Idaho Keeps Sales Tax On Groceries

Many states exempt groceries from sales tax per the premise that food is a necessity of life. This is a poorly targeted exemption though in terms of helping low-income taxpayers. Higher income individuals spend more on food so get the bulk of the tax savings. If instead, groceries were taxed, tax relief could be better targeted to the taxpayers who need it via a refundable income tax credit based on income.

Idaho subjects groceries to sales tax, but offers a grocery credit on the personal income tax returns. The only variation in the amount of the credit is that it is $120 per year rather than $100 if the individual is age 65 or older. So, it is poorly targeted and includes the out-dated assumption that senior citizens have financial needs (not all do).

Recent legislative activity in Idaho called for repeal of the sales tax on groceries. The governor vetoed this effort due to the revenue loss and the fact that a refundable income tax credit exists to reduce the burden of the tax.

I have more in this blog post, originally posted at SalesTaxSupport.com (which unfortunately shut down in 2018).  

Here is that post of 4/23/17:

Most states exempt most groceries from sales tax (see table from the Federation of Tax Administrators). Idaho is not one of those states. While Idaho includes groceries in its sales tax base, it offers a refundable tax credit against income taxes to help reduce the regressive nature of this tax on what is mostly a necessity of life. The Idaho State Tax Commission says that the credit averages $100 per person. With a 6% sales tax rate in Idaho, that equates to about $1,666 of tax free food per year or $138 per month. Per the US Bureau of Labor Statistics, in 2015, the average household spending for food at home was $7,023. If that household is two adults in Idaho and each gets a $100 credit, then they end up paying sales tax on 52% of their food purchases. That still seems like a lot. Is it? It depends.

The Idaho grocery tax credit is not tied to income. The only factor that affects it is age. If someone is age 65 or older, they get a credit of $120 for the year rather than $100. This is a flaw in the credit. It should be tied to income. For example, for individuals with income below a certain multiple of the federal poverty level, their credit should be closer to the sales tax actually paid on their food purchases. For those above that multiple, the credit should be phased down with higher income individuals getting no credit.

This would make the system more fair and allow for lower rates.

The states that exempt all or most grocery store food purchases generally do so on the basis that food is a necessity of life. It is necessary, but people with more income spend more on food relative to lower income individuals. Thus, the exemption is a bigger tax break to individuals who don't need the break. Higher income individuals likely aren't clipping food coupons, aren't necessarily buying the cheapest brands and often aren't that concerned about prices. Thus, they spend more even though they might not eat more than lower income individuals.

The sales tax exemption for groceries represents a significant loss of revenue for the state. For example, it is the largest tax exemption in California at just over $8 billion per year (per BOE Publicatoin 61). If this exemption were replaced with a refundable income tax credit for low income individuals, phasing out as income hits middle income levels, it would be a much better targeted relief for necessities of life. It might also support a lower sales tax rate.

In March 2017, the Idaho legislature passed SB 67 to exempt groceries from sales tax. But Governor Otter vetoed it on April 11. In his veto letter, Governor Otter notes that the cost of the new exemption would be about $80 million. He also noted that removing the exemption makes the sales tax less stable. That makes sense because people likely don't modify their food purchases in an economic downturn.

Governor Otter referred to the possible benefits of SB 67 as "largely imaginary while the downsides are many and very real. The job of all of us who represent and serve the people of Idaho is to do what's right, not necessarily what's popular." He expressed hope that the veto would provide "impetus" for lawmakers to comprehensively review the tax system, "particularly the wisdom and continuing utility of the multitude of tax exemptions in Idaho Code." He didn't mention anything about better targeting the grocery credit to better help low-income and not provide an unneeded benefit to higher income households. But, that would be a great idea.

What do you think?  Should all states tax groceries and provide a refundable income tax credit based on need?  Many states already provide an Earned Income Tax credit, so low-income individuals are already filing in most states even if they owe no personal income tax.

Designing sales tax exemptions - what is necessary?

Several sales tax exemptions fall under the "necessity of life" category - or at least that is typically how a state might describe them. For example, see page 1 of California Board of Equalization Pub 61 which lists food, health and housing under this category. One that caught my attention recently is Idaho's addition of  “eyeglasses and eyeglass component parts” as a sales tax exemption effective July 1, 2015.

While the lens are health related, the frames are often fashion related. Frames range in price from $50 including the lens (!) to over $250 for just the frames. If I'd been asked, I would have suggested that Idaho just exempt the cost of the lens and the cost of a basic frame (perhaps $20). The rest should be subject to sales tax. That helps the system be more equitable as expensive frames are not a necessity of life and more likely to be purchased by individuals who can afford the more expensive frame AND the sales tax.

For a bit more and the links, see a short post originally posted to Sales Tax Support.

Idaho recently amended its list of sales tax exemptions to include "eyeglasses and eyeglass component parts" (HB 75, 3/24/15, effective 7/1/15).  There were already exemptions for drugs, hemodialysis supplies, braces and orthopedic appliances, dental prostheses and other medical related items. While eyeglasses seem to fit the list, there is a significant difference between eyeglasses and most medical supplies and devices. Eyeglasses are also a designer item where the cost can be quite high due to the choice of frame. Also, for most medical items, the doctor prescribes the item and the patient has no choice of style or manufacturer. In contrast, patients have a lot of choice in eyeglass frame.

So, the exemption helps any one in need of corrective lenses, but provides a bonus to individuals who want the $300 (or higher) frame rather than a $40 frame. This could be alleviated by only providing the sales tax exemption for the glass and then only the first $50 of the cost of the frame. It would not be difficult to compute. It also sends the message to consumers that the exemption is only for the medical aspect of the purchase, not the designer element of it.

What do you think?