In some ways, when a city or state lowers its excise tax rates it benefits from having taxes paid by those who live in other cities or states. The states losing tax base don't like this. In the EU, you get discussion of "tax harmonization", which is really a code for stopping tax competition. It happens in the States too. Ed Morrissey talks about Tennessee's attempt to stop the loss of its cigarette tax revenue by posting police on its borders looking for Tennesseans coming back from neighboring states with a few low-tax cartons.

My experience as a former New Hampshirite living near Massataxes, I mean, Massachusetts is that surveillance happens pretty often. Someone in Ed's comments mentions the battle over liquor taxes between the states, as NH sells spirits in state-run stores often placed strategically along its borders. But "Tax-Free NH" doesn't have a sales tax on clothing either, and the southern half of the state is full of malls with parking lots full of cars with Massachusetts plates. Ditto Bangor, Maine, with cars from visiting Canadians escaping the GST.

How big an export is it? One estimate I've seen suggests more than 10% of beer taxes paid in NH are paid by out-of-staters. I don't know what it is for the sales tax, but it's enough to get MA border businesses to lobby for tax-free weekends. If Tennessee really wanted to stop exporting its cigarette consumption over the border, it could do the same.

Labels: economics, taxes