Thursday, May 15, 2008

Butt Out!

The Associated Press reported yesterday that New Hampshire lawmakers are set to capitalize on the Massachusetts legislature's newly-minted higher cigarette tax. The New Hampshire legislature voted to approve a measure that would delay its own $.25 increase if the Granite State doesn't get $50 million from cigarette sales between July 1 and Oct. 1.

With Massachusetts considering adding $1 to its current $1.51 per pack tax the short drive to the NH border is looking more appealing. By leaving its taxes constant -- at least for the time being, the per pack price in NH will remain lower and rise only to $1.33 per pack while Massachusetts will become one of the highest in the nation. As local NH retailers know very well, the delay mostly likely will draw more sales into NH and thus increase tax revenue. This doesn't even account for other spending that might take place in sales-tax free, “Live Free or Die State.”

As we noted recently, increases in cigarette taxes are also steeply regressive -- placing almost nine times the burden on households making less than $20,000 than the burden placed on those households making $50,000. That might turn out to be an incentive for low-income smokers to drive north. Expect the state lottery to take a hit too. Low-income smokers tend to gamble more and they like the opportunity to buy Powerball tickets. The higher gas prices to fill the tank for the trip to NH also provide another perverse incentive for Massachusetts shoppers to stock up on items they might have purchased at home.

Like individuals, states respond to incentives. By delaying a modest increase in its own taxes, New Hampshire is once again beating the Bay State on the field of tax competition. Herein is the lesson: Since by nature they are distortionary, taxes do matter.

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