Excise taxes don't just affect sales of the products that are directly taxed. Price Waterhouse and other analysts have clearly shown that there is a cascading effect. If a consumer crosses a border to fill up his car with gas in a state with lower motor fuels taxes, that person may also, while at the gas station, buy bread, milk, and a newspaper. Thus, all these sales are lost to the economy of the state with the higher excise tax. Recent analysis indicates that the relationship between higher taxes and lower economic growth in the states remains strong.
Excise taxes lead to economic loss for higher tax states for three key reasons.
First, there is a loss in business revenue and employment in the state with higher taxes as residents cross borders to make their purchases. As jobs are lost, so are employees' wages, salaries, and benefits. Along with this lost income, the state's economy loses the induced effects that this income would have provided. Induced effects occur as retail and wholesale employees spend their wages within the state. These economic benefits are transferred to the lower-tax state.