Jared Walczak of the Tax Foundation has a new report that suggests the answer is no.
Only 13 states tax groceries at all, and many of them tax them at a lower rate than the general sales tax. The rationale behind not taxing groceries is usually that doing so would disproportionately harm the poor (since food takes up a larger proportion of their spending), and basic necessities such as food should not be taxed.
Walczak argues convincingly that the basic argument for exempting groceries from the sales tax is incorrect. First of all, he points out that any purchases made with the Supplemental Nutrition Assistance Program (SNAP) or the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) are already exempt from sales tax in every state. Poor families that are part of those programs are unaffected by the sales tax regardless of whether the state in which they live taxes groceries.
Walczak also finds that the data do not support the view that including groceries in the sales tax disproportionately harms the poor:
Additionally, the conventional wisdom underestimates the degree to which higher consumption of groceries does scale with income. Higher earning households purchase not only more, but higher qualities of, groceries. Low-income households, in fact, are more likely to purchase taxable substitutes to what states classify as groceries, a category that traditionally only covers unprepared foods. For lower-income working families, prepared foods—rotisserie chickens, deli items, fast food, and more—are often more economically efficient than buying raw ingredients and making home-cooked meals, but prepared foods are taxed, whereas ingredients are exempt when states adopt a grocery tax exemption. The result is that a household in the fifth decile spends almost 70 percent more than a household in the first decile, and a household in the top decile spends over three times as much as a household in the lowest.
Finally, while low-income households spend more on groceries as a share of income than do the highest-income households, they do not necessarily spend more on groceries relative to other necessities. Compositional effects matter. If lower-income families spend moderately more on groceries, as a share of income, but substantially more on other household goods, then they will be worse off under a tax code which exempts groceries but with a higher rate than would be necessary were groceries included in the base. Given not only substitution effects—prepared foods for unprepared—but also, crucially, the exemption of SNAP and WIC purchases for many low-income households, this is not just a hypothetical but the reality for many families.
As a result, Walczak writes that sales-tax exemptions for groceries send more benefits to the middle of the income distribution than to the bottom. A policy that is often adopted in the name of the poor doesn’t actually benefit the poor — and this is not a new phenomenon.
Walczak finds that a more effective way to help the poor is by including groceries in the sales tax and using the extra revenue to lower the sales-tax rate or provide a tax credit to low-income residents. He writes, “The poorest decile of households experiences 9 percent more sales tax liability with a grocery tax exemption than they would if groceries were taxed and the general rate were reduced commensurately.”
Taxation is a necessary evil, and it should be conducted to minimize the damage to the people who are taxed. That means it should look to encourage economic growth and keep the tax burden as small as possible while adequately funding the government’s budgetary obligations.
Consumption taxes are better than income taxes for many reasons. Compare a general sales tax to an individual income tax, for example:
- Sales taxes don’t discourage saving or investment like income taxes do.
- Sales taxes don’t discourage upward mobility like income taxes do.
- Sales-tax rates are transparent. You see the tax taken out at the bottom of your receipt, as a flat percentage of the purchase price. No tax brackets, no tax tables, no guessing.
- Sales taxes are easier to pay than income taxes. You didn’t have to file a sales-tax return, jump through a zillion hoops, or use proprietary technology to calculate your sales-tax liability.
- Sales taxes are easier to collect than income taxes. It’s much easier for state revenue departments to collect tax payments from registered businesses than it is to track down every single individual in a state.
- Sales taxes require less personal information than income taxes. You don’t have to save documents going back seven years or fear an audit, either.
- Sales taxes are much harder to game than income taxes. People drive to states with lower sales-tax rates to buy some things, but that doesn’t compare with the thousands of loopholes, deductions, and carve-outs in the income-tax code.
- Sales taxes provide a more stable source of revenue than income taxes. Incomes (and profits) can change significantly from year to year, but consumption is much flatter over time.
In view of these advantages, states should seek to rely more on sales taxes and less on income taxes. But the general drift has been in the opposite direction, with sales tax bases shrinking over time as consumers shift their spending to services instead of goods and politicians exempt specific categories, such as groceries, to score political points.
Taxes stink, but we need them, and sales taxes stink less than other forms of taxation. The standard argument for blanket sales-tax exemptions for groceries does not hold up against the evidence. If states really want to help taxpayers and improve their tax codes, they should tax groceries and use the extra revenue to either lower the sales-tax rate or cut income taxes and other more economically destructive forms of taxation.
P.S. For a great example of a state making solid income-tax reforms, see this Capital Matters piece about Mississippi from last week.