Taxation: August 2008 Archives

Not surprisingly, Maine is not the only northeast state to worry about its competitiveness with New Hampshire.  Vermont also struggles with many of the same issues that Maine does . . . high taxes, too many regulations, anti-business political climate, etc.

Thanks to MHPC's sister free-market organization in New Hampshire--the Josiah Bartlett Center--I have become aware of this very interesting study by the Atlantic Institute for Market Studies based in Halifax, Nova Scotia.

The author of the study is Dr. Art Woolf from the University of Vermont and is titled "A River Divides It: A Comparative Analysis of Retailing in the Connecticut River Valley of Vermont and New Hampshire."  From the executive summary:

"This study examines the nature and extent of changes in retailing activity in the border counties of Vermont (Essex, Caledonia, Orange, Windsor, and Windham) and New Hampshire (Coos, Cheshire, Sullivan, and Grafton) over the past 40 years.  The border counties have exhibited similar rates of population growth over that period of time, but the economic growth rates of the two regions have diverged significantly . . . New Hampshire's border county stores are able to offer lower prices to consumers than their Vermont counterparts primarily because of Vermont's sales tax.  The study also presents evidence that Vermont's bottle deposit law has affected the location of larger supermarkets in the border region . . . the study finds that, if Vermont had not implemented its sales tax, Vermont's border counties would have 1,900 more retail jobs and $322.7 million more in retail sales than existed in 1997."

The only thing I would add to the study is differentials in excise taxes, especially cigarette, alcohol and gasoline, also add to the tax differential driving cross-border shopping and business relocation.

While this question has tasked the human brain for hundreds of decades, the answer to a similar question is much more apparent:

Which came first - the Taxes or the Spending?

Even though it may seem the case... the most aggressive politicians don't intentionally raise taxes faster than they can spend the money.  (It DOES happen occasionally, when tax rates are so high the revenues outpace expectations - creating that ear-to-ear grin on a politician's face when they can jump in front of a TV camera and claim to have a "surplus" to spend!)

But no.  There's no "surplus."  There's never a "surplus!"  And there won't be a "surplus."   

Here's why:   "It's the Spending, Stupid!"

But how did it get this way?

Ross Perot liked to repeat: "politicians buy your votes with your money," a statement that has been true since at least the Roman Republic.  The worst part of this observation by the little guy from Texas, is that there is always another election - with more votes to buy, more promises to fund forever, and more taxes to raise!

Government Spending is a financial sink-hole because it includes the checks written today and, more importantly, the promises to write exponentially more and larger checks in the future.  It's the long-term interest on bonds that paid for short-term projects.  It's hiring someone who can never be fired.  It's paying lifetime retirement and health benefits for someone who stops working in their forties.  It's "entitlement" programs that create multi-generational recipients who become trapped in dependency with no incentive to become self-supporting and no time-limits on their monthly checks.  It's paying millions of dollars studying moths' flight patterns, thorns on rose bushes, and hiring rooms full of psychologists to determine that, yes: teenagers without adult supervision will experiment with sex and alcohol.

Here in Maine, most people seem to agree that our tax dollars are wasted in criminal-theft proportions... then send the same politicians back to Augusta with one more chance to "fix" things. 

Pssssssst:  Unless Maine's elected leaders are bound by law to control spending, they will not. 

Please don't be fooled when politicians float "trial balloons" about shuffling lower Income Tax rates with higher Sales Taxes, increased Fees, higher Permit Costs or simply passing off more Maine taxes on tourists and seasonal residents.  The words are meaningless if they don't control spending.

So Spending does come first. 

And Spending must be controlled before we can touch taxes

Recently, Fraser America released a new study titled "Measuring Entrepreneurship: Conceptual Frameworks and Empirical Indicators."  After reading through the study I noticed a wide deviation between Maine and New Hampshire on several entrepreneurial metrics:

1)  Venture capital invested (by destination) per capita, 2005:  Maine ranked 10th from the bottom at $2.36 while New Hampshire ranked 7th highest at $90.19.

2)  Total industrial R&D expenditure (performing) as a percentage of GDP, 2003:  Maine ranked 18th from the bottom at 0.5 percent while New Hampshire ranked 8th highest at 2.8 percent.

3)  Total academic R&D expenditure (performing) as a percentage of GDP, 2003:  Maine ranked 3rd from the bottom at 0.19 percent while New Hampshire ranked 15th highest at 0.52 percent.

4)  Number of patents granted (all types) per 1,000 people, 2005:  Maine ranked 23rd from the bottom at 0.121 while New Hampshire ranked 9th highest at 0.413.

Note: Ranks are out of 60 since it includes all U.S. states and Canadian Provinces.

A recent Wall Street Journal editorial about Maryland's recent cigarette tax hike should give pause to Maine lawmakers who wish to further increase Maine's high cigarette tax.  The article states: "Politicians in Annapolis are scratching their heads wondering what happened to all those chain smokers who were suppose to help balance Maryland's budget.  Last year the legislature double the cigarette tax to $2 a pack to pay for expanded health-care coverage.  Eight months later, cigarette sales have plunged 25% and the state is in fiscal distress again . . . residents in Maryland's Washington suburbs can shop in nearby Virginia, where the tax is only 30 cents per pack, and save at least $15 per carton."

Of course Maine's "Virginia" is New Hampshire where cross-border shopping by Mainers is a well-known phenomena.

Recently Fraser America released their 2008 Economic Freedom of North America study that I blogged on once before.  The study ranks all U.S. state and Canadian Provinces based on their level of economic freedom.  Unfortunately, Maine (ranked 49th out of 60) has the third lowest level of economic freedom out of all the U.S. states with only Mississippi (tied, 49th) and West Virginia (55th) scoring the same or lower.  The good news is that Maine has more economic freedom than all of the Canadian provinces with the sole exception of Alberta (2nd).  As usual, the New England state with the most economic freedom is New Hampshire  (7th) followed by Massachusetts (14th), Connecticut (20th) and Vermont (44th)--all ranked higher than Maine.