While looking through the information at the Tax Foundation today I came across a very interesting article and a study about cross-border sales of beer and tobacco and how it effects tax revenues. It’s not something I thought much about or figured had that much impact but the study, done ten years ago, seems to suggest otherwise. Essentially, what happens is that between state borders, people either living near them or happen to be traveling through them will purchase items in the other state, the one where the taxes are less, making the products themselves less expensive. I hadn’t thought about this phenomenon in a long time, but I recall that as a kid, my stepfather — a heavy cigarette smoker — had people bring him cartons of cigarettes back from southern states where, presumably, the taxes were so much cheaper that the cost of a carton of smokes was worth the effort of buying them in another state and hauling them back to Pennsylvania. And I’ve heard in some states, particularly on the east coast where they’re closer together, people would travel across state lines to buy a car for the same reason though as I understand it most states have enacted laws to make that practice not work anymore.
How this relates to beer is that in states where the excise tax differs greatly from a state bordering it, the price of beer can likewise be pretty dramatically different between those states, primarily because the base tax gets marked up along the distribution chain so the difference in the tax is magnified. That makes it susceptible to cross-border buying resulting in lost sales and tax revenue for the state with the higher tax rate. How much of a problem could this be? I confess I was initially skeptical, but the study, How Excise Tax Differentials Affect the Cross-Border Sales of Beer in the United States, done by the Tax Foundation in 1999 found that nationally it resulted in nearly $35 million in “lost sales & excise tax revenue.” That certainly sounds like enough that it should give any state pause before jacking of their state’s excise tax rate on beer. It’s just one more reason why raising a state’s beer tax might be a losing proposition economically.
Here’s an excerpt from the abstract for the study:
Cross-Border Shopping for Beer
While the study measures cross-border shopping in every state, the results are naturally most dramatic along borders where the tax differential is high. For example, Washington state, which levies a statewide 6.5 percent sales tax, additional local sales taxes and a $7.172 per barrel beer excise tax, shares a border with Oregon, which levies no state or local sales taxes and has a state beer excise of just $2.60 per barrel.
Huge quantities of beer cross the border in these circumstances, but this migration of economic activity affects more than just sales and product-specific excise tax collections. Cross-border shopping affects income and property tax collections, license fees, and a host of other sources of government revenue.
Policymakers are frequently surprised by the magnitude of the revenue effects, and such surprises can be particularly unnerving when the government in question is required to maintain a balanced budget.
According to the study, California alone lost $5,248,466 for the year studied. The conclusion seems fairly unambiguous, here are the last two paragraphs:
The per capita sale of packaged beer varies widely by state. It has long been suspected that these differences are due in part to cross-border shopping. Building on earlier work in this area, this study sought to explain differences in packaged beer sales among the states. A model of demand for beer and its supply by source was constructed. This model was created in a manner that allowed it to capture the effects of both interstate and Canadian cross-border shopping on beer sales in the states.
The model was then tested empirically using data from 1990–1997. Cross-border shopping was found to have significant effects on packaged beer sales in the states. In particular, the study found that in 1997, 18.1 million cases of beer, on net, moved from low- to high-tax states. Such exports accounted for approximately 2.0 percent of sales in net exporting states and allowed them to export $18.8 million in sales and beer excise taxes to their high-tax neighbors. In addition, states along the U.S.-Canadian border were able to export 10.9 million cases of beer and $14.6 million in sales and beer excise taxes to Canada. The study clearly shows that high sales and excise tax differentials lead to significant increases in cross-border beer sales.
The pull-quote that lawmakers should pay attention to is that by being too heavy-handed with imposing higher excise taxes on beer, it just might backfire to the point where it’s actually counter-productive and even reduces the amount of taxes collected. It could, it appears, actually wreck a state’s economy
Policymakers should be aware that the effects of cross-border shopping on income taxes, property taxes, and license fees can match or even exceed the revenue changes in state and local sales and excise taxes measured by the model.
The study is long and complex, but worth your time if you’re in a position to speak with or write to a state lawmaker, or if you’re a geek for this stuff like me. It’s 24 pages and is available as a pdf file.