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Tuesday, March 22, 2016

Taxing Candy and Snacks - That's a Good Start

Many states exempt food from sales tax (see list from Federation of Tax Administrators). The rationale is that food is a necessity of life so should not be taxed. But this is a flawed rationale because many food items are not necessities of life, such as:
  • Candy
  • Soda
  • Chips
  • Expensive food versus its less expensive counterpart (high income individuals spend more on food so they get the biggest tax savings from the exemption)
Many years ago, the California legislature expanded the sales tax to cover snacks but it was so confusing and unpopular that in 1992 the voters passed Prop 163 to change the state constitution to forbid taxation of food. That means if California ever wants to tax food, a constitutional amendment is needed. Assemblymember Cristina Garcia (58th District) announced this month that she plans to introduce legislation to make this change so that candy and snacks can be subject to sales tax (3/11/16 press release). Per this press release, it seems that she wants to earmark the estimated $900 million per year that can be generated from the tax for health issues, such as fighting diabetes. Per Rep. Garcia:

"Removing the snack food tax exemption will generate close to $900 million per year, funding health services and programs to promote healthy eating & lifestyles, particularly for children and families living in poverty."

In 2010, the State of Washington started taxing bottled water, candy and gum. A few months later, the tax was repealed (see Special Notice of 11/17/10). See my blog post of 5/15/10 on the challenges of defining "candy" under Washington law. Unfortunately, I did not save a copy of the Dept. of Revenue's lengthy chart listing all type of candy and what was taxable and what was not (such as a KitKat because it includes flour).

While taxing non-essential food items sounds like a good idea, it has problems:

  • It is difficult to define "snack." This is what led to voter frustration with California's law decades ago. A box of donuts was not taxed but the pack with six small donuts was. M&Ms were taxed, but chocolate chips were not. An issue arose over Matzo crackers versus Matzo bread.  See this 7/23/91 article from the Deseret News for more.
  • The definitional challenge is frustrating for both vendors and consumers. For vendors, errors can be costly.
  • Why single out only candy and snacks? Many food items are non-essential. But any exemption makes a law difficult because it is not easy to define the taxed versus exempt items.  
  • It is regressive (hurts low-income taxpayers more than higher income ones).
Generating $900 million annually from taxing candy and snacks is a lot of money. Per the California Dept. of Finance's tax expenditure report that includes both the state and local government share of tax. If all food were taxed, over $10 billion could be generated annually (+ the candy/snack tax). 

Why not tax all food to make it easier? Easier in that no definitions are needed.  If it is a consumable, it is subject to tax. The revenue should not be earmarked though. It should go into the general fund. With the additional revenue, lawmakers should:
  • Create a refundable income tax credit for low-income individuals to offset the sales tax on food.
  • Lower the sales tax rate.
That would be a start. There are other ways that the sales tax should be broadened with revenue used to lower the rate. A tax with few exemptions and a lower rate is much better at meeting principles of good taxation. For more on this, please see my papers on broadening the sales tax base and principles of good tax policy.

What do you think?

1 comment:

Nina Athena said...

Thank you for sharing such valuable information and knowledge. It is very useful and informative. It would be great to see more updates from you soon.

Tax Specialist