With the election behind them, legislative leaders may have a surprise in store for Utah taxpayers — a hefty tax increase. At their Oct. 17 meeting, the Revenue and Taxation Interim Committee directed staff to draft a bill that would more than double the state sales tax on food. Powerful state Senate Majority Whip Wayne Niederhauser (R-District 9) and Sen. John Valentine (R-District 14) spoke in favor of the bill.
Niederhauser called the reductions in the sales tax on unprepared food, advocated by former-Gov. Jon Huntsman and enacted in 2006 and 2007, "a horrible mistake." Some lawmakers have seethed about the food tax cuts ever since they were enacted, and have sought to repeal those tax cuts in several failed bills. Here they go again.
Legislators would raise the state's portion of the sales tax on food from its present rate of 1.75 percent to 4.65 percent, the rate for all non-food items. This tax hike of approximately $140 million annually would have a serious impact on the average Utah working family, who would see their food bill jump by about $240 a year.
The in-vogue rationale for reinstating the full food tax is that the lower tax on food creates "volatility" in sales tax revenues. This argument claims that sales tax revenues are less stable without the full tax on food because people can cut back on their discretionary spending when times are tough, but they still have to eat, so revenues won't drop as much if food is taxed at the same rate as other purchases.
The data are inconclusive, and the effect on revenue stability is small. Taxable food expenditures are only about 11 percent of the taxable sales base — the tax on food could be eliminated and revenues would remain neutral if the general sales tax rate were raised by just 0.22 percent.
In 2009, the peak of the Great Recession, the sales tax base excluding food dropped by 7.8 percent, while the base with food fell a nearly identical 7.9 percent. According to the analysis by former Tax Commission chief economist Doug Macdonald, the sales tax base without food grows about 1 percent to 2 percent slower than it would with food included.
A much greater erosion of the sales tax base is attributable to over $450 million in existing sales tax exemptions, a long list of services excluded from sales tax, and the earmarking of 30 percent of new growth in sales tax revenues to roads.
Lawmakers argue that low-income households won't be pinched hard by the food tax hike because they receive food stamps. But no household can eat on food stamps alone. A family of four earning $25,000 per year qualifies for $34 per month in benefits. Meanwhile, the number of families needing food assistance has grown since 2008, as pantries statewide can attest.
In 2010, 18 percent of Utah households reported not having enough money to buy food at times during the previous 12 months. Additionally, 37 percent of households eligible for food stamps never apply for the program.
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The sales tax on food is highly regressive — families that earn less pay a higher percentage of their income for food. Do we really value minimally improved stability over fairness and progressivity in our tax policy? Not if the polls are correct — two-thirds of Utahns oppose restoring the food tax (Deseret News, 2009).
There is no need to tax basic necessities — 31 states exempt all non-prepared food from taxation, and only two tax food at the general sales tax rate. The economic recovery is picking up steam, and Utah projects a budget surplus. Restoring the food tax is the wrong move for the wrong reasons.
Glenn Bailey is the executive director of Crossroads Urban Center.