By David Brunori, research professor of public policy at The George Washington University and Senior Director at RSM US LLP
There have been a lot of calls to eliminate or reduce sales taxes on groceries. In the past couple of months, governors and legislators in at least seven states have made such proposals. Indeed, the governors of Virginia, Maryland, Kansas, and Illinois have made cutting food taxes a priority in their budgets.
This is not new or surprising; 32 states already exempt “food for home consumption” from the sales tax. Traditionally, the move to exempt groceries has been justified as a way to reduce regressivity. This year, though, proponents have used the pain of inflation on the general public as the primary rationale for cutting taxes.
Cutting taxes on groceries is, of course, politically attractive. If asked, people would generally rather keep more of their money in their pockets, rather than leaving them behind in retail establishments. What’s more, making a bold move like cutting grocery taxes can give political leaders a popular issue to exploit come election time. This helps explain why both Red and Blue state leaders have joined the chorus calling for tax cuts on groceries.
Whatever the political advantages, I believe that reducing or eliminating the tax on groceries is terrible tax policy. I’m fully aware of the argument that taxing groceries is considered to be unfair to people with less money who tend to spend more of their paychecks on food. But let me make my case.
First, exempting groceries violates the tried-and-true principle that the sales tax should fall on all final consumption. The idea is simple: If you exempt certain products and services, everything else must be taxed more.
A tax system built on a broad base and low rates minimizes economic distortions and administrative and compliance burdens. Exempting groceries intentionally distorts economic decisions – which in turn violates the principle that the tax system should be as neutral as possible when it comes to the economy. In the states that don’t tax groceries, the government favors food consumption over other types of consumption.
Worse, the exemption creates all kinds of compliance problems. What exactly is the definition of “food for home consumption,” the wording generally used for those items to be taxed?
In some states, 12 donuts are exempt but 11 are not. A loaf of bread and a half pound of ham is exempt, but a ham sandwich is not. Virtually all states tax candy and soda – but those products also need to be defined, and they are often not defined well.
Bear in mind that the grocery exemptions are based on the belief that groceries are a necessity. Admittedly, I am uncomfortable with the government deciding what is necessary. But are all non-soda and candy items at the grocery story necessities? Ice cream? Brussels Sprouts? Caviar? Lobster? I knew a woman who worked as a model. She existed on cigarettes, gin, and Twizzlers. I suspect her definition of necessity is different than yours.
But the real problem with exempting groceries is that it has a negligible effect on tax incidence. That is, the system is no fairer by exempting these products. When food for home consumption is exempt all people save money. My poor neighbor may pinch pennies at the discount grocer and be happy to save the tax on a can of generic green beans. But I shop at Whole Foods. My filet mignon and fresh swordfish is also exempt from tax.
At best, the exemption is a clumsy and expensive way to provide tax relief to the poor. Moreover, the discussion on groceries does not even reflect the way in which many people actually get their meals. Poor and middle-class families, particularly with children, eat out a lot. During COVID they have been ordering in a lot. They pay tax on their fast-food meals or their home delivered pizza.
I understand the politics. I understand that grocery stores would prefer their products to be exempt. And I understand the desire to help the poor. The sales tax as applied is decidedly regressive. But it is regressive largely because of what we don’t tax (intangibles, real estate, professional services). If everything was included in the base, the sales tax would be much more proportional.
In sum, to get back to the major objection to grocery taxes, which I mentioned earlier, there is a better way to provide relief to those with less money. Utah Governor Spencer Cox, whose state partially exempts groceries, is proposing a food tax credit that would be applied to residents’ income tax liability. He proposes, for example, that a single parent earning under $20,000 a year, raising two children would get a grocery tax credit of $240.
This would provide a refundable grocery tax credit to low-and-middle-income households, and it would provide more relief to the poor than a blanket grocery tax exemption. This credit would be refundable – so Utah residents could get it even if they didn’t have taxable income. The income tax is particularly well suited for providing relief to lower income residents. Such a credit is a far better idea from a policy perspective than a grocery tax exemption
The contents of this guest column reflect those of the author, and not necessarily those of Barrett and Greene, Inc.