Gas, Booze, and Cigs: How Lower Tax Rates Make Money for Missouri

In this video, David Stokes takes a first-hand look at commuters buying their gasoline, alcohol and tobacco in Missouri, motivated by the Show-Me State’s lower excise taxes — and therefore lower prices. This shifting of purchases across state lines mean higher tax revenues for the state of Missouri, precisely because our tax rates are lower.

Every day, Missouri has approximately 195,000 commuters that come into the state to work. That is the fifth highest total for any state. It is 55,000 more than leave the state to work each day. That ratio (+ 55,000) is the third highest number for any state. In both cases, Missouri trails only states along the eastern seaboard. (Our source for this is the 2000 Census, and we will update these numbers as soon as they are released from the 2010 Census.)

Missouri has low excise taxes. We have the lowest cigarette tax, the sixth lowest gasoline tax, the lowest beer tax, the ninth lowest wine tax, and the third lowest tax on spirits (liquor). What do excise rates and commuter totals have to do with each other?

Low excise taxes serve as an inducement for the 195,000 commuters to Missouri to voluntarily choose to purchase these goods while in Missouri. Missouri gains the tax revenue, and those commuters then bring many of the costs of the externalities of these items back to their home states. Low taxation levels on items that are often bought as part of a special trip serve as an incentive for commuters into Missouri to make those special trips when in Missouri. (This is opposed to, say, lowering the tax on lettuce, which is generally purchased as part of a comprehensive trip to the grocery store.)

These goods (gas, alcohol, tobacco) have other properties that make them a target for purchasing by commuter consumers. They can be purchased very quickly. This is a function of the standard quantity the goods are bought in, and the lack of search costs for most of the products. The reduced search costs are themselves a function of either no brand loyalty (gas) or extreme band loyalty (cigarettes). Among these three goods, only alcohol will generally see comparison shopping, but even there brand loyalty is very strong. These goods also do not spoil. (Cold beer is an exception.) Commuter consumers are not going to buy groceries on their lunch break, or before a long commute home in traffic. Finally, all of these items are more difficult to purchase online than other goods, for fairly obvious reasons and certain legal restrictions.

Missouri’s low excise taxes don’t just benefit Missourians who use these goods. They benefit the entire state by encouraging 195,000 daily commuter consumers to make these purchases while in Missouri. On the other side, they encourage the 140,000 Missourians who leave the state each workday to hold off on these purchases until they return to Missouri. This maximizes the tax revenues received by Missouri, while the costs of the externalities are spread among many states.

NB: As a matter of internal policy, the Show-Me Institute does not hold opinions. All opinions expressed in Show-Me Institute publications and video are those of the respective authors or speakers.