Board of Governors of the Federal Reserve System

June 2013

The Effect of State and Local Sales Taxes on Employment at State Borders

Jeffrey P. Thompson and Shawn M. Rohlin

Abstract:

This paper estimates the effect of sales taxes on employment at state borders using county-level quarterly data and a newly developed data set of local tax rates. Sales tax increases, relative to cross-border neighbors, lead to losses of employment, as well as payroll and hiring, but these effects are only found in counties with large shares of residents working in another state. The effects also represent an upper-bound, largely driven by employment shifting across the state border. We also find that employment in food and beverage stores is negatively affected when cross-border neighbors adopt low sales tax rates on food.

Keywords: Sales tax, local taxes, border models, cross-border shopping

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