tests the hypothesis that state and local retail sales taxes are fully shifted to consumers. The empirical analysis focuses on city-specific clothing price indices for eight cities during the 1947-77 period and fourteen cities during the 1925-39 period. The results for the postwar period suggest that retail prices rise by approximately the amount of the sales tax, in contrast to other studies that reveal tax overshifting. For the Depression period, clothing prices appear to rise by only two-thirds of the amount of sales taxes. This finding accords with earlier evidence based on retailer surveys in the interwar period.