Academic journal article Public Finance and Management

Consumers' Behavioral Response to Sales Taxes on Food in Kansas

Academic journal article Public Finance and Management

Consumers' Behavioral Response to Sales Taxes on Food in Kansas

Article excerpt

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The purpose of this study is to estimate the impact of food tax difference on food purchased to consume at home in Kansas counties during 2012 and 2013, especially in counties bordering on other states whose food taxes are lower. This study differs from existing studies in that it uses an alldimensional tax rate difference in which a county's tax rate is compared with those of all counties it shares border with, instead of comparing the tax rate to a single adjacent county. This is because consumers can be mobile in many dimensions; they will choose to purchase food in any jurisdictions adjacent to their home county depending on after-tax price as well as taste and preferences. For Kansas data, this measurement seems to improve the results compared to those derived from the measurement strategy used in other papers. For Kansas counties, we find that after controlling for heteroscedasticity and autocorrelation, the cross border shopping effect due to tax rate differences is larger than found in previous studies. This suggests that in Kansas, the alldimensional tax rate difference indicator can capture the effects of crossborder shopping better than the one-dimension indicator does, revealing a more pronounced effect of tax rate difference across jurisdictions.

As several states have considered cutting their income taxes,1 sales taxes have become the focus of policymakers given that when income tax is cut, states will need to shift their reliance on revenue sources.2 In Kansas, Governor Brownback's administration approved an income tax cut policy in 2013. The cut was across the board and income tax structure changed from four to two brackets, resulting in steady revenue decline from 2013 to 2015. The state's sales tax rate fluctuates; in 2013 it decreased from 6.3% to 6.15% and then increased to 6.5% in 2015, closing the budget gap in the fiscal year 2016.

Since 2013, the state has been struggling to find revenue sources to replace foregone income taxes; two major alternatives have been retail sales taxes (including those on food for at-home consumption - groceries) and sumptuary taxes (primarily on cigarettes). While taxes on groceries are a relatively stable revenue source since demand for food is price inelastic, state and local policymakers should be careful since sales taxes as a whole can fluctuate due to macroeconomic cycles. This situation can hamper long-run revenue growth paths (Hawkins, 2000). Additionally, since consumers can avoid food sales taxes by purchasing groceries in neighboring jurisdictions where taxes are relatively lower, food sales tax rates that are dramatically different than those of neighboring jurisdictions should be avoided. This study investigates this problem using Kansas counties as the unit of analysis.

The state's shift from reliance on income tax to reliance on sales taxes may create challenges to local governments because they tend to rely on sales tax revenue second only to property tax (American Legislative Exchange Council 2015). While local governments need to maintain their spending on public road, safety, and communities' amenities, state sales taxes can short-change local governments' capacity to raise revenue. A state's sale tax rate that is significantly different from that of its neighbors can cause local governments to lose their competitiveness in terms of economic development, which, in turn, defeats the state's reason for cutting income taxes for growth. In Georgia, one of the main obstacles for county governments to adopt local sales taxes is high state sales taxes (Zhao, 2005).

Furthermore, state sales taxes can add inefficiency to local government revenue systems, especially when grocery food is not exempted. Consumers will consider price level to decide where and how much to purchase grocery food, all else being equal. Assuming that before-tax prices for grocery food are similar between two adjacent counties and that travel cost is not high, the county that has a higher tax rate will lose grocery sales volumes and sales tax revenue to the adjacent county. …

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