While this tax switch is somewhat positive because it at least represents a shifting of the tax base away from productive activity and towards consumption, raising excise taxes is risky. 11 Upping excise taxes leads to economic loss for two key reasons. First, there is of course a loss in business income and employment in the state with higher taxes as residents cross borders to make their purchases. Second, there are subsidiary sales losses - when people travel across borders to buy products subject to excise taxes, they may make other purchases along the way at convenience stores and gas stations. Direct sales losses and subsidiary sales losses both lead to a loss in government revenue, which means expectations for net revenue increases from excise-tax hikes are rarely met.
Governments lose a whole host of revenues including, most obviously, sales and excise taxes.
In addition, there is something of a domino effect. Studies in the past have demonstrated the economic consequences of playing with excise taxes. Commissioned by the American Legislative Exchange Council, a 1992 study by Price Waterhouse examined the New England states and found significant cross-border activity on several products. For example, because of its substantially lower excise taxes on cigarettes, New Hampshire was a big economic winner in cigarette sales. The New Hampshire tax in 1991 was 25 per pack versus 34 in Maine and 41 in Massachusetts.