Finance

Rejecting Sales Tax Exemptions on Food

Does taxing food partially or not at all make sense politically or fiscally? One University of Connecticut law professor says it doesn't.
by | February 16, 2011
 

Remember all the angst a proposed tax on soda pop unleashed last fall? Given that hoopla, this may not be the best time to bring up a sales tax on food.

And yet, Richard Pomp has. In a recent discussion with Connecticut state legislators about waste within the state’s tax system, the University of Connecticut law professor suggested that the exemption of food from the sales tax didn't make sense -- politically or fiscally. He even put a number on it: In Connecticut, ending the state’s 6 percent sales tax exemption for food would generate $400 million a year for state coffers.

Unfortunately, that number can't be translated nationally. Sales tax rates vary from state to state, and moreover, the exemptions vary widely. Thirty-one states exempt most food purchased for consumption at home and seven tax groceries at lower rates than other goods, according to the Center on Budget and Policy Priorities (CBPP). Meanwhile, recent Census figures show that the average family of four spent $5,279 in 2008 on food purchased for consumption at home.

The underlying rationale for exemption is the regressiveness of the tax: A sales tax on food hits poorer people harder than it does the rich. Pomp takes issue with that premise and a whole lot of other points about the food tax exemption. Here are excerpts from our recent conversation on the topic.

What do you have against a sales tax exemption on food?

My whole point is that right now, to exempt the poor, we take a shotgun approach and exempt everyone. That’s perverse. The serious point is: All you can do in a tax system is not tax poor people, but that doesn’t do a thing to get at the root causes of poverty.

Taxing food raises about 20 percent of sales taxes in states that tax food at the full rates. So, if you taxed food, you’d have money for programs to really address the problems of the poor.

How should states that exempt food change the way they tax groceries?

States serious about dealing with poverty would be better off giving a series of credits -- or use other methods -- to relieve the burden on the needy. Food bought with food stamps cannot be taxed under federal law. So, just as food bought with food stamps is already exempt, you could have more generous exemptions by way of a credit under the income tax that would phase out as income increases. People like me would not get a food credit; only the truly needy would.

Another way would be to issue a means-tested card to people that would allow them to buy food without paying a tax on it.*. We’re in the 21st century and have a tax system that goes back to the 19th century. It’s time to modernize it and demand transparency and accountability when it comes to taxes.

Politically, is it possible for a state that exempts food to get rid of the exemption?

It would have to be properly packaged with relief programs for the poor. There would have to be an explanation as to the theory of food taxes.

Here is another argument: Economists argue that a state that exempts food from the sales tax has higher food prices. If you were to tax food, you could expect to see the price of food actually go down. This problem is known as tax capitalization. It’s why housing prices are higher than they would be if not for the mortgage deduction. By using taxes to make something cheaper, it increases demand and the price will rise. It’s a basic law of economics, and you can argue that has happened with food.

But it is always easier not to give people something they have never had than to take away something once they have it. There will be people who will object to taxation of their food because it was never taxed before.

Are there other positive fallouts from getting rid of the exemption on food?

It depends on whether you exempt the poor from food taxes, and it depends on how you use money. If you raise $2 billion from taxing food purchased by people like me and the money is used to help offset cuts that would otherwise take place in some programs oriented to the poor, then the food tax turns out not to be regressive at all.

Tax simplification would result from taxation of food. Legislators think they are doing a wonderful thing when they exempt food but tax candy. But we live in a country where it’s almost impossible to distinguish food from candy. Chocolate covered peanuts: a candy or food? New York state for many decades exempted small marshmallows as food but taxed large marshmallows as candy. And on and on it goes.

But it’s even trickier than that. States haven’t exempted all taxes that go into food. Many things a supermarket buys are taxable: cash registers, conveyor belts, forklift trucks and display cabinets. These are all taxable and enter into the price of food. So we are exempting food only from one particular kind of tax.

*Note: According to CBPP, five states tax groceries fully but offer offsetting credits or rebates that are usually set at a flat amount per family member. Two states -- Alabama and Mississippi -- apply their sales tax fully to food purchased for home consumption without providing any offsetting relief for low- and moderate-income families.

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