We often look at how tax competition affects nations, but the same concept applies to U.S. states as well. Two recent reports demonstrate what happens when politicians fail to understand just how tax competition works.
In a report from the Maine Heritage Policy Center, we see how New Hampshire’s low retail tax rate is attracting sales being driven away by Maine’s high tax rates.
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…
…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).
…This study strongly suggests that Maine’s sales and excise taxes are on the back-side of the Laffer Curve. 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.
While Maine is seeing an exodus of retail sales, Rhode Island (like many high tax states) is just seeing an exodus, according to the Ocean State Policy Research Institute:
Key findings include:
- Rhodes Island lost a net of 107,086 residents to other states between 1991 and 2009, or about one in ten current residents.
- …Between 1995 and 2007, total net income (in–migration minus out-migration) leaving the state averaged $78,468,000 every year translating into a total loss of over $1 billion. Had this income stayed in Rhode Island, state and local governments would have collected an average of $9,111,000 every year translating into a total loss of over $118,449,000 in additional taxes…
- …People move to states where the weather is warmer, taxes are lower, union membership is lower, population density is lower, and the cost of housing is lower.
- The most significant driver of out-migration is the estate tax, especially considering that the number one destination state for former Rhode Island residents is Florida, a state with no estate tax (or individual income tax).
- Additional analysis also shows a negative post-2004 effect on Rhode Island’s capital income (interest, dividends and capital gains) and high-income taxpayers.
Local and state politicians dreaming of hiking taxes to fund ever growing governments take heed.
