Whenever the debate surrounding the sales tax on food reignites, hyperbole and emotion sometimes get in the way of facts and data. Your Taxpayers Association would like to explain a few facts that seem to always be missing from the conversation.
Since 2008, purchases of unprepared food or groceries have been taxed at a reduced state tax rate of 1.75% instead of the full state rate, which is currently at 4.85%. There is another 1.25% local sales tax on food for a total of 3%, however this article is only discussing the 1.75% state sales tax rate.
The first fact — which is surprising to most — is that the current lower sales tax on food overwhelmingly benefits the wealthy more than the poor. The most common knee-jerk reaction to calls for lowering or eliminating the sales tax on food is that it helps the poor and those that are struggling financially. But in reality, the current 3.1% exemption mostly benefits the wealthy. Cutting or eliminating the sales tax on food will hand most of that benefit to them.
As an example, under the current reduced rate, if a wealthy family spends $150 on groceries for a week’s supply, they bank a tax savings of approximately $4.65 (3.1% reduced tax rate of 1.75% versus 4.85%). If a low-income family spends $45 on groceries for the same week, they only bank a tax savings of approximately $1.39 (3.1% reduced tax rate of 1.75% versus 4.85%). So, the wealthy buyer banks a tax break that is 334% higher or over three times as high. If the current 1.75% state sales tax rate was eliminated, the same would hold true. The wealthy family in this case would bank a tax savings of $2.62 versus the low-income family at $0.79 cents.
Second, recipients of SNAP or WIC benefits do not pay any sales tax on grocery purchases when they use those benefits. So, any cut or elimination of the sales tax rate on food would not help these citizens since they don’t pay it in the first place. For the working poor who make too much money to qualify for SNAP or WIC, a far better solution is a grocery tax credit that can be given to offset the tax they pay, or even better, an exemption card could be issued to them so they could benefit right at the cash register by not having to pay sales tax on their groceries.
Third, when it comes to funding government- tax revenue stability matters. The most common phrase in good tax policy is: broaden the base and lower the rate. A broad base means as many items or people paying taxes provides a larger or “broader” tax base. This means that a lower rate is needed to generate the same amount of revenue. Essentially, the more people chipping “into the pot”, the less each person needs to pay.
On the flip side, when you have a smaller or thinner tax base, each person needs to pay in more in order to generate the same amount of revenue. A broad base means more stability in revenue because taxes are being collected from lots of different people and products or services.
Along with that, sales tax on food is the most stable source of tax revenue for government entities because those necessary items are purchased no matter what economic circumstance we find ourselves in. Utah experienced an economic downturn throughout 2020 and into 2021. Sales tax revenue has been solid as purchases remained steady even during lockdowns. This helps government provide essential services in economic downturns to those that need it the most.
There are some that feel that taxing food is unfair. However, we think it is important to note that the sales tax on food is often some of the only tax that some pay into the system and it is fair to ask all that benefit from government services to pay something, even if it is only the “widow’s mite”. We firmly believe an elimination of the sales tax on food will lead to conversations about raising the sales tax rate on everything else we purchase in just a few years.
As discussion around the sales tax on food continues, we need to remember and acknowledge these important facts, that while politically unpopular, is proper tax policy when applied appropriately.