Taxation: June 2006 Archives

The Lottery Tax

The next installment of the "Hidden Tax/Fee of the Week" is available on the MHPC website.

Total Hidden Taxes/Fees to Date: 13

Recently, the Federal Reserve Bank of Boston released a study (pdf) examining the economies of New England. Today, the New York Times ran a story about Maine's plight titled "Maine Struggling to Revive Ailing Economy" (registration required). MHPC also recently sent out a press release on this report.

The Bank's study dryly concludes: "In many areas of the economy, Maine concluded 2005 no better than it began the year; in some areas, the situation worsened. Maine's recovery seems to have stalled, and, accordingly, the state's average coincident economic activity index barely budged between 2004 and 2005--and actually fell slightly over the course of the year--as the other New England states saw gains. In fact, Maine was the only state in the country to see a decline over this period, except for Louisiana."

But while Louisiana's decline was due to "forces of nature," Maine's decline can be attributed to the "forces of man." Much of Maine's economic woes can be blamed on a multitude of poor public policy decisions made at the state and local levels of government that substitutes government spending for real economic development.

Maine needs a principled and disciplined free-market approach to reduce its level of taxation, reform its byzantine tax code and reform its health care system--and to do so with a sense of urgency. Every day that passes Mainers fall further behind their fellow Americans in terms of economic progress. Since 1998, Maine has lagged the national average annual growth in Gross State Product by nearly a full percent point--3.1 vs. 2.2 percent, respectively.

Questions/Comments: Email J. Scott Moody

A new report by the Tax Foundation examines the difference between tax collections and tax burdens.

Opponents of the Maine Taxpayer Bill of Rights assert that it will limit government's ability to promote economic development in the state. Ed Cervone of the Maine Center for Economic Policy recently stated that "In Maine, this [economic development] could be done through further investments in the community colleges . . . Another option is improvements to energy infrastructure." And the list goes on.

Even better, the other side argues, is if we can pay for these government services with taxes on "people from away." Some want to increase property taxes on out-of-state second home owners while others want to increase the sales tax since they hit tourists--or even better, enact a local option sales tax.

Overlooked in this discussion is the fact that Maine is already the beneficiary of large amounts of government spending funded entirely by "people from away."

The next installment of the "Hidden Tax/Fee of the Week" is available on the MHPC website.

Total Hidden Taxes/Fees Revealed To Date: 10

The U.S. is one the precipice of an unprecedented demographic change. In the next few years, the baby-boomer generation will begin retiring. Maine is at the forefront of this change and, in fact, is currently the oldest state in the union with a median age of 40.2 years. A graphical illustration of Maine's aging population from 1970 to 2030 based on Census Bureau data and forecasts can be found here on the MHPC website. Naturally, this will have profound economic, political and social ramifications.

The Aeronautical Jet Fuel Tax.

Total Hidden Taxes/Fees Revealed To Date: 9

Believe it or not, taxes matter. They matter in the sense that people change their behavior in regards to activities subjected to taxation. For example, about ten years ago the federal government levied massive tax increases on the luxury boat building industry . . . practically wiping out domestic boat building as buyers fled to foreign boat builders. Taxes matter.

That being said, proving that "taxes matter" is not as easy as it would seem. In the economics profession there is this tension between "economic theory" and "economic evidence." Theory tells us that taxes distort behavior, but econometrics (the toolbag economists use to measure the world) may not be able to find such distortions. Does the lack of evidence mean the theory is wrong? Of course not! Does anyone actually believe OJ was innocent even if the evidence could not prove it?

So I am starting a "mini-series" in my blog posts called "Taxes Matter" that will highlight important studies--new and old--that find evidence of tax distorted behavior. The first installment is based on a brand-new paper by Glenn Ellison and Sara Fisher Ellison published by the National Bureau of Economic Research (NBER) titled: "Internet Retail Demand: Taxes, Geography, and Online-Offline Competition." The full study can be found here.

They find that:
"Our most basic conclusion on sales taxes is that they are an important driver of e-retail activity. Our state-level regressions show clearly that [on-line] sales are higher in states that levy higher sales taxes on traditional retail purchases. The fact that the websites we study sell so little in California is strong evidence that what we are picking up is a tax effect and not some artifiact of unobserved heterogeneity."

". . . applying the sales tax to e-retail sales could reduce e-retail demand by one-quarter or more."

"In terms of sales taxes, for example, it is quite easy for consumers, in high tax states, especially, to learn the general principle that buying things online saves on taxes, and we find clear evidence [online] sales being higher in high tax states."

While Maine's state sales tax rate is about average, this study suggests that Maine's policy-makers might want to think twice about raising the state sales tax rate and/or allowing local option sales taxes--consumers can easily shift purchases to the internet to avoid the tax. In addition, based on anecdotal evidence, Maine already losses considerable sales tax revenue to New Hampshire (which has no sales tax).