Companies adjust prices to account for VAT increases, but not for VAT decreases.Raising Taxes Leads to Higher Prices, but Lowering Them Leads to Greater Profits
What Happened When a US State Scrapped the ‘Tampon Tax’
- March 23, 2021
- CBR - Economics
Necessities such as food and medicine are largely exempt from sales tax in the United States. But until recently, this dispensation had not been extended to tampons and sanitary napkins. Menstrual hygiene products have historically carried an additional cost burden—the so-called tampon tax, which its opponents say systematically and unfairly penalizes women.
Advocates worldwide have argued that sanitary products are also necessities and shouldn’t be taxed. In response, 13 US states have removed the tax on tampons and sanitary pads. But this action isn’t an efficient way to help women, particularly lower-income women, suggests research by University of Texas PhD student Ziyue Xu.
To study the issue, Xu analyzed scanner data collected by point-of-sale systems from the Nielsen Datasets held at Chicago Booth’s Kilts Center for Marketing, which cover a wide range of products, categories, retail channels, stores, and geographic markets in the US. Focusing on figures from the four largest nationwide retailers, she compared data from Illinois, which rescinded a 6.25 percent levy on menstrual products in 2016, with numbers coming from other states that continued levying the tax.
Xu plotted sales and price trends of menstrual products before the Illinois tax was rescinded, and then compared them with the same trends once the law went into effect, covering a total of two years. She also looked at sales of toilet paper during the same time period “as a kind of placebo or sanity check” to contrast the effects, she explains.
“I went into the study expecting that abolishing the tax would see consumer prices drop a bit and that this would lead to a small increase in purchasing,” says Xu. Instead, in the year after the tampon tax’s repeal, the pretax prices for tampons and sanitary pads each rose 1 percent in Illinois, while sales dropped 1.5 percent and almost 2 percent respectively, she finds.
Xu can’t say for certain why this happened but offers what she sees as a likely explanation: “Companies making and selling tampons and pads expect to see women buying more of these products, as removing the tax makes them cheaper to the end user,” she says. “It could be that they want to maximize value as demand increases by adjusting their prices upward—but not too much.” If companies add 1 percent to the price after a 6.25 percent tax disappears, the net cost to consumers is still less than it was, so the price hike might be unnoticeable.
The decrease in sales, however, is a little harder to unpack. With tampons and pads about 6 percent cheaper overall, demand might have shifted to higher-priced products because of perceptions around quality, Xu says. She suggests that women opted for pricier products that offer more protection, and thus bought slightly fewer tampons and pads overall.
Ultimately, if the goal of removing the tampon tax was to make feminine hygiene goods more accessible to lower-income women in particular, it did not have a strong impact, and policy makers might want to consider alternative approaches such as subsidies and community distribution schemes, she concludes.
“It’s just not that efficient economically,” says Xu. “Getting rid of the tax is having economic repercussions that seem to provide some minimal benefit to retailers and manufacturers, but there’s no evidence to suggest it’s creating more access in those segments of the population where the need is greatest.”
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