Most states exempt most groceries from sales tax (see table from the Federation of Tax Administrators). Idaho is not one of those states. While Idaho includes groceries in its sales tax base, it offers a refundable tax credit against income taxes to help reduce the regressive nature of this tax on what is mostly a necessity of life. The Idaho State Tax Commission says that the credit averages $100 per person. With a 6% sales tax rate in Idaho, that equates to about $1,666 of tax free food per year or $138 per month. Per the US Bureau of Labor Statistics, in 2015, the average household spending for food at home was $7,023. If that household is two adults in Idaho and each gets a $100 credit, then they end up paying sales tax on 52% of their food purchases. That still seems like a lot. Is it? It depends.
The Idaho grocery tax credit is not tied to income. The only factor that affects it is age. If someone is age 65 or older, they get a credit of $120 for the year rather than $100. This is a flaw in the credit. It should be tied to income. For example, for individuals with income below a certain multiple of the federal poverty level, their credit should be closer to the sales tax actually paid on their food purchases. For those above that multiple, the credit should be phased down with higher income individuals getting no credit.
This would make the system more fair and allow for lower rates.
The states that exempt all or most grocery store food purchases generally do so on the basis that food is a necessity of life. It is necessary, but people with more income spend more on food relative to lower income individuals. Thus, the exemption is a bigger tax break to individuals who don't need the break. Higher income individuals likely aren't clipping food coupons, aren't necessarily buying the cheapest brands and often aren't that concerned about prices. Thus, they spend more even though they might not eat more than lower income individuals.
The sales tax exemption for groceries represents a significant loss of revenue for the state. For example, it is the largest tax exemption in California at just over $8 billion per year (per BOE Publicatoin 61). If this exemption were replaced with a refundable income tax credit for low income individuals, phasing out as income hits middle income levels, it would be a much better targeted relief for necessities of life. It might also support a lower sales tax rate.
In March 2017, the Idaho legislature passed SB 67 to exempt groceries from sales tax. But Governor Otter vetoed it on April 11. In his veto letter, Governor Otter notes that the cost of the new exemption would be about $80 million. He also noted that removing the exemption makes the sales tax less stable. That makes sense because people likely don't modify their food purchases in an economic downturn.
Governor Otter referred to the possible benefits of SB 67 as "largely imaginary while the downsides are many and very real. The job of all of us who represent and serve the people of Idaho is to do what's right, not necessarily what's popular." He expressed hope that the veto would provide "impetus" for lawmakers to comprehensively review the tax system, "particularly the wisdom and continuing utility of the multitude of tax exemptions in Idaho Code." He didn't mention anything about better targeting the grocery credit to better help low-income and not provide an unneeded benefit to higher income households. But, that would be a great idea.
What do you think?
Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:
- Idaho Keeps Sales Tax On Groceries
- Sales Tax Policy Outlook for 2017
- Would Broader Sales Tax Base Deliver Simplification - and Savings?
- Trailing Nexus - When Does It End?
- Sales Tax As Penalty?