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.

New Hampshire Inches Closer to Right-to-Work

Today the New Hampshire House voted to send the Senate version of the Right-to-Work bill to Gov. Lynch.  The Governor has 5 days to sign it or let it become law without his signature.  However, he has already vowed to veto it.  In which case, it goes back to the Legislature for an override.

This version was already passed by the Senate with a 2/3 majority so I’m guessing that won’t problem in the override process.  However, the House did not pass its own version with a 2/3 majority.  It remains to be seen as to whether or not this particular Bill, which originated in the Senate, would garner more votes in the House than in the last go-around.

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

Per Capita versus Per Household Personal Income

For state-to-state comparisons, per capita personal income is the standard-bearer.  Its simple to calculate and simple to understand; however, as I recently discovered it’s also simply misleading.

Why?  States where the average household is larger are penalized under a per capita ranking  because children don’t earn anything.  I discovered this problem when I noticed what an outlier Utah was in the per capita personal income rankings where Utah ranks as the 49th highest in 2009 at $31,612.  However, Utah also has the largest average household size at 3.23 people.  And there is a large variance among states with the lowest household size belonging to North Dakota at 2.32 people.

As such, failing to hold constant the difference in the size of households rewards states with small households and penalizes states with large household using a per capita personal income metric.  To illustrate, let’s look at Maine versus New Hampshire.

In 2009 per capita terms, Maine ranks as the 30th highest at $36,479 while New Hampshire ranks as the 10th highest at $42,585.  New Hampshire’s per capita personal income is 16.7 percent higher or $6,107 dollars for every man, woman and child.

However, the average household in New Hampshire is larger than it is in Maine.  New Hampshire’s households average 2.62 people (the 24th highest in the country) while Maine’s households average 2.42 people (the 49th highest in the country).

After adjusting personal income by household, New Hampshire ranks as the 14th highest per household personal income at $111,402 while Maine ranks as the 41st highest per household personal income at $88,261.  New Hampshire’s per household personal income is 26 percent higher, or $23,141, than Maine’s . . . adjusting for household size makes a big difference.  Also note that Maine’s relative economic performance falls from 30th under per capita to 41st under per household . . . another big difference.

My take away from this is that per capita personal income is a seriously flawed metric.  A state can, in the short-term, enjoy a bonus to its per capita income by simply having fewer children which shrinks the average household size.  However, as Maine is now discovering there is a long-term price to be paid called Demographic Winter.  Last year the U.S. Census Bureau reported that Maine’s population in 2009 fell for the first time since at least the 1960’s.  Think economic development in Maine is already tough . . . try doing it with a shrinking population base!

I will be posting another blog soon that further illustrates why per household personal income is the better metric.

Fiscal Federalism I: Federal Expenditures

Today, the U.S. Census Bureau released their annual Consolidated Federal Funds Report which tracks federal spending by state.  The vast sums of federal dollars that flow to the states has radically transformed the meaning of “Fiscal Federalism.”  Fiscal Federalism use to mean that most spending decisions were made at the state and local levels.  Now, the role of the federal expenditures in any given state exceeds the influence of spending by state and local governments.  As a result, the federal government has usurped the role of state and local government to decide their own economic destiny.  Is this what the Founding Fathers intended?

The chart below shows the growth in federal spending by major category.  Overall, federal spending increased by 16.1 percent to $3.2 trillion from $2.7 trillion.  However, that growth varied dramatically by state.  The state with the highest percentage change in federal spending was Hawaii with an increase of 64 percent to $24.6 billion from $15 billion.  The state with the lowest percentage change was Kentucky with a decrease of 4.3 percent to $50 billion from $52 billion.  And, of course, its always interesting to see what’s going in Maine and New Hampshire.

This report is full of good stuff so stick with us at Wealth Alchemy as we plumb this data in more detail in the future.

Federal Expenditures by Major Category for 2009