Price elasticities in consumer sales tax revenue

If demand follows prices, income, and household characteristics, taxable sp ending by consumers also follows these variables, and a unique sales tax re venue elasticity should exist for each demand determinant. In this article, the author investigates whether price elasticities exist and how exemption s affect the price responses that should appear in consumer sales tax reven ue. Consistent with microeconomic theory the estimates in this study indica te that individual prices matter only when states exempt a large share of c onsumer purchases. For services, food, and residential utility exemptions, consumer price responses can affect revenue cycles. Within a revenue cycle, the pro-cyclical or countercyclical effect will depend on the relative pri ce changes and the sales tar structure.