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Sunday, March 28, 2010

Taxing Food - Good or Bad Idea?

This past week New Mexico Governor Bill Richardson vetoed legislation that would have imposed sales tax on food (Durango Herald News, 3/25/10). His rationale was the burden such a tax places on low and middle-class taxpayers. Per his March 24 press release:

"“I am not willing to put this burden on working families in the form of an unfair tax on food. I agree with those who call this a cruel tax,” Governor Richardson said. “It is especially cruel during the worst financial crisis New Mexico has ever experienced."

The legislature had proposed reinstatement of the food tax to help cover budget deficits. Per the Durango Herald, other tax increases were enacted.

Is a sales tax on food a bad idea? Is a food exemption needed to help low and middle-income taxpayers?

No! The reality is that higher income taxpayers spend more on food so they get the bulk of the tax relief. Also, many states tax some kinds of food such as snacks or soda or take-out food. Tax laws become complicated in crafting narrow exceptions to rules. It would be better from an equity and simplicity standpoint to tax food AND provide a refundable income tax credit to low-income individuals. Or perhaps a sliding scale credit.

Some data from the US Census Bureau for 2008 indicates the following spending patterns for consumers with income before taxes below $70,000 and at $150,000 or higher:

Income below taxes less than $70,000:
Food at home $3,033
Food away from home $1,784

Income of $150,000 and higher:
Food at home $5,940
Food away from home $7,071

So, assuming a sales tax rate of 5%, a consumer with under $70,000 of income saves about $152 annually by exempting food at home. In contrast, a consumer earning $150,000 or more before taxes saves almost $300 per year. It would be better to tax the food and give the low income taxpayer a $150 refundable income tax credit. If a state also exempts food away from home, the tax break for high income taxpayers is even bigger.

Drawbacks? Yes, there are some. the big one is that a sales tax exemption is immediate while the income tax refund for a low income taxpayer won't come until they file their income tax return. If the low-income taxpayer is already receiving some type of payments from the state, it is possible that the tax credit could be distributed more regularly through that system.

Another alternative, lower the overall tax rate and broaden the base. That reduces the cost of other items purchased by low-income consumers while capturing more of the consumption of high income taxpayers. New Mexico already has a broad-based sales tax though.

But, bottom line - elected state officials should stop giving big tax breaks to high income taxpayers with the excuse that they are helping low-income taxpayers. There are other ways to help low-income taxpayers.

For more information - click here.

What do you think?

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