A special South Carolina House of Representatives tax panel will consider a proposed cut to the state’s top income tax rate and a change in how property taxes are adjusted and will determine which sales tax exemptions will be allowed to continue. According to The State, the estimated total amount of sales tax revenue lost to exemptions per year could be as high as $3 billion as of 2017.
While some targeted exemptions could be considered corporate welfare, one tax should not: the sales tax applied to groceries. Grocery taxes are controversial and can have a dramatic effect on families by making food purchases more expensive and procuring healthy foods more difficult. Many states have moved away from these taxes because they place an unnecessary burden on lower-income people. Despite much opposition, 13 states and many localities continue to tax the sale of groceries.
Like most states, South Carolina does not apply its full sales tax (6 percent) to groceries, an exemption that costs the state $444.8 million per year. This should not change. Charging a sales tax for items that are essential goods that consumers cannot live without is both regressive and dangerous for the health of South Carolina families.
According to the U.S. Department of Agriculture, low-income Americans spent an average of $3,667 on food in 2014, which amounted to 34.1 percent of their income. Middle-income families spent an average of $5,992 on food or 13.4 percent of income.
Grocery taxes contribute to a phenomenon known as “food insecurity.” The U.S. Department of Agriculture defines food insecurity as “reduced quality, variety, or desirability of diet” or “disrupted eating patterns and reduced food intake.” Food insecurity has helped to contribute to a segment of the populace being less healthy, which has created other costs, many of which are related to health care.
Groceries taxes incentivize shoppers to drive across state borders to avoid high levies, making them an unreliable source of tax revenue. In a study by researchers at Wichita State University, the authors found at the local level, for every 1 percent increase in food tax difference in any county, food sales volume per person per year drops by about 9.769 percent. The Wichita State study also found the sales tax on groceries had a negative effect on rural grocery stores.
“The economic output and value-added in the economy by these enterprises is reduced by the sales tax, even when compared to an alternative income tax that would produce the same amount of revenue for the state,” the authors wrote. “Further, workers at rural grocery stores see lower compensation due to the sales tax on groceries and employment in rural groceries is slightly lower than it would otherwise be without the tax.”
Groceries are not the only essential goods the panel will consider imposing the sales tax on. Legislators will also contemplate adding the sales tax to pharmaceutical drugs. This is the second time the state has considered such a tax. According to The State, in 2010, the S.C. Taxation Realignment Commission recommended repealing the sales tax exemption on some prescriptions. The Commission recommended taxing other prescriptions at 1.25 percent of their cost, instead of the state’s full 6 percent sales tax. This is problematic, because even a lower tax would place an added burden on low-income families and keep needed medicine out of the reach of some individuals and families.
Grocery taxes are unpopular, regressive, and play a key role in denying low-income families the nutritious food they need to stay healthy. No government at any level should be imposing a tax on items that no person can live without. Instead of imposing burdensome taxes on families, South Carolina legislators should focus on encouraging government efficiency by enacting legislation that would enact low, broad-based taxes and placing reasonable limits on spending.
The following documents examine grocery taxes in greater detail.
WSU Research Shows State Food Taxes Drive Shoppers Away
http://www.wichita.edu/thisis/stories/story.asp?si=3073
The Wichita State News examines a new report conducted by the Kansas Public Finance Center at Wichita State University’s Hugo Wall School of Public Affairs. The report examines the effect grocery taxes have on sales and found that Kansas’ sales tax on food harms economic activity, especially in border counties.
Decried as Unfair, Taxes on Groceries Persist in Some States
http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2016/08/16/decried-as-unfair-taxes-on-groceries-persist-in-some-states
Writing for Stateline, Elaine S. Povich examines grocery taxes in several states and why the trend of repealing these taxes has slowed down in recent years.
Regressive Effects: Causes and Consequences of Selective Consumption Taxation
https://www.mercatus.org/system/files/Hoffer-Selective-Consumption-Taxation.pdf
In this article, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas of the Mercatus Center at George Mason University provide a systematic analysis of selective consumption tax policies.
Do Grocery Food Sales Taxes Cause Food Insecurity?
http://ageconsearch.umn.edu/record/235324/files/Wilson_ Zheng_ Burney_ Kaiser – Do Grocery Taxes Cause Food Insecurity.pdf
In this paper, four researchers, led by Norbert Wilson of Auburn University, examine the impact of grocery-tax rates on food insecurity and their differential impact on Supplemental Nutrition Assistance Program participants and non-participants. “By using data from the Current Population Survey Food Security Supplement matched with county-level grocery tax rates, we found that grocery taxes had a positive impact on increasing only the probability of non-SNAP households being food insecure,” the study concluded.
Income, Grocery Tax Proposal Deserves Support
http://idahofreedom.org/income-tax-plan/
The Idaho Freedom Foundation examines a 2016 tax reform plan that would lower the top marginal income tax rate and eliminate the state’s grocery tax, arguing would be a net positive for Idaho taxpayers: “For too long, Idahoans have suffered under a tax policy that hurts people and holds our economy back. For once, state lawmakers are considering a bill that has the potential to do our state tremendous good. Hopefully, state lawmakers will recognize the proposal for the potential that it holds,” the authors wrote.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
The Effect of Sales Taxes on Employment: New Evidence From Cross-Border Panel Data Analysis
https://heartland.org/policy-documents/effect-sales-taxes-employment-new-evidence-cross-border-panel-data-analysis
This study, authored by Federal Reserve Board researcher Jeffery Thompson and Kent State University economics professor Shawn Rohlin, examines how sales taxes affect employment rates in areas near state borders, where cross-border economic effects often take place.
Rich States, Poor States
https://www.alec.org/publication/rich-states-poor-states-10th-edition/
The tenth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams examines the latest movements in state economic growth. The data ranks the 2017 economic outlook of states using fifteen equally weighted policy variables, including various tax rates, regulatory burdens and labor policies.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
