by Thomas Stratmann, Andreea Militaru, Rachel Reese
August 21, 2014
State and local governments often turn to increases in sales taxes to generate added revenue. Estimates of fresh revenue from the higher tax tend to be overly optimistic, partly because the number of sales tax exemptions tends to rise with the rising tax rate. Given the fact that politicians seek to raise a certain amount of revenue and wish to maximize their chance of re-election, this relationship suggests that politicians face a trade-off when seeking votes from groups that favor sales tax decreases and groups that lobby for certain tax exemptions. Assuming that higher tax rates increase the incentive to lobby for tax exemptions, agencies that estimate the effects of sales tax increases should take into account the expected increase in tax exemptions as well. Ultimately, the link between sales taxes and sales tax exemptions serves to undermine the certainty of generating additional revenue by increasing sales taxes.