Economists have long argued excise taxes—taxes on specific goods rather than income or consumption generally—are poor revenue sources because they’re highly non-neutral, and encourage smuggling and development of black markets.
According to a new study, border counties in West Virginia are getting a first-hand lesson in the flaws of excise taxation. West Virginia University researchers show the state’s 6 percent food taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. has shoppers scrambling across borders for cheaper groceries in neighboring lower-tax jurisdictions. From the Charleston Gazette:
ShareIt may only be 6 cents for every dollar spent, but the sales tax on food does indeed push border-county West Virginians across the state line to shop for their groceries, a soon-to-be-published study has confirmed.
West Virginia University’s Bureau of Business and Economic Research is wrapping up a review of the food tax, which was restored in 1989 after having been eliminated in 1981.
“There has been a significant decrease in retail activity in reaction to the tax,’’ said Mehmet Tosun, director of the bureau’s Public Finance Program. “The counties at the borders have suffered a loss of retail activity.’’
Nearly 54 percent of the state’s 1.8 million people reside in the 29 counties that adjoin another state. Of West Virginia’s five neighbors, only Virginia taxes food. That state recently reduced its tax from 4 percent to 2.5 percent, but also increased the overall sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rate from 4.5 percent to 5 percent and added public utility costs to taxable services.
After phasing out food from the sales tax between 1979 and 1981, cash-strapped West Virginia nixed the exemption and increased the overall sales tax rate from 5 percent to 6 percent in 1989. Tosun’s study aims to measure the impact of both moves.