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Impact of the Sales Tax Rate on its Base: Evidence from a Small Town

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  • John L. Mikesell
  • C. Kurt Zorn

Abstract

Local governments and businesses fear that increased local sales tax rates will induce losses to the local economy, even inducing losses so severe that no additional revenue will result from a higher tax rate. Earlier works by Fisher, Hamovitch, and Mikesell have examined sales loss in metropolitan areas, typically finding significant but not overwhelming effects. Those results do not address the question for small cities and typically are complicated by the expenditure effects resulting from the increased tax revenues. The present analysis uses unique data for a small town to examine the impact of a temporary sales tax rate increase with a retail sales share model. The evidence shows a significant but small sales impact that did not endure (a differential of 1% would lower city sales by 3.07%) and no impact on vendor location. The unfavorable rate differential produced a short-run effect, but not economic disaster.

Suggested Citation

  • John L. Mikesell & C. Kurt Zorn, 1986. "Impact of the Sales Tax Rate on its Base: Evidence from a Small Town," Public Finance Review, , vol. 14(3), pages 329-338, July.
    • Handle: RePEc:sae:pubfin:v:14:y:1986:i:3:p:329-338
    DOI: 10.1177/109114218601400305
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    References listed on IDEAS

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    1. Ronald C. Fisher, 1980. "Local Sales Taxes: Tax Rate Differentials, Sales Loss, and Revenue Estimation," Public Finance Review, , vol. 8(2), pages 171-188, April.
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    Cited by:

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    2. Rogers, Cynthia L., 2004. "Local Option Sales Tax (LOST) Policy on the Urban Fringe," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 34(1), pages 1-24.
    3. repec:wvu:wpaper:05-12 is not listed on IDEAS
    4. Luna, LeAnn & Bruce, Donald J. & Hawkins, Richard R., 2007. "Maxing Out: An Analysis of Local Option Sales Tax Rate Increases," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(1), pages 45-63, March.
    5. Saxon, Nicholas & Tosun, Mehmet S. & Yang, Jingjing, 2015. "State and Local Sales Taxes and Business Activity in the United States," IZA Discussion Papers 9413, Institute of Labor Economics (IZA).

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