The great tax divide | Policy changes are the only way to close the cross-border retail gap with New Hampshire
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% of personal income (6th highest) while New Hampshire has one of the lowest tax burdens at 8.7% 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 — 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 we know occurs up and down the Maine-New Hampshire border. The Maine Heritage Policy Center recently released a new study utilizing comprehensive retail data from the U.S. Census Bureau over the last 60 years to shed more light on the issue.
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 1990s when it reformed its tax code, instituting a consumption tax, called the Business Enterprise Tax, in place of other job-killing taxes.
Overall, we found that retail sales per person 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, when retail sales were nearly equal. By 2007, the retail gap was $8,660 per person — $19,976 in New Hampshire versus $11,316 in Maine.
If Maine had the same level of retail activity as New Hampshire in 2007, 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. That $2.2 billion retail loss is just for 2007. Put another way, for every $1 spent per person in New Hampshire, only 57 cents is spent in Maine.
Of course, with consumers voting with their feet, it is not surprising that retailers have noticed the gap as well. In fact, when we plotted the location of every big-box store along the border (Walmart, Home Depot, Lowe’s and Target) we found a 40-plus mile “retail desert” on the Maine side of the border. In New Hampshire, however, big-box stores were all clustered as close to the border as physically possible.
Overall, these results strongly suggest that Maine’s sales and excise taxes are too high and actually lose money for Maine retailers and government coffers. Put simply, lowering Maine’s sales and excise taxes would likely increase retail sales to the point where greater business performance would increase other tax collections, such as the individual and corporate income tax, which would more than offset the lower sales and excise tax revenue.
Fortunately, in the future, it appears we can expect the retail gap to plateau or even to slightly shrink. The rationale for such an outlook has to do with the dramatic decline in the cigarette tax differential, dropping by more than half, from $14.40 in FY 2007 to $5.09 in FY 2010 — but only thanks to New Hampshire raising its cigarette tax. Additionally, gasoline prices have soared since 2007, which not only discourages long-distance shopping trips, but also mitigates the growing differential in the gas tax.
Nonetheless, only policy changes can ensure that the retail gap does, in fact, recede:
First, and least expensive, is to adjust Maine’s excise tax rates (cigarette, alcohol and gasoline) to New Hampshire’s and eliminate the bottle tax.
Second, the sales tax rate should be lowered to at least 4%, which is the point at which, historically, the retail gap began to significantly widen. Of course, it’s not 1963, when the sales tax rate was last at 4%, and there are far more people living on the border today. As a result, there are many more Mainers able to engage in cross-border shopping.
Finally, the sales tax should be put on a path toward its eventual elimination to permanently end the incentive to cross-border shop. This goal could be accomplished with further sales tax rate reductions and/or the adoption of a more economically efficient consumption tax, similar to New Hampshire’s Business Enterprise Tax, to fund the difference.
Overall, Maine policymakers need to act quickly. Right now New Hampshire legislators are debating a bill to lower their cigarette tax by 10 cents, widening the tax gap to $6.24 per carton. New Hampshire policymakers now realize they may have narrowed the tax gap too far and it is now hurting their retail economy. Maine policymakers need to step up to the plate or else risk falling further behind in the race for economic prosperity.
J. Scott Moody is chief economist at the Maine Heritage Policy Center, and a member of Maine’s Consensus Economic Forecasting Commission. He can be reached at jsmoody@mainepolicy.org. Read more Public Engagement here.
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