Massachusetts Repeals Liquor Taxes; Should Missouri, Too?

Residents of Massachusetts have a special reason to celebrate the new year. Beginning Jan. 1, the state repealed its 6.25-percent sales tax on alcoholic beverages.

Liquor taxes are a kind of so-called “sin tax,” a topic that that contributors to Show-Me Daily have discussed before. The primary purpose of such taxes is to discourage behaviors that may be considered socially undesirable, and the secondary purpose is to generate revenue for the government.

Sin taxes have a marginal nature, which is illustrated in this example from Massachusetts. Liquor stores that are located close to the Massachusetts border will particularly benefit as a direct consequence of the repeal — they will experience increased sales from nonresidents. Similarly, stores that are located on the other side of the border will likely experience fewer sales. This illustrates how rational individuals tend to think on the margin, another topic that we have blogged about previously. From an interview of a liquor store owner published in the Tauton Daily Gazette:

“It wasn’t a mass exodus [when Massachusetts instituted a liquor tax]” Matias said. “You would still see Rhode Island plates in the parking lot. They just wouldn’t come as often. If you saw a guy every two weeks, now he might come once a month.” The repeal is expected to be a boost for the South End stores. An Ocean State resident is more likely to make the trek to Massachusetts now that the savings is significant.

Compared to other states, Missouri assesses some of the lowest tax rates on alcoholic beverages (and on cigarettes, too). Similar to the illustration provided by the aforementioned article, a marginally higher number of individuals purchase these products in Missouri instead of in their home states because of the difference in tax rates.

Should Missouri eliminate its tax on alcoholic beverages, too? A disadvantage of that policy change would be that state government would miss out on revenue. Massachusetts, for instance will miss out on $100 million as a consequence of eliminating its tax. However, as an advantage, stores in Missouri would experience a higher volume of sales. Policymakers are always looking for ways to encourage economic activity and job creation. Perhaps repealing the liquor tax could be a means to achieve these goals, in part.