On October 1, 2013, Mainers felt the sting of a 10 percent increase in the sales tax to 5.5 percent from 5 percent and 14 percent increase in the Meals and Lodging tax to 8 percent from 7 percent.
It is well-known that Maine and New Hampshire are polar opposites when it comes to tax policy. In Fiscal Year 2011, Maine has one of the highest tax burdens in the country at 18.5 percent of private sector personal income (6th highest) while New Hampshire has one of the lowest tax burdens at 11.4 percent (49th highest). These 7.1 percentage points represent one of, if not the, largest tax differentials between any two states in the country.
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. 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).
Table 1 shows that nationally the Gross Domestic Product for the retail and wholesale industries generates $6,184 for every person in the country in 2013. Maine is significantly below the national average with $5,644 per person (-8.7 percent). On the other hand, New Hampshire is significantly above the national average with $7,141 per person (15.5 percent).
Of course, this trend has been going on for a long time. As shown in Chart 1, New Hampshire’s retail and wholesale industries have outperformed Maine’s in every year between 1997 and 2013. More troubling, the gap between the two states has also been growing over that time-period.
If Maine had the same level of retail and wholesale activity as New Hampshire in 2013, retail sales would have been up to $2 billion higher—from $5.6 billion to $7.1 billion—and created thousands of retail and wholesale jobs. Again, that $2 billion loss is just for 2013. Another way to look at is that for every $1 spent per person in New Hampshire, only $0.79 cents is spent in Maine.
Of course, with consumers voting with their feet, it is not surprising that retailers have noticed as well. In fact, when the location of every big-box store along the border (Walmart, Home Depot, Lowes and Target) are plotted one quickly finds that there is a 40-plus mile “retail desert” on the Maine side of the border. In New Hampshire, however, the 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, more than offsetting the lower sales and excise tax revenue.
Unfortunately, policymakers in Augusta failed to heed the clear evidence of rampant cross-border shopping in New Hampshire and chose instead to raise the sales tax even higher. Such shortsighted policy hurts Maine’s small businesses that are the backbone of the economy.
The only good news for Maine’s beleaguered entrepreneurs is that the sales tax hike is set to expire in less than a year. Let’s hope Maine’s policymakers have learned their lesson and let the sales tax hike expire as planned.