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Monday, February 27, 2017

Whip the Poor: Lawmakers Want Food Tax

When people ask me what I do for a living, I tell them that I spend all my days trying to convince politicians that it is a bad idea to raise taxes. Then I tell them: "Trust me, it's a full time job, and then some".

Last week I got yet another affirmation of how true that statement is. Barely had SF131 The HIT Bill died in House Committee of the Whole, until there is a new proposal on the table for higher taxes. On Saturday, KGAB reported:
a house committee on Friday made so many changes to the Senate funding plan that they ended up producing a substitute bill that would implement about $82 million in cuts over the next two years. It would also reinstate a state sales tax on groceries, which hasn’t been levied in Wyoming in many years. The implementation of the compromise budget agreement would require the defeat of the other budget proposals because those bills include cuts that are much larger than the $45 million included in the new proposal. It remains to be seen whether legislators will vote against the larger cuts in favor of the compromise bill.
Did you spot the new tax that just popped up like a blip on a radar screen? Our elected officials are now considering the reinstatement of a sales tax on groceries. 

Here we have another tax that seems like small potatoes if you look at it from a government budget viewpoint. The problem is that to us consumers and taxpayers, this is the kind of tax that can easily become a big deal on the margin.

As always, the exact impact of a new tax is difficult to assess until we have all the details. However, the last thing we can do now is to wait for all the details; last time voters waited to see what was in a bill, we got Obamacare. Therefore, let us make some realistic assumptions about what our beloved legislators may be up to here. 

The first question is: what items would be taxed? Of the half dozen or so states that have a state sales tax on groceries, the general idea is that the tax applies to products that are sold for off-premises consumption. South Carolina limits the tax exemption to products you can buy with food stamps. Utah has two different sales-tax rates for groceries depending on what you buy together with the groceries. New York - true to its reputation as The Government State - offers an exempt list so complicated it will take a law degree to sort out what products are taxable and which ones are not.

Let us assume that a groceries tax would be general and simple, in other words that it will follow the standardized national-accounts definition of food and beverages. This helps us nail down the tax base: in Wyoming we spend something like $1.8 billion a year on products that fall within this category. 

The next question is: what will the tax rate be? Will it be one percent as in Illinois? Or 1.225 percent as in Missouri? Will we copy Arkansas or Virginia and put the rate at 1.5 percent? Should we follow the weird two-rate system they have in Utah, forcing you to pay 1.75 or 4.65 percent depending on what else you have in your shopping cart? 

Perhaps we will follow Tennessee, which also is free of a state income tax. There, groceries are taxed at five percent. (Texas does not tax income or groceries, but let us forget about that for a moment.)

The answer to what rate our state legislators might go for is best found if we look at the tax from the other angle, namely what revenue they "need" from the tax. If we assume that the tax base is $1.8 billion (total spending in Wyoming on food and beverages for off-premises consumption), a one-percent tax would - by static calculations - bring in $18 million. But would our lawmakers really put up a fight for a grocery tax just to end up with a puny $18 million, would they? 

Suppose the grocery sales tax lands at three percent. The static estimate is then $54 million in new revenue. With this rate in mind, the third question of the day is: how will it impact us taxpayers?

The absolute first rule with any tax on essential consumer items is that it will, almost by definition, be a regressive tax. This means, plain and simple, that the tax burden will hit poor and low-income families harder than it will hit people who make good money. In other words, to the extent that our legislators consider how the tax will impact us taxpayers, it is not sufficient to simply use this equation:

T=tCf*(Cf/Y)

where T is the total cost of the tax, t is the grocery tax rate, Cf is total spending on groceries (the tax base) and Y is personal income. This equation gives us an idea of how the average household is impacted, but it says nothing about how low-income families are affected. 

According to national-accounts data from the Bureau of Economic Analysis, the average Wyoming household spends just below six percent of their personal income on groceries as defined above. Using the Census Bureau's estimate of mean household income, this translates to an annual expenditure of approximately $4,400 per household (with the average household size being 2.56 persons...). This means that a three-percent tax on groceries would add a mere $132 to their annual grocery bill. 

Does not sound like much, does it? Well, let us now take a look at households at the lower end of the income scale. Sticking to Census data, in 2015 there were 54,400 households in Wyoming that earned less than $30,000 per year. Using the SNAP (food stamp) program as an estimate of how much they spend on groceries, the picture changes radically: a household of the average size of 2.56 persons is eligible for $3,855 worth of SNAP benefits per year. If we assume that this is how much they spend on groceries per year, the tax they are now forced to pay would take 3.5 times as much out of their annual income compared to the average household. 

We could start making assumptions that all of these households apply for SNAP (they don't) and that they SNAP benefits will rise enough to cover the cost of the tax (they won't), but that does not change the fact that the tax is highly regressive. 

In other words, it is a Whip-the-Poor tax.

It really does not matter what tax rate the legislature settles for. A grocery tax is always regressive, and - as this example shows - heavily so. Let us also keep in mind that the median household income in Wyoming is $58,800, far lower than the average household income. This means, plain and simple, that households in Wyoming are spread out with a bias toward lower-income brackets. (The average private-sector, non-minerals job pays $36,000 per year.) In other words, the regressive nature of the grocery tax will be compounded by the distribution of households earnings.

One last point - and I will keep repeating this until the last tax-hike proposal has died: 

Wyoming cannot afford higher taxes. 
 

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