Interstate Relations: The Neglected Dimension of Federalism

By Joseph F. Zimmerman | Go to book overview
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Interstate Tax Revenue Competition

The federal system of the United States encourages state lawmakers to develop innovative taxes that will fall exclusively or more heavily upon taxpayers in other states and nations. By exporting taxes, the lawmakers reduce the tax burden placed upon their constituents, enhance their state revenues, and increase prospects of reelection.

The nature of tax exportation varies considerably among the states. A state may levy heavier taxes upon foreign business firms than on domestic firms. If a state is a tourist state, the state legislature will place special taxes upon hotels and motels, and restaurant food costing more than one dollar. 1 A state legislature also may decide to raise revenue from nonresidents by levying a low excise tax on alcoholic beverages sold exclusively through state-operated stores, thereby encouraging residents of border states to purchase beverages in state stores. Similar price differentials, attributable to excise taxes, enhance the excise tax revenues of the low tax state, and encourage casual and organized crime smuggling of alcoholic beverages, cigarettes, and motor fuel.

However, state excise taxes can be avoided through purchases of products at military post exchanges and on Indian reservations. Furthermore, Congress allows the importation of a limited number of cigarettes and one quart of alcoholic spirits from other nations free of tax. A 1985 report revealed that seven states identified post-exchange abuse as the source of the greatest loss of cigarette tax revenues, and eight states indicated that abuse of Indian reservation sales was their first or second most serious problem relative to cigarette excise tax collection. 2

The differential in premiums on motor vehicle insurance also encourages motorists in a high insurance cost state to register motor vehicles in a neighboring state with lower premiums by use of a "convenience" address, thereby depriving the state of residence of motor vehicle fees. Massachusetts has had a problem with many of its residents residing near the New Hampshire border registering their vehicles in New Hampshire where insurance rates relatively low and there is no mandatory insurance coverage as in Massachusetts. 3 In 1995, Massachusetts


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Interstate Relations: The Neglected Dimension of Federalism


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