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Research & Commentary: Utah Considers Regressive Grocery Tax Hike

November 12, 2019

In this Research & Commentary, Matthew Glans examines a proposed tax increase on food purchased in Utah grocery stores.

Grocery taxes are controversial because they can have a dramatic effect on families by making food, especially healthy products, more expensive. Over time, many states moved away from these taxes as they place an unnecessary burden on lower income people. Unfortunately, thirteen states (and many localities) continue to tax groceries.

Since 1998, seven states have eliminated their tax on groceries. However, in recent years this positive trend has stalled. Scott Drenkard, an analyst at the Tax Foundation, argues that “States might be looking at getting rid of sales tax on groceries, but groceries are between a sixth and a seventh of all consumption.” Drenkard also notes, “If you want to raise the same amount of money you might have to increase the [general] sales tax by a full percentage point.”

Not all states charge grocery taxes the same way. According to the Tax Foundation, six states tax groceries at the full sales tax rate while six others tax food at a lower rate. Many of the states still imposing grocery taxes also have large low-income populations.

Utah is one of the states that charges a sales tax on groceries, albeit at a lower rate than the normal sales tax. As part of a larger tax reform plan, Utah lawmakers are now considering a tax increase on food purchased at the grocery store. The new proposal would increase the sales tax rate on “unprepared food and food ingredients” from 1.75 percent to 4.85 percent.

Although the sponsors of the proposal claim taxpayers would come out ahead due to a proposed reduction in income tax, grocery taxes are very regressive. The plan attempts to offset the taxes’ regressive nature by offering a grocery tax credit for low-income families.

In a 2017 study, four researchers led by Norbert Wilson of Auburn University found the average tax rate paid by shoppers was 4.3 percent or $200 for a family with an annual grocery bill of $5,000. The authors also noted that in some localities this rate was much higher, they pointed to Tuscaloosa County, Alabama as an example, where the state and local taxes can be as high as 9 percent.

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.

These taxes also contribute to a phenomenon known as food insecurity. U.S. Department of Agriculture defines food insecurity as “reduced quality, variety, or desirability of diet” or “disrupted eating patterns and reduced food intake.” The end result of this problem is a less healthy portion of the populace, which can create other costs down the road.

Shoppers have also shown they are not afraid to drive across state borders to avoid high grocery taxes. In a study from Wichita State University, the authors found that at the local level for every 1 percent increase in food tax difference in any county, food consumption drops by about 9.8 percent. The Wichita State study also found the sales tax on groceries caused 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. 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,” the authors wrote.

Grocery taxes also have a negative effect on food sales. In a 2007 study, Mehmet Tosun and Mark Skidmore used county level data on food sales and sales tax rates for West Virginia from1988 to1991to estimate the effect of the sales tax on grocery sales. Tosun and Skidmore found “for every one-percentage point increase in the county relative price ratio due to the sales tax change, per capita food sales decreased by about 1.38 percent. Our estimates indicate that food sales fell in West Virginia border counties by about eight percent as a result of the imposition of the six percent sales tax on food at the beginning of 1990.”

Grocery taxes are unpopular, regressive, and raise the price of nutritious food. Instead of imposing burdensome taxes on families, state legislators should focus on encouraging government efficiency, reducing taxes, and placing reasonable limits on government 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 which studies the effect of grocery taxes on sales and found that Kansas' sales tax on food hurts 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
Elaine S. Povich of Stateline examines the persistence of the grocery tax in several states and why the trend of repealing these taxes has slowed down.

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 policy.

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 its differential impact on SNAP 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.

Ten Principles of State Fiscal Policy  
https://www.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://www.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 Arthur Laffer, Stephen Moore and Jonathan Williams examine 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.

If you have any questions about this issue or The Heartland Institute’s website, contact the government relations team, at governmentrelations@heartland.org or 312-377-4000.

Article Tags
Taxes
Sub-topic
Taxes: Sales Tax
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR