Arkansas recently passed legislation that would reduce the sales tax on “food and food ingredients” to 1/8% if certain budget goals are met. Is this a good idea? There are two competing public policies at play here, plus a healthy dose of politics.
Good tax policy calls for low rates applied to a broad base with few exceptions. This allows states to meet their revenue targets without imposing too high a tax on any given transaction, and it has the additional benefits of reducing costs and increasing compliance. Under this theory, groceries should be taxed at the same rate as everything else because each carve-out reduces the amount of revenue and increases complexity. Aside from the revenue equation, simplifying taxability (now there's a topic for discussion ...) means nobody has to figure out if that cranberry juice cocktail contains enough juice to be exempt or reprogram the system when Milky Way bars are reformulated without flour.
Another public policy holds that necessities should not be taxable. Sales taxes fall on the poor the hardest because they spend much of their income just to meet their basic needs. We can argue about whether we as a society can’t get away from sales taxes but there's no avoiding the fact that sales taxes are regressive and grocery sales taxes are particularly regressive because we've all gotta eat. Some states use income tax credits to offset the sales tax, but as applied, even that relief is only partial. For example, Idaho offers a $70 annual refund ($90 for individuals with less than $1,000 in income). The credit is not available for any month the person received food stamps, among other limitations. The Idaho sales tax rate is 6% so $70 represents $1,166 in food purchases for the year, or $97 per month. For comparison, average monthly SNAP (food stamp) benefits are $133, so $97 worth of food isn't a whole lot to live on.
This leads to the political angle: every dollar of tax is a dollar less of fruits and veggies for Little Johnny. Of course the response to this is that sales tax is a vital component of the state budget and without it the state won't be able to pay Little Johnny's teacher. (This is all about Little Johnny; it doesn't matter if the state is simultaneously giving tax breaks to out of state filmmakers.) Fifteen states currently tax food at either the full or partial state tax rate. Over the past few years several states have eliminated or reduced their taxes on groceries but none have gone the other way and imposed state taxes on food. Oddly enough, Streamlining actually forced the imposition of local sales taxes in a few places that had exempted groceries. Texarkana, AR, used to match Texas's exemption rather than Arkansas's imposition of sales tax on food, and several Georgia counties that previously exempted groceries from certain local taxes now tax them in the name of maintaining a uniform tax base.
So ... what does it all mean? From a purely economic perspective, taxing groceries makes sense. The regressivity could be minimized with better income tax credits, and those of us
who can afford steak can also pay a little extra for tax. Practically speaking, I can't see any politician getting up and announcing that he wants to tax breakfast cereal. Supporters of the Marketplace Fairness Act have been accused of raising taxes when all they are trying to do is increase (or shift) compliance with existing taxes. Actually raising taxes? Not very likely!
So, what do you think? Should food be subject to sales tax? Should it be taxed at a lower rate than general tangible personal property? If states do tax groceries, how can they minimize the financial impact on those least able to absorb more taxes? And most important from a real-life perspective, what’s the political spin that would make grocery taxation palatable to voters?
Other recent “Food (Tax) for Thought” posts by Connie Eisenberg:
- Texas Snacks Tax: One is the Loneliest Number, and Taxable, Too
- If It's Sweet It Might Be Candy, But Is It Good Tax Policy?
- The Case for Taxing Groceries. Or Against It. Or for It …