The Impact of Sales Tax on Selling Prices

Posted on the 17 July 2015 by Markwadsworth @Mark_Wadsworth

Using the same source for the relative price of goods for all US states (see previous post but one) and this handy table, from The Tax Foundation... we establish that there is no correlation whatsoever between the level of sales taxes (zero in three states, up to 9.46% in Tennessee)*.
Which is what we would expect. By and large, consumers have a lot of choice how to spend their money and whether to spend it or not; each business is set up to produce a fairly constant number of a narrow range of goods.
If demand is more price sensitive than supply, the supplier bears the tax (selling price unchanged and the supplier accepts lower profits per unit); and if supply is more price sensitive than demand, then the consumer bears the tax (prices go up by the amount of the tax).**
We've seen exactly the same with changes in the VAT rate in the UK and other European countries, selling prices remain unchanged, but profits and/or output levels change quite a lot - and nobody has ever produced any data to suggest otherwise. You can pick holes as much as you like, those are just observable and easily explainable facts.
* Actually, the coefficient of correlation between prices and the state average Sales Tax rate comes out as negative 0.16, heck knows how that happened.
** So land is at one extreme end of the spectrum and tobacco is at the other.