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.
Since 1998, seven states have eliminated their tax on groceries, but in recent years, the movement to end these burdensome levies has stalled. Scott Drenkard, an analyst at the Tax Foundation, argues, “States might be looking at getting rid of sales tax on groceries, but groceries are between a sixth and a seventh of all consumption,” said Drenkard. “If you want to raise the same amount of money you might have to increase the [general] sales tax by a full percentage point.”
Not all states charge grocery taxes the same way. According to the Tax Foundation, six states tax groceries at the full sales tax rate; five others tax food at a lower rate. Many of the states still imposing grocery taxes also have large lower-income populations.
In a 2017 study, four researchers led by Norbert Wilson of Auburn University found the average tax rate paid by shoppers was 4.3 percent, about $200, for a family with an annual grocery bill of $5,000. The authors also noted that in some localities, this rate was much higher. In Tuscaloosa County, Alabama, for example, the state and local taxes can be as high as 9 percent.
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.
These taxes also 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.
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.
“The economic output and value added in the economy by these enterprises is reduced by the sales tax, even when compared to an alternative income tax that would produce the same amount of revenue for the state,” the authors wrote. “Further, workers at rural grocery stores see lower compensation due to the sales tax on groceries and employment in rural groceries is slightly lower than it would otherwise be without the tax.”
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. Instead of imposing burdensome taxes on families, state legislators should focus on encouraging government efficiency; low, broad-based taxes; and placing reasonable limits on spending.
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.
Rich States, Poor States
https://www.alec.org/publication/rich-states-poor-states-10th-edition/
The tenth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams examines the latest movements in state economic growth. The data ranks the 2017 economic outlook of states using fifteen equally weighted policy variables, including various tax rates, regulatory burdens and labor policies.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
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.
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Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
