A bill now under consideration in Michigan would block local governments across the state from implementing a sales tax on groceries. Grocery taxes are controversial and can have a dramatic effect on families by making food purchases more expensive and procuring healthy foods more difficult. Many states have moved away from these taxes because they place an unnecessary burden on lower-income people. However, 13 states and many localities continue to tax the sale of groceries.
Grocery taxes contribute to a phenomenon known as food insecurity. The U.S. Department of Agriculture defines food insecurity as “reduced quality, variety, or desirability of diet,” or “disrupted eating patterns and reduced food intake.” Food insecurity has helped to contribute to a segment the populace being less healthy, which has created other costs, many of which are related to health care.
Like most states, Michigan does not apply its full sales tax (6 percent) to groceries, but there is no law currently on the books to prevent local governments from imposing such a tax. With budgets at all levels of government facing growing deficits, it is not inconceivable that some localities could soon consider such a tax on food to address their budget woes. The soda taxes being imposed in cities across the country are one sign of this new taxing trend.
The Michigan proposal states localities “shall not impose an excise tax on, or enact, enforce, or administer any ordinance, regulation, resolution, policy, rule, or directive imposing a tax or fee on, the manufacture, distribution, wholesale, or retail sale of food for immediate consumption or nonimmediate consumption, except as otherwise provided by federal law or a law of this state.”
Preventing local grocery taxes from being formed would benefit all Michiganders, but especially low-income families. According to the U.S. Department of Agriculture, low-income Americans spent an average of $3,667 on food in 2014, which amounted to 34.1 percent of their income. Middle-income families spent an average of $5,992 on food, or 13.4 percent of income.
In addition to causing many problems, groceries taxes often incentivize shoppers to drive across state borders to avoid high levies. In a study by researchers at Wichita State University, the authors found at the local level, for every 1 percent increase in food tax difference in any county, food sales volume per person per year drops by about 9.769 percent. The Wichita State study also found the sales tax on groceries had a negative effect on rural grocery stores.
In a 2007 study, Mehmet Tosun and Mark Skidmore used county-level data on food-sales and sales-tax rates for West Virginia from 1988 to 1991 to estimate the effect the state’s sales tax had on grocery sales. Tosun and Skidmore found “for every one-percentage point increase in the county relative price ratio due to the sales tax change, per capita food sales decreased by about 1.38 percent. Our estimates indicate that food sales fell in West Virginia border counties by about eight percent as a result of the imposition of the six percent sales tax on food at the beginning of 1990.”
Grocery taxes are unpopular, regressive, and play a key role in denying low-income families the nutritious food they need to stay healthy. Preventing local governments from imposing these burdensome taxes on families is the right path for Michigan.
The following documents examine grocery taxes in greater detail.
WSU Research Shows State Food Taxes Drive Shoppers Away
http://www.wichita.edu/thisis/stories/story.asp?si=3073
The Wichita State News examines a new report conducted by the Kansas Public Finance Center at Wichita State University’s Hugo Wall School of Public Affairs. The report examines the effect grocery taxes have on sales and found that Kansas’ sales tax on food harms economic activity, especially in border counties.
Decried as Unfair, Taxes on Groceries Persist in Some States
http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2016/08/16/decried-as-unfair-taxes-on-groceries-persist-in-some-states
Writing for Stateline, Elaine S. Povich examines grocery taxes in several states and why the trend of repealing these taxes has slowed down in recent years.
Regressive Effects: Causes and Consequences of Selective Consumption Taxation
https://www.mercatus.org/system/files/Hoffer-Selective-Consumption-Taxation.pdf
In this article, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas of the Mercatus Center at George Mason University provide a systematic analysis of selective consumption tax policies.
Do Grocery Food Sales Taxes Cause Food Insecurity?
http://ageconsearch.umn.edu/record/235324/files/Wilson_ Zheng_ Burney_ Kaiser – Do Grocery Taxes Cause Food Insecurity.pdf
In this paper, four researchers, led by Norbert Wilson of Auburn University, examine the impact of grocery-tax rates on food insecurity and their differential impact on Supplemental Nutrition Assistance Program participants and non-participants. “By using data from the Current Population Survey Food Security Supplement matched with county-level grocery tax rates, we found that grocery taxes had a positive impact on increasing only the probability of non-SNAP households being food insecure,” the study concluded.
Income, Grocery Tax Proposal Deserves Support
http://idahofreedom.org/income-tax-plan/
The Idaho Freedom Foundation examines a 2016 tax reform plan that would lower the top marginal income tax rate and eliminate the state’s grocery tax, arguing would be a net positive for Idaho taxpayers: “For too long, Idahoans have suffered under a tax policy that hurts people and holds our economy back. For once, state lawmakers are considering a bill that has the potential to do our state tremendous good. Hopefully, state lawmakers will recognize the proposal for the potential that it holds,” the authors wrote.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
The Effect of Sales Taxes on Employment: New Evidence From Cross-Border Panel Data Analysis
https://heartland.org/policy-documents/effect-sales-taxes-employment-new-evidence-cross-border-panel-data-analysis
This study, authored by Federal Reserve Board researcher Jeffery Thompson and Kent State University economics professor Shawn Rohlin, examines how sales taxes affect employment rates in areas near state borders, where cross-border economic effects often take place.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
