Sales Tax on Food. General History of Tax. Purposes of Tax. Types of Tax. U.S. History

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1 Sales Tax on Food By: Natalie Done, Ann., & Jessica.. General History of Tax Tax has been around since ancient times The Egyptians used taxation as did the Romans Taxes finance services that the State is obligated to provide and to fulfill its agenda. Types of Tax Progressive Tax: Varying rates on graduated scale based on income of taxpayer Ex: income tax increases with income Regressive Tax: Fixed rate separate from taxpayer s income Food Tax is a Regressive Tax Lower-income people pay a higher share of their income on Food Tax Over one year a food tax in the 8% range paid by a family of four is enough money to feed them from Thanksgiving to Christmas Chris Daly of Chattanooga, chairman of Tennesseans for Fair Taxation ( Purposes of Tax One way states and localities generate revenue is through food tax Tax policy analysts advise state policymakers to design efficient, equitable, and stable tax systems It ought to be fair to different groups of people ( Since food tax is a regressive tax, is the food tax fair? U.S. History As of 2005, forty-five states and the District of Columbia levy general sales taxes. Most of these states have in some way altered their original sales tax standing. Of these states: Twenty-nine states and the District of Columbia exempt most food purchased for consumption at home from the state sales tax. Louisiana and New Mexico are the states that most recently eliminated their sales tax on food Four states tax groceries at lower rates than other goods; they are Illinois, Missouri, Tennessee and Virginia. 1

2 Five states Idaho, Kansas, Oklahoma, South Dakota, and Wyoming tax groceries fully but offer credits or rebates to offset some of the taxes paid on food by some portions of the population. These credits or rebates usually are set at a flat amount per family member. The amounts vary, but typically are insufficient to give eligible households full relief from sales taxes paid on food purchases. Seven states continue to apply their sales tax fully to food purchased for home consumption without providing any offsetting relief for low- and moderate-income families. They are Alabama, Arkansas, Hawaii, Mississippi, South Carolina, Utah, and West Virginia. Local governments, which in many states levy their own sales taxes, usually follow state policy on the food exemption. Major exceptions include localities in Arizona, Colorado, Georgia, Louisiana and North Carolina. Grocery food purchases in those states are fully or partially exempt at the state level, but typically taxed at the local level. Utah s Current Situation Currently Utah charge 6.6% on all food items that are purchased and doesn t offer any credit or rebate to offset the cost of food for lower income families. Plus, Utah is currently one of only six states that still taxes food. This shows, that since the previous graph was made, 3 states no longer tax food. What To Do Rep. Merlynn Newbold, R-South Jordan, is proposing a bill that would eliminate the tax on groceries (not pre-prepared foods) completely but add a small increase to the sales tax rate on non-food items to protect cities and counties from revenue losses. She is working with the cities and towns to make sure none are unfairly burdened. Under the legislation, the city portion of the state sales tax on non-food sales tax would increase one-tenth of 1 percent, to 1.1 percent. The county sales tax on non-food items would increase from 0.25 percent to 0.28 percent. Lawmakers also want to come up with a formula to share revenues so small communities don't suffer revenue shortfalls. 2

3 What the bill would achieve.. Reduce the burden that is placed on low income individuals and families. The removal of the grocery tax would mean a tax break of about $86 for every Utahan. Example of how the Sales Tax on Food Places a Disproportionate Burden on Lower-Income Households To purchase a nutritious diet at the grocery store, a family of four in 1997 in the continental United States must spend at least $4,950 per year, according to the U.S. Department of Agriculture. If a state s combined state and local sales tax rates total seven percent - a typical rate in states that tax food - the annual tax bill on that family s grocery purchases would be about $347. For a family at the poverty line, the tax paid on food is equivalent to about a week s wages. Were it not for the tax, the family could buy an additional 3.5 weeks worth of groceries. Possible Side Effects of removing Food Tax: It's the old tax catch-22: governments need tax dollars to run, but nobody wants to pay To offset the loss of revenue: State programs could be cut which could leave some low-income individuals worse off if social welfare programs are cut Raise the sales tax on some nonfood items: How do you decide which items to tax instead? Making Up For Eliminating Food Tax If there is a problem.. Offer rebates to lower income households By eliminating or reducing food tax, states are swayed to allocate the lost taxes elsewhere. This becomes controversial because it can in fact hurt lower income households as well as move the tax to another facet which inevitably makes it appear as though no tax cut has been provided. In order for tax credits to work at its full potential, it should: be available to all poor and near-poor individuals and families who are exposed to the tax be large enough to offset the sales tax on a family s grocery purchases. NONE of the seven states now administering sales tax credits or rebates meet these two tests. This ideal program should be revamped and adjusted to fit these or similar qualifications. 3

4 The most commonly suggested is a refundable food-tax credit for low-income consumers. Credits, however, do little or nothing to improve the growth of sales tax revenue over time. This brings another complication-regressiveness. Ideally, a food-tax credit can provide comparable benefits to low-income families at a significantly lower cost than a food exemption. The main benefit from this is high rewards at a lower cost. Side Effects and Interest Group Conflicts The House's proposal (HB109) would cost the state $167 million in revenues (about 70 percent of projected general funds) and lead to a $14 million increase in sales taxes to business. The proposal has yet to address revenue loses to local governments and Utah Transit Authority (a loss of about $12 million/year). However, there is Bi-Partisan Support [Food] Tax cuts of this type tend to be politically popular since they can garner support from both sides of the political spectrum. Traditional conservative scan embrace these policies since they involve tax cuts. Liberals can support the policies since they are designed to increase income equality. 22differential+sales+tax%22 Abolishing the tax isn t a partisan cause. Former Republican Congressman Merill Cook has supported the measure for years. He said the state s tax system is in desperate need of reform. Democrats and Republicans interested in social justice ought to take [the sales tax on food] off and quit whining about it, Cook said Whether or not the doubts surrounding sales tax removal are valid possible ways to evaluate Doubts typically have centered around three issues. Can the state afford to exempt such a large share of consumption purchases - in either the short or the long run - without raising its general sales tax rate? Do low- to moderate-income families & including those who receive federal food stamps & reap a significant portion of the benefits from a food exemption? Or does the exemption largely benefit the more expensive food items purchased by higher-income residents (the "caviar effect")? Is the exemption worth the administrative difficulties it creates? What the studies show Sales tax that exempts food tends to grow more rapidly without rate increases than a sales tax that includes food. As a result, the historical record suggests that rate increases have been less frequent in states exempting food than in states taxing food. An exemption is the most certain way to provide relief from the food tax to lowerincome households, without the barrier of application procedures. Plus, states can use income taxes or other taxes to recoup the taxes that higher-income households would have paid on food purchases. Continued Finally, all sales tax exemptions create potential problems for tax administration. However, states can minimize the difficulties of administering a food tax exemption by adopting categories and classifications already in use for the federal food stamp program and by using uniform state and local tax bases. 4

5 Possible Ways to Evaluate Look at all the administrative costs that would be needed to implement this bill and the proposed revenue losses. Create a proposed figure for the revenue that would be made up from the slight increase in income tax. Then perform a cost benefit analysis Difficult because the numbers used are proposals not real numbers. Continued Methods of Evaluating Take polls or do studies one year after to see if low-income individuals are benefiting more than they were before when sales tax was in place on food. Summary on Food Tax Difficult because this is not been implemented yet. However, when we look at studies that have been preformed we do see positive results (in particular for lower income individuals) with regards to the income that they save. Summary Continued Considering that all but 6 states, including Utah, have removed sales tax from food and more are talking about the possibility of removing it, and not the other way around obviously states are finding this policy necessary and helpful. This is a policy, that when polls have been preformed, show that the vast majority of individuals favor this policy. Thank You For Your Attention!!! Do You Have Any Questions? Dessert: a sidebar on Twinkie Tax Introduced in 1994 via NY Times op-ed piece by Yale professor, Kelly D. Brownell Proposed tax certain foods-soda, fat foods-or specific high calorie/low nutrition foods Use tax to discourage unhealthy food choices, subsidize healthy food and fund nutrition programs Use to help curb obesity epidemic Penny tax on soda=$1.5 billion/year AK,TN,VA,WA created fat taxes 5

6 Problems with Twinkie Tax deciding exactly which products are unhealthy, taxable foods is a tricky practical matter. money collected through fat taxes has typically not been earmarked for obesityprevention programs or healthy food subsidies; instead they were often used to cover budget deficits. such a tax is inherently regressive, meaning it punishes poorer people who must spend much of their limited income on food. 6