Taxes drive consumers online, out-of-state
State bean counters blame the crash in sales-tax collections on high gas prices and a weak economy.
I bet there’s something else going on. In January, Maryland’s sales-tax rate rose by a fifth. To 6 percent. If you don’t think that’s compelling more people to avoid the tax by shopping on the Web or driving to “tax-free” Delaware, keep reading.
Given Maryland’s budget hole, raising the sales tax from 5 percent to 6 percent was probably necessary. But as much as small states such as Maryland like to steer their own destinies, forces from across the border often cause detours. The disappointing sales-tax haul shows the perils of running Maryland as if a Great Wall of O’Malley girded the state and banished the outside world.
What’s undermining sales taxes is the same thing that’s hurting Maryland’s tobacco-tax collections. Smuggling.
Nobody uses the word when it comes to sneaking in a tax-free plasma TV from Delaware’s Christiana Mall or buying a diamond ring from ice.com. But it amounts to the same thing in both cases. Consumers might not know that when they shop across state lines to save on sales tax, they still owe Maryland the money if they bring the wares back home.
Because of the rate increase, Maryland sales-tax collections should have shot up at least 20 percent. That’s what budget gnomes were counting on.
Instead, the take is falling short by tens of millions of dollars. In May, sales-tax collections were up by only 12 percent compared with May 2007. Figures for March were even worse.
[...]
But something is going on besides a punk economy. Two weeks ago, The Baltimore Sun reported that seizures of contraband smokes have soared since Maryland doubled its cigarette tax to $2 a pack in January. Legal cigarette sales have cratered, making a joke of state revenue estimates.
The tax increase has pushed more people to buy cigarettes in low-tax states, smuggle them into Maryland and bypass the tax man. There is no reason to think shoppers aren’t increasingly doing the same thing with clothing, electronics, DVDs and jewelry (although not in the same volume as the wholesale cigarette smugglers).
“It’s a real possibility that’s part of what’s going on,” says Roose, although he doesn’t think it’s the main cause.
Maryland consumers are supposed to pay “use tax” equal to the sales tax when they buy tax-free on the Internet or get stuff out of state. (Retailers with Maryland stores tend to collect Maryland sales tax on their Web sites, but Amazon and many others don’t.)
But hardly anybody pays use tax, and the state doesn’t make a habit of busting people for contraband iPods bought on the Web. By boosting savings for shopping across the border, Maryland officials have hurt Maryland stores and set themselves up for the disappointing revenue results.
A federal law requiring Amazon and everybody else on the Web to charge state sales tax might help. But that won’t happen soon.
And the song of tax-free Delaware would still sound as sweet. Despite the weak economy, Delaware consumer spending has grown at a 5 percent clip this year, according to state revenue authorities. Surely Marylanders are doing their part.
Giant states might be able to get away with high sales taxes and count on bagging most of the anticipated revenue. (California’s is 7.25 percent. Texas’ is 6.25 percent.) But when sharply lower taxes are only an hour or so away, the little guys end up getting a lot less than they counted on.
1 Comment »
RSS feed for comments on this post. TrackBack URL
1
Hi, Jeff. Hope your commute was tolerable.
I am not sure that one can blame the increase in sales taxes from 5% to 6% for much of the change. For one thing, gasoline is significantly more expensive now than it was last May, and there’s no short way to get to Delaware or PA for most Marylanders. Off of $500.00 in sales, the marginal “delta” of the sales tax hit was at most $5.00. Gasoline roundtrip to Christiana or Rehoboth from the state’s population “center” that’s probably near maybe Millersville has gone up nearly that much on a round trip, even in an economy car. Again, not trying to “troll” or contradict Hancock, just bringing up an alternative theory.
Delaware is said to be growing faster than Maryland, from what I understand. The bankruptcy bill has been kind to its largest sector: credit card lending and processing. But 5% is significant, and constitutes at least some evidence against my hypothesis.
It may simply be that people in MD have less disposable income because of the gas hikes and mild general economic malaise (severe elsewhere). Or they are skittish because their house values are flat or falling. The internet thesis sounds more plausible, because it saves both gasoline and taxes.
The cigarettes are a different matter, since ordering cigarettes through the mail is not only technically illegal but practically very difficult. And the marginal savings from smuggling’s a LOT greater. Also, it’s a question of enforcement priorities. When the tax goes up, both smuggling and the efforts to fight smuggling are more worthwhile for the smuggler and the Comptroller. So it would not surprise me if Comptroller Franchot reallocated resources that way, though that is a HUNCH not knowledge.
Comment by Bruce — September 3, 2008 @ 1:48 pm