Abstract

Retailers often price items at $9.99 rather than $10.00. They may do so to fool consumers into viewing the price as closer to $9.00 than to $10.00, or to signal consumers that the product is on sale (e.g., Stiving and Winer, 1997). Similarly, workers highly desire a six-figure income-a salary of $100,000 sounds much more impressive than a salary of $99,999. 

This paper explores related behavior by government. Suppose legislators attempt to reduce the salience of increases in the gasoline tax by avoiding moving gasoline taxes into double digits, and suppose that once taxes are moved beyond the double-digit threshold, legislators might as well raise them a little more than just the threshold increment to compensate for the increased visibility they have incurred. Two patterns might result: relatively few states imposing a tax of exactly 10 cents, and a more general avoidance of double-digit taxes. The data confirm this pattern. 

Such attention to nominal values can lead to peculiarities. Consider the following thought experiment. A state is observed to impose a tax of 8 cents on a gallon of gasoline. But were it forced to specify the tax as so many cents per quart, it would impose a tax not of 2 cents per quart, but of 3 cents per quart. Were such behavior common, then to explain the level of taxes it would be necessary to consider not only the usual economic and political explanations, but also the nominal value of taxes. 

In the following we present two different ways of testing for the importance of nominal values. Our focus is on gasoline taxes in the different states in the United States. Such taxes are both substantively important, and well suited for study since much data are available on them.