This commentary is by Doug Rosien of Vernon, a contract manager at Baystate Health in Springfield, Mass. He recently obtained a master’s degree in history and studied the impact of the Vermont sales tax.
In 1969, Vermont Gov. Deane Davis faced a fiscal crisis. The cost of state programs had risen 780% in three years, placing Vermont in jeopardy of a significant shortfall without a new source of revenue.
The governor recommended a 4% sales tax, which was calculated to raise $25 million annually. Ultimately, a compromise was reached, and a 3% rate became law that year.
Sales tax in America had its origins in the Great Depression of the 1930s. By the time Vermont passed its tax, 45 other states had some form of sales tax. Two of Vermont’s neighbors — New York and Massachusetts — had passed sales taxes in recent years, leaving New Hampshire as the lone holdout.
Concerns of “leakage” across the New Hampshire border — that is, residents of Vermont making their purchases in New Hampshire to avoid the tax — were voiced but not taken seriously. Vermont’s population centers were far from the border and the fact that Vermont lagged the rest of the nation in infrastructure often made such trips impractical.
Infrastructure, however, was improving. Interstate 91, which ran along the Vermont side of the border, was completed in 1965, and Interstate 89, which traversed the two states, was completed three years later. Not only did this provide easier access for local residents, but access was significantly improved to such population centers 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 industry data at the county level. It follows that, if the sales tax was having the effect of encouraging people to make their purchases 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.
A study of the retail data in these counties reveals that throughout the 1950s, 1960s and 1970s, per capita retail sales were virtually identical on both sides of the border.
However, 1982 turned out to be the watershed year. The previous year, the U.S. slipped into its deepest recession since World War II. The energy crisis of 1979 led to high gas prices and unemployment reached its peak at 10.8%. Tourism to New Hampshire and Vermont declined significantly and consumers near the border shopped for better value — which they typically found on the New Hampshire side.
While consumers were increasingly finding their way to New Hampshire to shop, retailers were responding. The first big-box retailer emerged in northern New England in 1976, when Kmart opened in West Lebanon, New Hampshire. In the following years, 16 additional big-box retailers — including Walmart, Target, Home Depot and Lowe’s — opened in the counties along the New Hampshire/Vermont border.
All but one of these retailers located itself on the New Hampshire side. This one exception was a Home Depot located in Brattleboro, Vermont. The store closed four years later.
Vermont raised its sales tax to 4% in 1982, 5% in 1991, and to 6% in 2003. Additionally, several towns implemented an additional 1% local option tax. All the while, the gap in retail sales between the two sides of the border widened.
Today, a visit to the border reveals a contrast between numerous large retail establishments on the New Hampshire side and smaller boutique retailers on the Vermont side. Even businesses that retail products exempt from the tax — such as grocery stores, pharmacies and gas stations — have often chosen the New Hampshire side, likely to take advantage of the benefits of greater retail traffic.
But what is the value of this retail business that moved across the border? As mentioned earlier, retail sales per capita were nearly identical in the years prior to the levying of the tax. Therefore, we can assume that, without a tax, this would remain so.
In 2017, aggregate retail sales for the border counties (both Vermont and New Hampshire) totaled $18,448 per capita. In the Vermont border counties, this figure was $8,924.
Therefore, by 2017, Vermont had lost $9,524 in annual retail sales per capita. With a population in the Vermont border counties of 163,607, this yields a total of around $1.3 billion.
By comparison, Vermont’s GDP in 2017 was $32.2 billion. Therefore, the Vermont sales tax resulted in $1.3 billion in annual retail sales — 4% of Vermont’s economy — leaking across the border to New Hampshire.
