Higher local sale tax leads to more local retail activity

Many US states are currently tempted to increase sales taxes in order to overcome revenue short falls. While they should really be thinking about introducing a value-added tax instead, in the short run it is useful to study what the consequences of such a tax increase would be, not just on revenue, but also on economic activity and its composition.

Daria Burnes, David Neumark and Michelle White study the impact of higher sales taxes on retail employment at the local level. You think that higher taxes lead retailers to flee, but one should not forget that local authorities have other tools, in particular zoning. They find that in fact that locations with higher sales taxes have more retail employment, and that is because authorities than make greater efforts to attract big retail outlets. The downside is that manufacturing employment is getting crowded out by these efforts.