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.

Income Tax Consequences of Winning the 2012 HGTV Urban Oasis in Miami, Florida

Picture of 2012 HGTV Urban Oasis in Miami, Florida

Note: To see analysis of the most recent HGTV home giveaways, please visit my new website Key Policy Data.

This year’s HGTV 2012 Urban Oasis Giveaway is in Miami, Florida. According to the HGTV contest rules, it comes with a home and furnishings valued at $900,000–interesting, this home does not come with any cash as the recent 2012 HGTV Green Home Giveaway did ($100,000 worth).

Of course, the cash would have come in hand because if you win the dream home, be prepared for a hefty federal and state income tax bill (this analysis excludes the myriad of other taxes such as any deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture).

Fortunately, thanks to the benefits of tax competition between the 50 states, there is no personal income tax in Florida . . . maybe that’s why they didn’t include any cash in the prize? For instance, the 2012 diy Blog Cabin Coastal Retreat is in high-tax Maine and the state income tax increased the total tax bill by 27 percent.

Nonetheless, the federal income tax bill alone comes to a whopping $274,900. If you plan on keeping the home, best be prepared to take out a home-equity loan to pay Uncle Sam.

Fortunately, HGTV does provide an escape hatch by offering $750,000 in lieu of taking possession of the home. If the winner opts for this choice, they will take home $527,701 free-and-clear after paying income taxes of $222,400.

My suggestion would be take this money and run. One could outright buy a very, very nice home with the cash and have zero debt. You could certainly buy that other home in Florida which is a pretty low-tax state. However, in Florida you would still have to deal with a sales and property tax. On the other hand, there are a handful of America’s tax havens left (all in New Hampshire) where there are no state and local income or sales taxes and very low (in some case no) property taxes.

Income Tax Consequences of Winning the diy Blog Cabin 2012 Coastal Retreat in Waldoboro, Maine

Picture of diy 2012 Blog Cabin Coastal Retreat in Waldobor, Maine

Note: To see analysis of the most recent HGTV home giveaways, please visit my new website Key Policy Data.

Maine is world famous for its lobster, coastline and lighthouses. However, Maine is also infamous for its high tax burden.

Unfortunately, its not just the location of the 2012 diy Blog Cabin Coastal Retreat in Waldoboro,  Maine that will create tax sticker shock for the winner. The rules of this contest leave the winner few alternatives other than to suck-it-up and pay the tax man or sell the home (and still pay the tax man).  From the rules:

Real estate transfer taxes, deed recording charges and closing costs, if not the obligation of the Developer pursuant to an agreement with DIY (the “Home Contract”) to acquire the home, shall be the sole responsibility of the Grand Prize Winner, as will all future real estate taxes and other expenses related to the maintenance of the house. Title insurance and homeowner’s hazard and liability insurance shall be the sole responsibility of the Grand Prize Winner. Condition of title to home shall otherwise be as set forth in the Home Contract.

Total ARV of the Grand Prize is $699,500

All costs, taxes, fees, and expenses associated with any element of a prize not specifically addressed above are the sole responsibility of the Grand Prize Winner. All federal, state and local taxes on prize are the Grand Prize Winner’s responsibility. The Grand Prize Winner will be issued a 1099 tax form for the ARV of the Grand Prize.

Overall, the federal and state income tax bill comes to a whopping $260,827 (this analysis excludes the myriad of other taxes such as any deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture).

It is too bad the contest is not being held in 2013 because Maine’s top personal income tax rate will drop from 8.5 percent o 7.95 percent which would save the winner some serious coin.

And unlike previous contests, such as the HGTV 2012 Green Home Giveaway or the HGTV 2012 Dream Home Giveaway, there is no escape clause that will let you take cash in lieu of the home. So you are stuck with the home and the tax man . . . have fun!

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.

HGTV Green Home in Serenbe, Georgia will Cost Lots of Green–for Taxes that is!

Picture of HGTV Green Home in Serenbe, Georgia

Note: To see analysis of the most recent HGTV home giveaways, please visit my new website Key Policy Data.

This year’s HGTV 2012 Green Home Giveaway is in Serenbe, Georgia. According to the HGTV contest rules, it comes with a home and furnishings (valued at $650,000), cash ($100,000) and a 2012 GMC Terrain SLT2 ($38,535) for a grand package valued at a cool $788,535–though not quite up to par to the $2,038,755 value of the HGTV Dream Home in Utah.

If you win the dream home, be prepared for a hefty federal and state income tax bill (this analysis excludes the myriad of other taxes such as any deed or transfer taxes and, most especially, the property tax which you pay year, after year, after year . . . well, you get the picture).

Overall, the federal and state income tax bill comes to a whopping $282,807 (note: actual federal income tax will be slightly less once inflation adjustments are taken into account but that won’t be updated until later this year). Even after using the $100,000 in cash, you will still be left with a tax bill of $182,807 . . . maybe the IRS will let you pay on an installment plan?

Fortunately, HGTV does provide an escape hatch by offering $400,000 in lieu of taking possession of the home, plus the $100,000 in cash and vehicle–for a grand total of $538,535. If the winner opts for this choice, they will take home $358,228 free-and-clear after paying income taxes of $180,307.

My suggestion would be take this money and run. One could outright buy a very, very nice home with the cash. For example, check out this home in beautiful Hale’s Location, New Hampshire listed for $429,000 (a cash offer might get that down to $358,000 in today’s weak real estate market). Hale’s Location is one of a handful of America’s tax havens left (all in New Hampshire) where there are no state and local income or sales taxes and very low (in some case no) property taxes. In fact, according to the listing, the property taxes are a mere $1,495 per year.