Connecticut Raises Sales Tax . . . Helping New Hampshire’s Economy

Bloomberg is reporting that Connecticut just raised taxes by $2.6 billion.  Why does this matter to New Hampshire?  Part of the tax increase includes raising the sales tax . . .

It boosts the retail-sales levy to 6.35 percent from 6 percent while broadening it to cover previously exempt goods and services. The rate becomes 7 percent on “luxuries” such as $1,000-plus clothing and boats above $100,000.

Since New Hampshire is the closest state to Connecticut without a sales tax, this will surely mean that more folks from the Nutmeg state will be shopping here more often (or spend more when they do)–just as Maine residents do already.

It would also help if New Hampshire’s policymakers dropped the cigarette tax rate since Connecticut’s cigarette tax is at $3 per pack (the second highest in the country).  Also, Connecticut’s sales tax is applied to the price of cigarettes which means their increase in the sales tax rate also increases the total tax burden on cigarettes.

Overall, this is bad news for Connecticut taxpayers but good news for New Hampshire retailers.

New Hampshire Needs to Lower the Cigarette Tax to Preserve Retail Competiveness

The Union Leader has an editorial today arguing that New Hampshire’s $1.78 per pack cigarette tax rate is too high.  However, the editorial does not really touch on the cross-border shopping angle.  As we found recently, New Hampshire’s economy is a retail mecca for out-of-state shoppers.  More specifically, in 2007, New Hampshire’s economy benefits from an additional $2.2 billion in sales thanks to Maine cross-border shoppers adding thousands of jobs to the economy.

New Hampshire’s cigarette tax back in 2007 was very favorable relative to Maine’s with a tax differential of $14.40 per carton (includes sales tax in Maine) . . . now, not so much with a tax differential of only $5.19 per carton.  Cutting the cigarette tax rate by 10 cents, as currently proposed in the Legislature, would help ensure New Hampshire keeps its retail competitiveness–the tax differential between Maine and New Hampshire would climb to $6.24 per carton.

Cigarette Taxes and Smuggling in New Hampshire

Michael Lafaive and Todd Nesbit of the Mackinac Center have updated their study on cigarette taxes and smuggling (pdf).  I don’t need to summarize this study because the good folks at Mackinac have already put together a excellent video summary.  This is required viewing for you out there that believe a few cents don’t influence people’s behavior . . . turns out it will drive a man through a brick wall, literally.

Additionally, since New Hampshire has more than tripled the cigarette tax to $1.78 per pack from $0.52 only five years ago, the study does not yet fully reflect the impact of these tax hikes.  For instance, it was recently reported that cigarette sales in Maine are up 5 percent in the first half of 2010:

With New Hampshire no longer the land of cheap cigarettes, more Mainers may be buying their smokes at home rather than venturing across the border, said Mike Allen, research director with Maine Revenue Services.

“We talked to some of the wholesalers and they indicated they were seeing a shift in their sales from New Hampshire stores along the border to Maine stores along the border,” Allen said. “That reinforced for us a little bit that that may be what’s going on.”

As such, with higher cigarette taxes, New Hampshire can expect commercial smuggling into the state to increase while casual and international smuggling to decrease.  Not only will this reduce cigarette tax revenue, it will mean lower business taxes across-the-board as stores and their supplies see reduced sales.  In the long-run, the overall impact may cost New Hampshire more in lost business taxes than was raised in the higher cigarette tax . . . wonder if we’ll ever see a study like that?