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Friday, June 15, 2007

Should food be subject to sales tax?

As noted in earlier blog entries, the ideal consumption tax would tax all or most forms of consumption. Many states (but not all) exempt food or tax it at a lower rate. California exempts food except for food purchased at a restaurant.

This is a current topic of discussion in Tennessee where the governor and some lawmakers want to decrease the food tax, but need to find replacement revenue. Proposals include increasing the tax on tobacco products and here's an interesting one - a porn or adult materials tax (on sex toys, escorts, and similar items).

15 states do impose sales tax on food.

Why should food be exempt from sales tax?
  1. Food is a necessity and similarly to personal and dependency exemptions for income taxes, the food exemption ensures that some basic level of living needs is not subject to tax.
  2. The exemption provides tax relief to low-income individuals.

Why tax food?

  1. Food is consumption and the sales tax is a consumption tax.
  2. It is often difficult to exempt food because some people think some food should be taxed, such as meals at restaurants, soda, liquor, and candy. When there is anything consumed for nourishment of some type ("food") that is not subject to tax, complexity results (recall the California snack tax of years ago which was repealed due to complexity over determining what was a snack and what wasn't).
  3. Not all food purchases represents a basic necessity of life. Thus an exemption provides relief where none is needed. For example, are soda, bottled water, and candy necessities of life? Also, one can purchase the cheapest food or one can shop at a gourmet grocery store and pay very high prices for food. Should all of it be exempt?
  4. Relief for low-income taxpayers can be provided in other ways such as a refundable income tax credit or government issued food vouchers. This approach better targets the relief.
  5. Taxing food would broaden the tax base allowing for a lowering of the tax rate and funds to provide relief to low-income taxpayers.

What do you think?


Anonymous said...

I think luxury meals should be subject to a conspicuous consumption tax. For example, Danny DeVito recently opened a restaurant in Miami. There are some steaks on the menu ( which list for $145. It seems to me that anyone willing to pay over $10 for a steak would not be in a position to object about a 10% luxury food tax. If you're paying $145 for a steak, what difference does another $14.50 make?

I don't know how you might implement such a tax, but I would certainly support it.

I do agree that if there was a tax on food, it must be structured so as not to penalize low-income people. I don't like the idea of tax rebate at the end of the year for low-income taxpayers. I think it is important to resolve the tax at the point of sale.

Last, I would favor a food tax that affects only tourists. Given the current weakness of the dollar against the Euro and other currencies, let's get some money from wealthy tourists who are eating and drinking in our fine restaurants. Again, I'm not sure how to implement such a tax. Would the restaurant not charge the tax if you show a U.S. driver's license or passport?

Food for thought.

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