Taxes Matter 13: Maine’s Sales Tax, Tax Zappers and the Laffer Curve, Oh My!

Old Cash Register 2
Creative Commons License photo credit: OhMyGouda in Florida

I just posted this on The Maine Heritage Policy Center’s blog (Maine Freedom Forum), but I also wanted to share this with Wealth Alchemy’s audience because so many of you will likely be seeing this debate coming soon to your own state.

Also, we all need to realize that the retail sales tax is one of the worst taxes out there and is simply on its last legs–all states should be working to eliminate it. The better alternative would be to enact a Business Enterprise Tax as New Hampshire has done which is also one reason why New Hampshire has one of the lowest business tax burdens in the country. Read on . . .

Today the Kennebec Journal has a story about the rise of sales tax zapper computer programs that enable businesses to under-report their taxable sales and lower their sales tax bill. Of course, the article casts Maine’s state government as the victim of unscrupulous business owners:

But some lawmakers are concerned the state may be losing significant revenue from the latest computer technology, called “zappers” because they alter sales records in a more subtle way that still yields a lot of cash for the seller.

“It’s clearly subversive and against our process of treating people fairly, equitably and everyone paying their fair share of the tax burden,” said Rep. Garry Knight, R-Livermore Falls, co-chairman of the Legislature’s Taxation Committee. “I would suggest that zappers be outlawed in this state.”

He said his panel has not looked at the expanding use of technology to cheat on tax laws, but he said if it is happening in other states, Maine should assume some is happening here.

With a zapper program, a $6 burger-and-fries combo at a restaurant, for example, could be altered by the software to reflect a $4 burger sale. In Maine, that would mean 14 cents going to the restaurant owner that should be paid in taxes. In other states, that has added up to a lot of lost revenue.

A retailer can have the program change the sales price of an item. For example, a $20 shirt is reported as selling for $18. In Maine, that’s a loss of a dime; but all of those nickels, dimes and pennies add up.

A retailer can have the program change the sales price of an item. For example, a $20 shirt is reported as selling for $18. In Maine, that’s a loss of a dime; but all of those nickels, dimes and pennies add up.

“Tax evasion is something that we always should take seriously,” said Rep. Seth Berry, D-Bowdoinham, the lead Democrat on the Taxation Committee. “Zappers are something that Maine Revenue Services is not able to track. It is a very difficult enforcement problem.”

He said Maine should watch what other states are doing and consider adopting policies and laws that seem to work the best. He agreed Maine may want to outlaw the computer programs, although he is not sure how effective that may be.

As usual, policymakers are simply treating this as a tax compliance issue when, in reality, this zapper issue is a symptom of a much larger problem–Maine’s sales tax is suffocating the state’s retailers. A few month’s ago I released a study which showed that Maine is annually losing an estimated $2.2 billion in retail sales to New Hampshire thanks to tax-fueled cross-border shopping by Mainers. Lowering the sales tax would encourage more Mainers to stay home to do their shopping. As a result, Maine’s retailers would not be struggling quite as much as they are now and having to resort to desperate measures such as sales tax avoidance.

In fact, the analysis suggests that Maine sales rate of 5 percent is very likely on the back-side of the Laffer curve. In other words, a lower sales tax rate would generate more economic growth and higher tax collections from other taxes, such as income taxes, the remaining sales tax, property taxes, etc., that it would offset the lower sales tax collections stemming from the tax rate reduction. It’s the closest thing to a “free lunch” that one can get in tax policy. Yet, policymakers have just left the sandwich on the table.

No, the real victims here are Maine’s businesses who have historically been treated by policymakers as a “money pinata.” Now, on top of the sorry economy, Maine businesses, especially smaller businesses, will have to live in fear that the next knock on their door will be an agent from the Maine Revenue Service as they attempt to crack down on these sales tax zappers. This will be an added tax compliance cost for all businesses which is especially onerous and demeaning to the overwhelming majority who play-by-the-rules.

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.” 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.

America’s Tax Haven–No Income, Sales or Property Taxes

No New Taxes!

Yes, you read that right, there are only a few small areas left in the U.S. where you can enjoy no state or local income taxes, state or local sales taxes and no local property taxes . . . can you guess where?  New Hampshire, of course! 🙂

First, the list gets really small quickly when you consider only two states have no state-level income or sales tax–Alaska and New Hampshire.  However, Alaska allows localities to levy their own sales tax (known as a local option sales tax).  According to the Tax Foundation’s State Business Tax Climate Index (pdf), the weighted-average of Alaska’s local sales tax yields an equivalent state-wide rate of 1.11 percent.

So that leaves New Hampshire in the no state or local income and sales tax pole position.  But wait there’s more . . . there are areas of New Hampshire where there are no local property taxes.  You can see from this data from the New Hampshire Center for Economic Policy that there are 19 unincorporated areas with a property tax mill rate of zero–I’ve also plotted them into a Google map below (you may need to zoom out).

There are also other areas that are unincorporated and have a close to zero property tax mill rate.  The most famous is probably Hale’s Location where they tout the “Hale’s Location Country Club Estate: Lakefront to Mountain side and all the fairways in between!” The 2010 property tax mill rate in Hale’s Location was only 3.04.  And there are 10 other places with single digit mill rates.

Of course, there is a catch.  Many of these places are remote and/or mountainous with few people.  Neither homes nor land come up for sale very every often and when they do they command a price premium.  Yet, there may be hope to snag some property as one of my favorite places, Millsfield, New Hampshire (adjacent to the amazing Balsams resort) which has a mill rate of zero, has this property for sale–400 acres for $1 million.  Surely there is a developer out there waiting to create the next Hale’s Location Country Club Estate.  Anyone?

Finally, recent developments in New Hampshire have resulted in the enactment of a state-wide property tax stemming from a ruling by the State Supreme Court on education funding–really it’s a back-door plot to getting an income or sales tax, but I digress.  The rate in 2010 was set at 2.19 mills, so it’s not too onerous.  This is the only thing preventing a full sweep of the big three taxes in these locations.

View New Hampshire Tax Havens in a larger map

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

Taxes Matter IX: U.S. Effective Corporate Tax Rate on Par with Uzbekistan

Kukeldash Madrassa, Tashkent
Creative Commons License photo credit: upyernoz

A distressing new study by well-respected Canadian tax economist–Duanjie Chen and Jack Mintz–for CATO found that the effective U.S. Corporate Tax was 34.6 percent in 2010 (pdf).  The U.S. corporate rate is the 4th highest among all OECD countries and on par with Uzbekistan (34.9 percent).  That’s what it says . . . Uzbekistan!

Also, I’m glad to see them recognize the destructiveness of state sales taxes:

State governments also play an important role in business tax policy. Unfortunately, the average state corporate tax rate has not been cut in at least three decades, despite major reductions around the world since then. Furthermore, state retail sales taxes impose substantial burdens on capital purchases, which undermines investment and productivity. Thus, sales taxes should be reformed to remove taxation on business inputs.

This may seem to be a minor point, but there is a clear movement among state-based policymakers that it is OK tax reform to raise sales taxes and cut other taxes.  I disagree and did so time and time again in the recent debate over reforming Maine’s tax system which included a cut in the income tax rate in exchange for a broader sales tax base.  I argued that the sales tax is a job-killer. (pdf)

While cutting the federal corporate income tax rate may seem like a distant dream because of high budget deficit, state can get in on the game by reducing their own corporate income tax rate and/or sales tax rate.  The benefits of doing so are very large.

A growing number of policymakers are recognizing that the U.S. corporate tax system is a major barrier to economic growth. The aim of corporate tax reforms should be to create a system that has a competitive rate and is neutral between different business activities. A sharp reduction to the federal corporate rate of 10 percentage points or more combined with tax base reforms would help generate higher growth and ultimately more jobs and income. Such reforms would likely lose the government little, if any, revenue over the long run.