Another Reason why New Hampshire Should Avoid the Sales Tax

The Kennebec Journal in central Maine is reporting a new plaque for Maine tax officials–a computer program called the “Sales Tax Zapper” designed to avoid Maine’s sales tax:

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.

Of course this cat-and-mouse game between businesses and the Maine Revenue Service also increases tax compliance costs for everyone. Now aren’t you glad New Hampshire doesn’t have a sale tax 🙂

New Hampshire’s Lack of Income Tax Good for In-Migration

A new study by Antony Davies and John Pulito, from the Mercatus Center, find that tax rates do influence the migration of people across state and county lines (pdf). They found that:

This paper explores the relationship between high-income tax rates and the interstate migration of high-income households. Controlling for property-tax rates, sales-tax rates, high-income tax brackets, unemployment, and state/county specific and time-specific effects, we find that higher state income-tax rates cause a net out-migration not only of higher-income residents, but of residents in general. We also find that changes in the income levels to which the tax rates apply similarly affect out-migration. For county-level data, we find that high-income households react to a lowering of income levels to which higher tax rates apply in the same way that they react to increases in the tax rates themselves. This behavior suggests that the tendency to lower the threshold for “high income” or “millionaire” households to capture households and flee to more tax-friendly environs. Finally, for state-level data, we find that the effect of property taxes on migration is significantly stronger than the effect of high-income tax rates on migration. For example, a one percentage point increase in the property-tax differential between two states has almost three times the effect on migration as does a one percentage point increase in the difference in high-income tax rates. All of these data suggest a recipe for population depletion. States lose households to more tax-friendly states by (1) lowering the “high-income” threshold so as to capture more households, (2) increasing high-income tax rates, and (3) increasing property-tax rates.

So New Hampshire’s lack of income tax is a significant driver of the influx of migrants into the state in the past few decades. However, the study indicates that New Hampshire’s relatively high property tax burden may be offsetting some of the benefits of not having an income tax.

However, the study does not examine the migration effects on states with no income tax (or no sales tax), so it is impossible to say exactly how much of the net benefit is eroded by the property tax. Also, a high state-wide average property tax burden does not, obviously, mean that all towns have a high property tax burden. In fact, there are some towns in New Hampshire that are America’s last remaining “Tax Havens” with extremely low or no local property taxes.

New Hampshire’s Low Business Tax Burden

Ernst & Young and the Council On State Taxation (COST) just released their annual study on “Total State and Local Business Taxes” (pdf) which provides a comprehensive look at the business tax climate.  As shown in the chart below,  New Hampshire’s state and local tax burden on businesses as a percent of private sector Gross State Product, for Fiscal Year 2010, was 4.4 percent–the 36th highest in the country.

Also, to better understand the “New Hampshire Advantage,” the chart shows that neighboring Vermont (7.1 percent, rank 4th) and Maine (6.8 percent, rank 5th) have business tax burdens that are significantly higher.  Although New Hampshire’s business tax burden is on par with Massachusetts’ (4.3 percent, 39th).

The study also indicates that the tax burden on businesses has been declining in recent years.  Table 6 on page 11 shows that, between FY 2007 and FY 2010, the tax burden on businesses has declined by $400 million.  Interestingly, most of that decline has come from local property taxes which dropped by $300 million, or 19 percent.