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.

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

Tax Freedom Day 2011

US Capitol Building
Creative Commons License photo credit: bclinesmith

Today the Tax Foundation released their 2011 edition of Tax Freedom Day.  Unfortunately, America’s taxpayers will have to wait another 13 days to celebrate Tax Freedom Day which falls on April 12.  Additionally, the study goes on to note the role that the enormous federal deficit plays in Tax Freedom Day.  The measure does not include include the deficit because that money comes from borrowing rather than taxation.  Yet, had taxes been raised to cover the deficit then, nationally, Tax Freedom Day would have arrived 41 days later on May 23.  Ugh!

In the meantime, Congress is bickering over whether to cut the budget by $60 billion or $30 billion.  Really?!

Taxes Matter X: Vermont Edition

New England 2010 008
Creative Commons License photo credit: mrlaugh

Vermont’s Gov. Peter Shumlin (D) admits to Politico.com that their tax system in uncompetitive vis-a-vis New Hampshire.

Vermont Gov. Peter Shumlin, a Democrat with a unified legislature, is rejecting calls from within his party to raise taxes. And he has a Sarah Palin joke to explain why.

“My problem is, on the eastern side of me, I’ve got the state of New Hampshire,” he told POLITICO. “Sarah Palin said that she could do foreign policy because she could see Russia from her house. Well, I’m the first governor in 40 years that can see New Hampshire from my house. So I can do tax policy. And I can tell you, we’ve got no more capacity. They’re killing us.”

New Hampshire has no sales tax and no income tax.

Vermont has a 6 percent sales tax and, at the top tier, a 9 percent income tax. The result has been a long period of stagnation for the Green Mountain State.

“We’ve already got a progressive income tax in Vermont, and we can’t get more progressive because we’ll lose the few payers that we have,” Shumlin said in between sessions at the National Governors Association meeting. “We don’t have any more tax capacity.”

Is it Really Just the Flat Tax versus the Fair Tax (Sales Tax)?

Dan Mitchell, with the CATO Institute, provides some reasons why he prefers the Flat Tax over the Fair Tax (sales tax) in this video:

Unfortunately, the Fair tax has one glaring weakness in that a broad-based sales tax inevitably leads to tax pyramiding–the taxation of business-to-business transactions.  Pyramiding leads to all kinds of distortions in the marketplace.  Finding solutions to pyramiding either requires shrinking the tax base–and raising the rate–or dramatically increasing tax compliance costs.

While I am a big fan of the flat tax (and have also written papers about it in the distant past), there is a third-way out there which I have discussed previously.  A little known tax in New Hampshire called the Business Enterprise Tax.  It is much like the flat tax, but I would argue it is a little less complicated for businesses.

For businesses the flat tax works on a subtractive principle (start with receipts and subtract expenses) while the BET works on an additive principle (salaries and wages, interest and dividends).  While New Hampshire does not have a personal component like the flat tax, there is no reason why you couldn’t have one to compliment the business-side tax–that is for any other state but New Hampshire. 🙂