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.

Taxes Matter XI: The Amazon Tax and Business Location

Who is that man with all those bags?
Creative Commons License photo credit: Paul-in-London

As if we need more evidence that taxes influence behavior . . . check out this story from the Chicago Sun-Times: “Amazon Directs Business Toward State Not Collecting Online Sales Tax.”

Amazon.com Inc. says it plans to open a fourth Arizona distribution center, giving the state a nod for its hands-off stance on the issue of pressing online retailers to collect sales tax on shoppers’ purchases.

Seattle-based Amazon’s new 1.2-million-square-foot facility, planned to open in an existing building this fall, will join three existing distribution centers on the west side of the Phoenix metro area.

Amazon declined to provide specific figures but said the new facility will add hundreds of jobs, giving the company an Arizona work force of more than 3,000.

As some states facing budget squeezes press for online retailers to collect sales taxes, Amazon is steering business toward states that are not.

Amazon also announced last week that it would open a fourth Indiana distribution center just outside of Indianapolis. Indiana officials four years ago offered not to push the tax issue in recruiting Amazon to the state.

My own research has also found that sales taxes can influence shoppers to not only jump on the internet to buy, but to also jump across state-lines to engage in cross-border shopping in order to avoid the sales tax.

The Great Tax Divide: New Hampshire’s Retail Oasis vs. Maine’s Retail Desert

For those of you who may be wondering why my blog posts have been a bit irregular, you can blame my latest study: “The Great Tax Divide: New Hampshire’s Retail Oasis vs. Maine’s Retail Desert.”  There are two versions of the study, one focused on Maine (published by The Maine Heritage Policy Center) and one focused on New Hampshire. (published by the New Hampshire Center for Economic Policy)

Here is the Executive Summary from the Maine version:

It is well-known that Maine and New Hampshire are polar opposites when it comes to tax policy.  Maine has one of the highest tax burdens in the country at 12.6 percent of personal income (6th highest) while New Hampshire has one of the lowest tax burdens at 8.7 percent of personal income (49th highest).  These 3.9 percentage points represent one of, if not the, largest tax differentials between any two states in the country and is the basis for “The Great Tax Divide.”

The close geographic proximity of the two states leads to numerous arbitrage opportunities for Mainers to escape their significantly higher tax burden.  The most obvious way is through direct cross-border shopping which previous MHPC studies have shown to be occurring up and down the Maine-New Hampshire border.  This study builds on this research by utilizing comprehensive retail data from the U.S. Census Bureau over the last 60 years.

More specifically, Mainers are engaging in cross-border shopping in New Hampshire in response to Maine’s higher sales tax, cigarette tax, gasoline tax, bottle tax and alcohol taxes (beer, wine and liquor).  Additionally, retailing in New Hampshire was given a significant boost in the early 1990’s when they reformed their tax code instituting the Business Enterprise Tax in place of other job-killing taxes.

Overall, Chart 1 shows that per capita retail sales in the adjacent bordering counties in Maine (Oxford and York) and New Hampshire (Coos, Carroll, Strafford and Rockingham) have been diverging ever since Maine adopted the sales tax in 1951.  By 2007, the retail gap was $8,660 per person ($19,976 versus $11,316).  If Maine had the same level of retail activity as New Hampshire, retail sales would have been up to $2.2 billion higher—from $2.9 billion to $5.1 billion—and created thousands of retail jobs.

Chart 1 Per Capita Border County Retail Sales (Maine vs. New Hampshire)

Additionally,the big-box retailers are well aware of this retail sales gap.  The map below shows the placement of the major big-box stores (Walmart, Home Depot, Lowes and Target) along the Maine-New Hampshire border.  Note that there is a 40+ mile “retail desert” on the Maine side while the big-box stores on the New Hampshire side cluster as close to the border as is physically possible.  Think they know something that Maine’s policymakers don’t?

 


View The Great Tax Divide: Maine in a larger map

The Coming Food Tax

Excise taxes violate the most basic principle of taxation–low rate, broad base–since they are purposefully levied on a narrow base and generally with the highest rate possible.  Why?  Generally to “discourage” the activity being taxed.

Take cigarettes for example.  The base is defined as one product and the tax rate, especially over the last decade or so, keeps going up, up and up i the name of “reducing smoking.”  Unfortunately, violating the principles of taxation carry a heavy price.  In the case of cigarettes it can lead to cigarette smuggling and cross-border shopping.

Now, apparently, they want to tax your food . . . I wonder what kind of unintended consequences will come of this?

Hat Tip to International Liberty

Taxes Matter IV — Cigarette Taxes and Smuggling

Michael Lafaive and Todd Nesbit of the Mackinac Center have updated their study on cigarette taxes and smuggling (pdf).  I don’t need to summarize this study because the good folks at Mackinac have already put together a excellent video summary.  This is required viewing for you out there that believe a few cents don’t influence people’s behavior . . . turns out it will drive a man through a brick wall, literally.