* As you know, the Illinois legislature just voted to get rid of the state’s 1 percent grocery tax for a year. Revenues from that tax go to local governments, but the locals will be reimbursed by the state for the loss. So, while this Tax Foundation take is a bit late for our purposes, it’s still worth a look…
In the face of decades high inflation, policymakers across the political spectrum have proposed either reducing or repealing their states’ grocery taxes. Doing would “actually increase tax liability for the lowest-earning households” while “providing only extremely modest tax savings for the middle class,” according to a new study released today by the Tax Foundation.
Current state of grocery taxes:
13 states currently tax groceries to some degree. While they may be in the minority, “the economic evidence strongly suggests that they are in the right,” said Jared Walczak of the Tax Foundation. Of these 13 states, only three tax groceries at the ordinary rate without providing some sort of offsetting grocery tax credit.
State definitions of groceries vary, but mostly at the margin. All states distinguish between prepared and unprepared foods, and prepared foods are subject to tax. (For example, a rotisserie chicken is a “prepared food” and therefore subject to grocery tax.)
A flawed logic for exemption:
Exempting groceries from state sales tax bases is seen as a progressive move; advocates say that it would benefit low-and middle-income taxpayers most since they spend more of their income on groceries.
“The assumption is simple and, on the surface, reasonable—and it is wrong,” Walczak said. “Grocery exemptions are a middle-income, not a low-income, benefit—and middle earners can be more efficiently made whole through grocery tax credits.”
Here are the flaws to the argument, Jared finds:
• It largely ignores the full impact of the universal policy of exempting from sales tax any purchases made using federal food-purchasing assistance programs, such as SNAP. These kinds of policies can dramatically reduce taxable consumption for low-income families.
• 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.
• 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.
The result is that a policy designed to inject progressivity into the sales tax has the opposite effect, increasing tax liability on the lowest-income households.
The bottom line: “Public perceptions regarding grocery taxation are not easily changed. In states where groceries are taxed, the policy is not always very controversial, because it is deemed the ordinary condition, at least until policymakers agitate for change. But in states where groceries are exempt, or taxed at a preferential rate, a reversal is likely to meet with stiff opposition unless the public can be convinced of the benefits,” said Walczak.
“A more comprehensive approach, however, is possible, broadening the sales tax bases to include both groceries and consumer services (which tend to be consumed by higher earners) and is potentially paired with a modest grocery tax credit, with remaining revenues dedicated to income tax reductions. This approach can manage something of a tax policy hat trick: it is progressive, it yields greater revenue stability, and it makes the overall tax code more pro-growth,” said Walczak.
The full report is here.
* But what hasn’t really been highlighted yet is that millions of Illinoisans will still be paying sales tax on groceries via the mass transit tax. Here’s the breakdown…
• 1.25 percent sales tax on qualifying food, drugs, and medical appliances in Cook County
• 0.75 percent sales tax on general merchandise and qualifying food, drugs, and medical appliances in DuPage, Kane, Lake, McHenry, and Will counties […]
• 0.25 percent sales tax on general merchandise and sales of qualifying food, drugs, and medical appliances in Madison County
• 0.75 percent sales tax on general merchandise (excluding items that are titled or registered) and sales of qualifying food, drugs, and medical appliances in St. Clair County
“Qualifying food” means groceries and is defined here.
- TheInvisibleMan - Wednesday, Apr 13, 22 @ 10:33 am:
In Will county, I’m paying 75 cents in the RTA/Pace tax for every hundred dollars in groceries.
In a month, that probably adds up to maybe 3 dollars. Or 36 dollars in taxes a year.
I don’t even notice it.
I still haven’t looked at the full details of the bill yet, because reasons, but the current 1% grocery tax imposed by the state outside of these transit taxes is refunded 100% to the communities it is collected in. Is the increase in the LGDF supposed to cover this new deficit for individual municipalities, or will that shortfall be put on the residents of that town to make up through local taxes or cuts in services?
- City Zen - Wednesday, Apr 13, 22 @ 10:42 am:
Cashiers are now required to have a CPA.
- Stix Hix - Wednesday, Apr 13, 22 @ 10:43 am:
“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.”
I can’t argue with the premises of The Tax Foundation, but I sure see a lot of prepared food in the carts of lower income consumers. Not to be a snob, but way more than is in our cart.
- Cheryl44 - Wednesday, Apr 13, 22 @ 10:52 am:
Cashiers don’t figure out what’s taxed at what rate.
An I don’t pay attention to what’s in other peoples’ cart,
- Cheryl44 - Wednesday, Apr 13, 22 @ 10:54 am:
Sorry, I sneezed. I was trying to say I don’t look in other people’s carts nor do I try to guess their socioeconomic status.
- Anon221 - Wednesday, Apr 13, 22 @ 11:07 am:
Interesting that “granola”, if it doesn’t have flour in its ingredient list, is considered a “candy”. As are fruit rollups. Some of those products can be quite healthful depending on how they are crafted. Now… when it comes to chocolate covered bacon…calling that a “candy” is open to interpretation;)
- Ok - Wednesday, Apr 13, 22 @ 11:09 am:
I think this has more to do with people thinking their grocery bills are higher due to inflation, and this is a one-to-one response.
Same with gas.
The magical/mythical “suburban middle-class” drives policy, not concern for others.
- very old soil - Wednesday, Apr 13, 22 @ 11:09 am:
And working two minimum-wage jobs doesn’t give you a lot of time (or energy) to cook from scratch.
- NonAFSCMEStateEmployeeFromChatham - Wednesday, Apr 13, 22 @ 11:18 am:
I would consider myself a higher-than-median salaried state employee, but before I got married in the last 2 years I did a lot of prepared food. TV trays, easy microwavable foods and veggies, bagged salad, etc. And lots of soda, especially diet (still do to this day). So it’s not just low income shoppers that get prepared food with lots of sugar and sodium in it.
- me - Wednesday, Apr 13, 22 @ 11:21 am:
The whole study and premise are really stupid. If I don’t pay a tax, it’s more money in my pocket regardless. You may benefit more but that’s because, in the end, I pay more taxes than others.
- Captain Obvious - Wednesday, Apr 13, 22 @ 11:31 am:
Sounds like it’s not the tax policy causing lower income consumers to pay more tax but their purchasing choices.
- cermak_rd - Wednesday, Apr 13, 22 @ 11:57 am:
This analysis is considering folks who use SNAP benefits. But that is the very poor, and they are already benefitting from the taxpayers via their SNAP benefits. So the argument here is that the SNAP users are not taxed because they buy groceries with SNAP so if we take away that tax then they will still not pay taxes but everyone else will not be paying taxes therefore they will pay a higher proportion. Which is arguable I think.
But I would think it is a good tactic to use to help those just over the line for SNAP. After all, SNAP users are already getting help and people over the line are not.
- Candy Dogood - Wednesday, Apr 13, 22 @ 11:57 am:
===consumer services ===
This is the real humdinger and a lot of our neighboring states have incorporated some kind of tax on entertainment or consumer services. Some of those states get very specific about what does and does not count, and some of those starts are run by GOP majorities and Governors.
Other states have debated for a long time what is the best way to raise public revenues while Illinois spent a long time simply trying to justify not having to raise an adequate amount of revenue to fully fund the expense of the government and governmental services we have been enjoying. Sometimes these are rough conversations to have because very few people might be excited to pay taxes or to have taxation introduced to their industry, but if taxes have to be paid those conversations have to happen.
===I was trying to say I don’t look in other people’s carts nor do I try to guess their socioeconomic status. ===
You can usually do that just by knowing where and when they’re shopping.
Thankfully this study mostly focuses on SNAP and WIC programs being tax free and largely benefiting low income individuals.
===Higher earning households purchase not only more, but higher qualities of, groceries.===
There’s also significantly more waste of food a among higher income households that are more likely to purchase things like fruit and produce that go unused. You’re not doing well until there’s a bowl full of lemons and limes just hanging out in your kitchen with no specific planned purpose.
The ability to choose things other than inferior goods and the ability to have a significant amount of food waste are indeed luxuries which drive up consumption.
===Exempting groceries from state sales tax bases is seen as a progressive move; advocates say that it would benefit low-and middle-income taxpayers most since they spend more of their income on groceries.===
My preferred policy position is exempting food from sales tax, but these criticism of my preferred policy position are valid. This does not specifically address people that either do not qualify for assistance but still could be considered low income and households that do not seek the assistance programs available to them. It’s very tough to get by in the world as a person who is broke, single, and childless. The cut off for eligibility for single member households, at least for filing purposes, is very very low.
I also have my doubts about the overall cost of administration of a program that assesses 1% taxes and there are a lot of small business ventures that consistently violate the requirements for tax, like that person in your office who will make cakes or cupcakes to order may not be registered to the state and be collecting or remitting sales taxes or the random person who has set up a stand selling fruit and produce.
However, I think it would be a great alternative to create a system where everyone receives a monthly SNAP benefit and then food is taxed at a higher rate but that’s going to be a difficult lift since SNAP is a federal program and sales taxes are decidedly state directed and this starts sounding a lot like Universal Income which gets people real anxious real quick.
- Candy Dogood - Wednesday, Apr 13, 22 @ 12:02 pm:
===Sounds like it’s not the tax policy causing lower income consumers to pay more tax but their purchasing choices. ====
Sounds like Captain Obvious didn’t read the study before deciding that it supported their previously held opinion.
It’s okay to be wrong in public policy conversations, especially when presented with the data. I’m not even really sure what your response to this is because the study is suggesting assessing the regular sales tax rate on all food purchases might be the best economic decision.
So your post which ignores the information presented in the study also sounds like you’re in favor of completely removing the sales tax exemption for food?
- City Zen - Wednesday, Apr 13, 22 @ 1:17 pm:
==create a system where everyone receives a monthly SNAP benefit and then food is taxed at a higher rate==
SNAP purchases are exempt from state and local sales tax.
- 61820 - Wednesday, Apr 13, 22 @ 1:26 pm:
Generally speaking, lowering the tax rate and broadening the base increases efficiency. This study is analyzing that correctly, but it is not really looking at the impact of temporarily reducing the grocery tax rate and not replacing it with another tax. If all the policy does is remove the grocery tax without replacement, that can’t increase the tax burden of low-income people. Because of the SNAP exemption, its true that more benefit may go to higher income people, but the poor will benefit from this policy.
The amount by which a group can benefit from removing a tax is always bounded by the amount of taxes they are paying, and so virtually any time a tax is removed the benefits tend to accrue to higher income groups.
- Downstate - Wednesday, Apr 13, 22 @ 1:38 pm:
Gosh. Relief from the grocery tax of 1% for a year, AND a $100 tax refund in “late summer or early fall”? With those solutions, Illinois citizens won’t be touched by inflation. Thank you, dear leaders. /s/
- Nick - Wednesday, Apr 13, 22 @ 2:34 pm:
… meh
The economics of it to me look right. Higher incomes tend to buy more tend to buy more expensive items and don’t benefit from SNAP and other assistance and so, yes, it would track that this suspension of the grocery tax would be regressive.
And yet it’s not like Illinois controls SNAP benefits and tax credits often face large uptake problems. Fun fact many of the poorest households don’t even file. So yeah I’d rather just not tax groceries, even if imperfect.
- The point of the study - Wednesday, Apr 13, 22 @ 3:20 pm:
The point of the study is that if you were pitching a policy to really help the lowest income people removal of the grocery tax whether temporary or permanent would not be it. Happily we also expanded the Earned Income Credit and did that permanently. That will provide a far greater benefit to people with low incomes.
- Tony DeKalb - Wednesday, Apr 13, 22 @ 5:47 pm:
Just wondering how the revenue from these drop in the bucket refunds / repeals would have otherwise been used. Is the relatively small impact on people’s pocketbooks worth the overall revenue hit?