Taxes Matter 14: Cross-Border Shopping and Liquor

The Portland Press Herald ran an editorial on September 8 stating that lowering Maine’s liquor prices is bad public policy. Their logic: lowering prices is bad because it might encourage more people to drink, which would unleash other social costs.

The problem with that logic is that Mainers already have easy access to cheaper booze: they can simply buy it across the border in New Hampshire.

Cross-border shopping in New Hampshire is a major pastime for Mainers. We all know people who make a regular run to buy liquor, cigarettes or other everyday items in New Hampshire. When Mainers go on out-of-state vacations, they take orders from friends and family for the quick stop at the Portsmouth liquor store on the way home.

Put simply, with a little planning, there is virtually no one in Maine who doesn’t already have access to cheaper liquor in New Hampshire. In fact, as shown in the picture above, New Hampshire even pays you to come buy it. The state offers you a $25 coupon, which more than covers your gas bill to make the trip. As the ad in Down East magazine puts it:

“Explore Endless Summer Savings at your nearest New Hampshire Liquor and Wine Outlet—conveniently located across the state. Offering the best selection of wine and spirits at the lowest prices in America.”

In addition, New Hampshire is running a larger ad campaign, called “Load Up New Hampshire.” The state’s online website, www.loadupnh.com, proclaims:

“NO SALES TAX! Every Day, Every Year!

Substantial savings on all beer, wine, and ales

Up to 30.5 cents savings per gallon of gasoline

No state withholding on lottery ticket winnings

As much as $26.70 savings per carton of cigarettes”

Furthermore, the Portland Press Herald editorial misses a much larger point. Think about this: Why does New Hampshire go through all the trouble of running glitzy ads just to sell liquor? Because it isn’t just about liquor.

They know that once you get to New Hampshire, you’ll stay for other shopping and take advantage of other lower taxes on items such as cigarettes and gasoline—plus, there’s no general sales tax in the “Live Free or Die” state.

Of course, retail stores do this all the time. Take any “Marketing 101” course, and one of the first tactics you’ll learn is how to use targeted sales to lure customers who will stay to buy other goods—often negating their initial savings. From a tax perspective, customers save when buying just about anything in New Hampshire, compared to buying it in Maine.

Add up all of these cross-border shopping trips, and you end up with a very big problem. Recent MHPC research has estimated that Maine is losing up to $2.2 billion in retail sales each and every year to New Hampshire. This has created a 40-mile desert of big-box retailers on the Maine side of the border. At the same time, big-box retailers in New Hampshire locate as closely to the Maine border as possible.

Cross-border shopping also hits state and local government coffers. Higher Maine retail sales would mean greater income, sales and property tax revenue. Higher tax revenue would enable reductions in tax rates, which would fuel more economic growth.

Unfortunately, instead of this virtuous tax cycle, Maine has a vicious tax cycle that drives Mainers to spend their hard-earned money elsewhere.

Equalizing Maine’s liquor prices would be an important first step toward taking back our economy. Without the savings from liquor, the overall incentive to shop in New Hampshire is greatly reduced, especially with today’s high gasoline prices.

At some point, Maine’s policymakers have to come to the realization that Maine’s tax policy must become competitive in at least one area. Why not start with liquor?

But wait there’s more, the Union Leader is reporting that New Hampshire’s liquor sales are soaring:

Retail sales at New Hampshire Liquor & Wine Outlets since July 1 are up $9.8 million year-to-date, an increase of 9.4 percent over the previous fiscal year.

Spirit sales increased 9.5 percent and wine sales increased 9.3 percent, according to the New Hampshire Liquor Commission.

The commission said it is seeing continued growth at new and recently relocated stores across the state. Seven state liquor stores have been relocated over the past two years as part of a goal to update them statewide. Collectively, those stores experienced $7.9 million in growth in fiscal year 2012, which ended June 30, the commission reported.

This story originated as an editorial for The Maine Wire.

Tax Fraud by Illegal Immigrants Costs Uncle Sam $4.2 Billion

Chart Showing The Amount of Tax Fraud for the Additional Child Tax Credit has Grown Tremendously

This story clearly falls into the category: “you just can’t make this stuff up.” First, who knew that illegal immigrants in America could even file a tax return, but they can and do. Even though they don’t have a Social Security number, they can get an Individual Taxpayer Identification Number (ITIN). The ITIN was created because everyone in the U.S., legal or not, is required to pay federal income taxes.

Of course, the whole idea that an illegal immigrant would go through the trouble of obtaining an ITIN just to pay Uncle Sam is ludicrous–and only exists in a bureaucrat’s dream. However, they would go through the trouble if they discovered that they could get Uncle Sam to pay them. And that’s exactly what has happened.

Some enterprising tax accountant, perhaps illegal, discovered that the “Additional Child Tax Credit” (ACTC) could be paid through an ITIN. The ACTC is the refundable portion of the child tax credit which is currently worth $1,000 per child. So, let’s say a taxpayer has a tax liability of $2,000, but has three children yielding a child tax credit worth $3,000 . . . that taxpayer would receive a refund of $1,000 since the child tax credit exceeds their tax liability by $1,000 ($3,000 minus $2,000).

The Treasury Inspector General for Tax Administration recently looked into this problem in a report titled “Individuals Who Are Not Authorized to Work in the United States Were Paid $4.2 Billion in Refundable Credits” (pdf) As you can see in the chart above, this ACTC fraud has been exploding. In 2010, over 3 million ITINs claimed $4.2 billion in ACTC payments.

But wait, there’s more . . . according to the report:

The payment of Federal funds through this tax benefit appears to provide an additional incentive for aliens to enter, reside, and work in the United States without authorization, which contradicts Federal law and policy to remove such incentives.

HHHmmm, so Uncle Sam’s left hand doesn’t know what his right hand is doing.

OK, let’s put this $4.2 billion into perspective. According to state data published by the IRS, in 2009, New Hampshire paid $4.5 billion in income taxes to Uncle Sam. Now imagine if a foreign power sailed to our shores and stole New Hampshire’s entire booty meant for Uncle Sam. In such a case, Uncle Sam would have declared war on that foreign power. Yet, such thievery is happening everyday via illegal immigrants and Uncle Sam does nothing.

Of course, I could have inserted a great many other states, even multiple states, other than New Hampshire such as: Alaska ($2.7 billion), Delaware ($2.7 billion), Washington, D.C. ($3.6 billion), Hawaii ($3.7 billion), Idaho ($2.9 billion), Maine ($3.1 billion), Montana ($2.3 billion), North Dakota ($2 billion), Rhode Island ($3.2 billion), South Dakota ($2.3 billion), Vermont ($1.7 billion), West Virginia ($3.7 billion), and Wyoming ($2.1 billion).

Additionally, in FY 2010, the ACTC cost $22.7 billion so $4.2 billion in fraud represents 19 percent of all ACTC payments . . . how many private businesses would still be in business if 19 percent of vendor payments were fraudulent?!

Also, being an economist, I found this passage particularly funny:

Another reason for the increase is that a significant number of individuals are filing multiple claims to obtain the ACTC for prior year tax returns (e.g., filing Tax Years 2007, 2008, and 2009 returns at the same time).  In Processing Year 2010, approximately 238,000 ITIN filers submitted more than 608,000 tax returns for multiple years at the same time and claimed just more than a billion dollars in ACTCs on those returns.  The ACTC claims for these individuals for the combined tax periods can be substantial . . . Moreover, in our analysis of returns filed in Processing Year 2010, some individuals had submitted duplicate tax returns for multiple years to multiple IRS processing centers and received ACTC refunds.

I guess incentives really do matter 🙂

Finally, I couldn’t get this video to embed, but if you have 6 minutes or so the video shows an investigative report titled “IRS Tax Loophole” that tells the story of a tax accountant who is blowing the whistle on this fraud.

Welfare Spending by State

The U.S. Census Bureau recently released a report on welfare by state called the “Public Assistance Receipt in the Past 12 Months for Households: 2009 and 2010” (pdf) More specifically:

Public assistance income provides cash payments to poor families and includes General Assistance and Temporary Assistance to Needy Families (TANF), which replaced Aid to Families with Dependent Children (AFDC) in 1997. Public assistance income does not include Supplemental Security Income (SSI), noncash benefits such as Food Stamps/SNAP, or separate payments received for hospital or other medical care. To qualify for public assistance benefits, the income and assets of an individual or family must fall below specified thresholds. However, unlike AFDC benefits, TANF benefits are time-limited, require most adult recipients to work, and give states increased flexibility in program design.

The top welfare providing states, aka, “hammock” states, are Maine, Vermont, Michigan, Alaska, Washington and California.

On the flip side, the least welfare providing states are Texas (Gov. Perry anyone?), Wyoming, Arkansas, Louisiana, Alabama, Georgia, South Carolina and Virginia.

Check out the map below to see where  your state falls on the “hammock” scale . . .

 Map Showing Percentage Receiving Public Assistance for Households by States 2010

Fiscal Federalism 14: Federal Expenditures by State

Today the U.S. Census Bureau released the latest Consolidated Federal Funds Reports (CFFR) for Fiscal Year 2010. The CFFR is the most comprehensive analysis of federal spending by state available. A few weeks ago I blogged on Federal Aid to the States which is one of many components included in the CFFR.

Overall, the major moocher states off of Uncle Sam include Massachusetts, Connecticut, Virginia, Maryland, Kentucky, North Dakota and New Mexico with per capita federal spending topping over $12,000. On the flip side, the states that receive the least (ranging from $0 to $8,999 per person) from Uncle Sam include New Hampshire (Yes!), Texas (Gov. Perry anyone?), Illinois, Minnesota, Utah, Nevada, Oregon and California.

Check out the map below to see where your state falls on the moocher scale . . .

Chart Showing Per Capita Federal Expenditures by State for Fiscal Year 2010

State Debt Loads are Soaring

We all know that Uncle Sam is drowning in red ink–if you need a humorous reminder check out Remy’s “Raise the Debt Ceiling.” Well, it turns out that states are not in much better shape. According to a new study by Harvard Economist Jeffrey Miron, for the Mercatus Center, states will reach dangerous debt levels in 20 to 30 years. From the study “The Fiscal Health of the U.S. States” (pdf):

This paper examines the fiscal health of the 50 U.S. states and reaches five conclusions. First, state government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound. Second, the key driver of increasing state and local expenditures is heath-care costs, especially Medicaid and subsidies for health-insurance exchanges under the Patient Protection and Affordable Care Act of 2009. Third, states have large implicit debts for unfunded pension liabilities, making their net debt positions substantially worse than official debt statistics indicate. Fourth, if spending trends continue and tax revenues remain near their historical levels relative to output, most states will reach dangerous ratios of debt to GDP within 20 to 30 years. Fifth, states differ in their degrees of fiscal imbalance, but the overriding fact is that all states face fiscal meltdown in the foreseeable future.

Check out this video to see when your state reaches the danger zone.

Hat tip to Matt Mitchell at Neighborhood Effects