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.

Question 3 in Massachusetts

The Union Leader (UL) ran a story today about the effects of Question 3 in Massachusetts.  Question 3 would reduce the Bay state’s sales tax to 3 percent from 6.25 percent.  The UL story predominantly centered around the reduction in cross-border shopping from Massachusetts to New Hampshire.

However, I’m surprised no one in the story mentioned the real problem with the sales tax–it is a tax on investment.  For instance, a hammer can be used by an individual or a business.  To the individual its consumption, but for the business its an investment.  For more on this issue see this important study by the folks at the Council on State Taxation.

Therefore, a lower sales tax in the Bay state will mean more of their entrepreneurs can stay home rather than jumping over the border.  In fact, the Beacon Hill Institute found (pdf) that Question 3 would increase private sector employment in the Bay state by over 27,000 due, in part, to higher investment.

So, while losing cross-border shoppers will certainly hurt in the short-run; losing cross-border entrepreneurs will hurt New Hampshire a lot more in the long-run.  Regardless of what happens to Question 3, New Hampshire must first-and-foremost remain vigilant against adopting a sales tax.