originally published in the Moscow-Pullman Daily News March 17-18, 2007
By Judith L. Brown
As I write this, an increase in Idaho's grocery credit is one of two or three key issues remaining to be resolved before the 2007 Idaho Legislature closes up shop and adjourns. Gov. Otter proposed a targeted grocery credit of $90 per family member for lower-income families, phasing out to zero credit for higher-income families. The House instead passed an alternative flat credit of $50 for everyone ($70 for seniors), regardless of family income. The Senate amended the House version and reduced it to $40 ($60 for seniors). The governor has indicated pretty strongly — with just enough wiggle room for some compromising — that he will veto the bill headed his way. Meanwhile, the Democrats say they are supporting the governor's targeted credit for now, but over the longer haul they will continue to press for removing the sales tax from food entirely.
Just what are the issues involved in taxing or not taxing food, and what are the pros and cons of different approaches to reducing taxes on food?
Taxing food creates essentially two problems. The first is an equity issue. Tax on food falls much more heavily on lower-income families than on higher-income families. As a share of income, low-income families pay sales tax on food at four to five times the rate of high-income families, according to the Center on Budget and Policy Priorities. Few if any taxes are as regressive as sales tax on food, a basic necessity. Some go so far as to say it is immoral to tax food.
The second issue involved in taxing or not taxing food is a revenue issue. Taking the sales tax off food narrows and destabilizes the sales-tax base and reduces the revenue generated by the sales tax. Currently, taking the sales tax off food in Idaho would cost about $180 million annually. That's a sizable chunk of change.
Thirty states resolve the equity issue by simply deciding not to tax food. Another seven states tax food, but at a lower rate than they tax other goods. These states have structured their tax systems to make up the foregone revenue in other places, by relying more heavily on income, property and other taxes.
Five states, including Idaho, tax food fully but then provide some sort of grocery credit to offset some of the taxes paid on food. Idaho has always followed this approach, enacting a $10-per-person grocery credit in 1965 at the same time it enacted a 3 percent sales tax.
The major advantage of grocery credits is that they can be structured to offset sales tax on food at a much lower revenue cost than fully exempting food from sales tax.
The major disadvantages of grocery credits are that they do not fully offset sales tax on food and they erode in value over time.
That's what's happened in Idaho. If the $10 credit enacted in 1965 had been fully adjusted for inflation and for increases in the sales tax rate, it would now be well over $100 per person. That's unaffordable in our current budget context.
After the sales-tax rate increased to 6 percent in October, pressure mounted to either increase the grocery credit or start phasing out the sales tax on food.
Otter grew up in a family that struggled to make ends meet. He also is no fan of tax increases, so he is unlikely to raise another tax in order to take the sales tax off food. And he has acknowledged that public education in Idaho is underfunded. Hence, he proposed to dramatically restructure the grocery credit, targeting it to offset the sales tax on food only for those families struggling to put food on the table. A flat credit for everyone, he has said, is "just spreading money around for no particular reason."
I think Otter's proposal is a good one. I don't think it is immoral to tax food for those of us who can easily afford food. I do think it is immoral to tax food for those really struggling to get by. I also think it is immoral — very immoral — to shortchange our children out of a sound education and a solid start on life.
I hope the governor holds out for his targeted grocery credit.
* Judith L. Brown is an economist and director of the Idaho Center on Budget and Tax Policy. She lives in Moscow with her family and can be reached at jlbrown@turbonet.com.