Maine lawmakers are considering another round of tobacco tax hikes, a move that likely would increase business and tax revenue in neighboring New Hampshire, where taxes are lower, according to a report issued in March by The Maine Heritage Policy Center.
“Policymakers must recognize that there will be a market reaction to any new tobacco tax increase,” said J. Scott Moody, author of the report, titled “Smoke and Borders: How tobacco tax increases promote cross-border shopping,” released March 6.
“Cross-border shopping will result in less-than-projected tax revenues and lower sales for Maine retailers,” Moody said in an interview for this article.
Moody’s report analyzes the phenomenon of cross-border shopping for cigarettes, which occurs when an individual from one state travels to another to avoid paying a state tax on an item. With cigarettes, cross-border shopping happens nationally, as tobacco taxes vary widely from state to state.
New Hampshire’s Draw
In New England, according to Moody, New Hampshire benefits greatly from cross-border shopping for cigarettes. New Hampshire’s cigarette tax rate (80 cents per pack) is significantly lower than the rates in Maine ($2 per pack), Massachusetts ($1.51), and Vermont ($1.19).
Despite having a cigarette tax that is $1.20 per pack lower than in Maine, and nearly the same population and smoking rates as Maine, New Hampshire raised almost as much revenue as Maine did from cigarette taxes in FY 2006 ($138 million versus $153 million).
Border Counties Hit Hard
Moody analyzed proprietary data provided by Big Apple/CN Brown convenience stores in Oxford and York Counties, which border New Hampshire. Average cigarette sales fell by 9.9 percent in Oxford County and 7.1 percent in York County after Maine hiked cigarette taxes $1 a pack at the start of Fiscal Year 2006.
At the same time, sales rose in their New Hampshire stores by an average of 7.8 percent.
“The data clearly show that as tobacco taxes increase, so does the amount of cross-border shopping to avoid the tax increases,” said Moody.
Revenue Estimates Questionable
Maine Gov. John Baldacci (D) nevertheless is projecting $66 million in new revenue from dramatic hikes in tobacco taxes, including a 50 percent increase in the cigarette tax (to $3 per pack from $2 per pack) starting in state fiscal year 2008.
Baldacci also proposes raising the tax on “smokeless tobacco” 50 percent (to 117 percent of the wholesale price, up from 78 percent). Taxes on other tobacco products such as cigars and pipe tobacco would increase 50 percent (to 30 percent of the wholesale price, from 20 percent).
Jason Fortin ([email protected]) is director of communications/projects manager at The Maine Heritage Policy Center.
For more information …
“Smoke and Borders: How tobacco tax increases promote cross-border shopping,” written by J. Scott Moody and published March 6, 2007 by The Maine Heritage Policy Center, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to http://www.policybot.org and search for document #20801.
