The Effect of Sales Tax Rates on Food Exemptions

In this paper I explore the relationship between the sales tax rate and the tax treatment of food in American states. One of the main difficulties in the empirical estimation of this relationship is that state governments set the two tax policy variables. This produces a potential endogeneity problem that would bias the estimates if not considered. I use instrumental variables to solve the problem and to identify the effect of the sales tax rate on the probability of having a food exemption. The empirical results show that, on average, a one percentual point increase in the sales tax rate increases by 20% the probability of having a food exemption