Rules of Thumb and Attention Elasticities: Evidence from Under- and Overreaction to Taxes

This paper tests costly attention models of consumers’ misreaction to opaque taxes. We report an online shopping experiment that involves shrouded sales taxes that are exogenously varied within consumer over time. Some consumers systematically underreact to sales taxes while others systematically overreact, but higher stakes decrease both under- and overreaction. This is consistent with consumers using heterogeneous rules of thumb to compute the opaque tax when the stakes are low, but using costly mental effort at higher stakes. The results allow us to differentiate between various theories of limited attention. We also develop novel econometric techniques for quantifying individual differences.

Shopping for Lower Sales Tax Rates

Using comprehensive high-frequency state and local sales tax data, we show that shopping behavior responds strongly to changes in sales tax rates. Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, consumers adjust in many dimensions. They stock up on storable goods before taxes rise and increase online and cross-border shopping in both the short and long run. The difference between short- and long-run spending responses has important implications for the efficacy of using sales taxes for countercyclical policy and for the design of an optimal tax framework. Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities. We provide additional evidence in favor of this new shopping complementarity mechanism. (JEL E21, E32, G51, H21, H25, H71)

The Disproportionate Sales Tax Compliance Burden on Small- and Medium-Sized Online Businesses After Wayfair

Many states’ sales and use tax provisions, updated in response to the Supreme Court’s decision in South Dakota v. Wayfair, Inc., will likely impose a disproportionate tax compliance burden on small- and medium-sized businesses (SMBs) that engage in e-commerce. Relative to large companies like Amazon and eBay, SMBs cannot absorb the high compliance costs associated with tracking, collecting, and remitting taxes. Wayfair expanded states’ authority to collect sales taxes on companies without a physical presence in the state. But states should wield this power judiciously. While mimicking South Dakota’s statute (upheld as constitutional in Wayfair) may help states avoid litigation, they would better promote the goals of fairness and efficiency by exempting a larger category of small vendors from sales tax obligations. In light of the COVID‑19 pandemic, which has acutely hurt SMBs, reducing sales tax-related compliance burden would also help states provide relief to struggling SMBs. States should (1) clarify which entities are subject to the remote seller and marketplace facilitator statutes and (2) raise the de minimis safe harbor thresholds that shield smaller businesses from having to remit taxes.

SALTy Citizens: Which State and Local Taxes Contribute to State-to-State Migration?

State and local governments depend heavily on revenue generated from state and local taxes (SALTs). Migration between states occurs for many non-tax reasons, but prior research suggests tax-related factors may play an important role. Even so, the specific SALTs motivating state-to-state migration remain unclear given mixed and inconclusive results of prior studies. This study examines state and local tax variables individually and then jointly, and controls for important economic and non-economic factors to determine which SALTs matter to residents when making relocation decisions. Using data collected from multiple sources for 2008 to 2015, results indicate overall state and local tax burden, individual income taxes, select sales taxes, and property taxes are all significantly and negatively associated with taxpayer migration. Further, select sales taxes and property taxes seem to be most significantly associated with migration. We also provide some intuition related to the economic impact associated with net migration.