Doug Rosien: What’s Vermont’s Retail Loss to New Hampshire?

This comment comes from Doug Rosien at Vernon, a contract manager at Baystate Health in Springfield, Mass. He recently earned a master’s degree in history and researched the effects of Vermont’s sales tax.

In 1969, Vermont Governor Deane Davis faced a financial crisis. The cost of state programs had risen 780% in three years, putting Vermont at risk of running a significant deficit without a new source of revenue.

The governor recommended a 4% sales tax that should bring in $25 million annually. A compromise was finally reached and a rate of 3% became law that year.

The sales tax in America had its origins in the Great Depression of the 1930s. When Vermont passed its tax, 45 other states had some form of sales tax. Two of Vermont’s neighbors — New York and Massachusetts — had collected sales taxes in recent years, leaving New Hampshire as the only high-flyer.

Concerns about “leaks” across the New Hampshire border — that is, Vermont residents doing their shopping in New Hampshire to avoid the tax — have been raised but not taken seriously. Vermont’s population centers were far from the border, and the fact that Vermont lagged behind the rest of the nation in terms of infrastructure often made such travel impractical.

However, the infrastructure improved. Interstate 91, which ran along the Vermont border, was completed in 1965, and Interstate 89, which crossed the two states, was completed three years later. This not only made access easier for local residents, but greatly improved access to metropolitan areas such as Boston and New York. This led to an increase in tourism for both states.

We can track the impact of the tax over time by studying the Census of Retail Trade, which is released every five years and provides county-level industry data. It follows that if the sales tax encouraged people to do their shopping on the New Hampshire side of the border, we would see this most pronounced in the counties that lie along the border of the two states.

An examination of retail data in these counties shows that retail sales per capita were virtually identical on either side of the border in the 1950s, 1960s, and 1970s.

However, 1982 proved to be a turning point. Last year, the US slipped into its deepest recession since World War II. The 1979 energy crisis led to high gas prices and unemployment peaked at 10.8%. Tourism to New Hampshire and Vermont dropped significantly, and consumers near the border shopped cheaper – which they usually found on the New Hampshire side.

As consumers increasingly made their way to New Hampshire to shop, retailers responded. The first big-box retailer emerged in northern New England in 1976 when Kmart opened in West Lebanon, New Hampshire. In the years that followed, 16 other major retailers—including Walmart, Target, Home Depot, and Lowe’s—opened in counties along the New Hampshire-Vermont border.

All but one of these retailers have settled on the New Hampshire side. That one exception was a Home Depot in Brattleboro, Vermont. The store closed four years later.

Vermont raised its sales tax to 4% in 1982, 5% in 1991, and 6% in 2003. In addition, several cities introduced an additional 1% local option tax. Meanwhile, the retail sales gap widened between the two sides of the border.

Diagram created by Doug Rosien.
Diagram created by Doug Rosien.

Today, a visit to the border reveals a contrast between numerous large retail stores on the New Hampshire side and smaller boutiques on the Vermont side. Even businesses that sell tax-exempt products — like grocery stores, pharmacies, and gas stations — have often sided with New Hampshire, likely to take advantage of greater retail traffic.

But what is the value of this retail business that has moved across the border? As noted, retail sales per capita were nearly identical in the years before the tax was imposed. We can therefore assume that this would remain the case even without the tax.

In 2017, the retail sales of the frontier counties (both Vermont and New Hampshire) totaled $18,448 per capita. In Vermont’s frontier counties, that number stood at $8,924.

Therefore, by 2017, Vermont had lost $9,524 in annual retail sales per capita. With a population of 163,607 in the Vermont frontier counties, that brings the total to about $1.3 billion.

In comparison, Vermont’s GDP was $32.2 billion in 2017. Therefore, Vermont’s sales tax resulted in $1.3 billion in annual retail sales — 4% of Vermont’s economy — flowing across the border into New Hampshire.

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Keywords: Doug Rosien, New Hampshire, sales tax

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