Sunday, September 27, 2009
Massachusetts' Laffer Curve
"On Interstate 95 here, just past the Massachusetts border, a big red barn full of tax-free liquor has helped New Hampshire [NH] turn itself into a booze-sales machine. ... [NH] has taken a different tack, betting that higher sales of alcohol would offset the absence of tax receipts. Nearly half of [NH's] booze is sold to out-of-state customers, according to state figures. Last year, [NH], which derives more revenue from wine and liquor sales than any other non-tax source, had the highest per-capita sales of hard liquor in the country, a distinction the Granite State has held for years. ... A budget crunch in Massachusetts pushed lawmakers this summer to revoke alcohol's long-standing exemption form the sales tax. ... A state audit earlier this year chided the [NH] commission for keeping liquor prices too low. The auditors said prices could be raised some--and would still be lower than in Massachusetts, Maine and Vermont", Philip Shishkin at the WSJ, 8 September 2009, link: http://online.wsj.com/article/SB125236461011390855.html.
Masschusetts got thrown a curve, a Laffer curve. The auditors are wrong about NH raising its prices to meet surrounding states. They ignore the difference between quoted and delivered prices. Can NH raise its liquor prices to within 6.25% of Massachusetts and not lose lots of sales? I predict NH's liquor sales to NH residents will decrease sharply. Why? Here's an example for NH's auditors. Suppose a liter of Johnny Walker (JW) sells for $20 retail in Boston, or $21.25 including sales tax. Can NH continue to sell liquor to Bostonians? If a Bostonian has $212.50, he can buy ten bottles of JW around the corner and spend five minutes. Or he can drive 40 miles to NH and spend say 20 cents a mile, or $16 plus time, which might be 90 minutes round trip. Excluding time value the NH liquor can sell for no more than $196.50. At $10 an hour for time, $181.50. No, auditors, you must use the "Boston delivered price" to estimate NH's maximum price. Lenin would understand what's going on. Massachusetts residents are "voting with their feet", or in this case, cars.