This legislative session, the gross sales tax on meals has garnered an excessive amount of consideration in Kansas, with policymakers on each side of the aisle proposing the elimination of groceries from the gross sales tax base. Whereas this difficulty has lengthy been a topic of debate in Kansas, it has gained elevated consideration this 12 months partly because of the state’s giant finances surplus and the excessive ranges of inflation impacting client costs.
Whereas the thought is politically widespread, completely exempting meals from the gross sales tax base is a short-sighted, economically inefficient, and complicated means of offering aid. If Kansas policymakers wish to completely scale back income by half a billion {dollars} or extra, as a grocery exemption would do, a extra economically useful, structurally sound, and distributionally environment friendly method could be to scale back revenue and/or gross sales tax charges whereas enhancing Kansas’ present Meals Gross sales Tax Credit score.
In Kansas and elsewhere, a gross sales tax exemption for groceries has usually been introduced as a progressive coverage change with a distribution of advantages that favors low- and moderate-income households. This assumption usually goes unquestioned, nevertheless it has a number of flaws. First, this assumption fails to acknowledge that many grocery purchases made by low-income shoppers are already tax-free. To obtain federal grants to manage the Supplemental Vitamin Help Program (SNAP) and the Particular Supplemental Vitamin Program for Girls, Infants, and Youngsters (WIC), states should exempt purchases made with SNAP and WIC advantages from any state and native gross sales taxes, and all states achieve this.
This assumption additionally neglects the truth that middle- and higher-income households purchase extra unprepared meals and spend more cash on dearer meals than lower-income households, which means they obtain extra of the profit from a grocery exemption than do lower-income households. This shouldn’t be conveyed as a foul factor; virtually any tax lower yields extra financial savings in nominal {dollars} to those that have interaction in additional of the taxed exercise, whether or not consuming, incomes revenue, or in any other case. But when the goal of a grocery exemption is to inject progressivity into the tax code and goal aid to shoppers struggling to make ends meet, it largely fails to take action.
Our analysis reveals that, in two revenue-neutral situations by which the next gross sales tax price is paired with a grocery exemption and a decrease gross sales tax price is utilized to a base that features groceries, the bottom deciles of shoppers are literally higher off with groceries included within the base, given the existence of tax-free SNAP and WIC advantages. This profit extends to many extra deciles when a meals gross sales tax credit score is added. As such, a much more environment friendly technique of concentrating on tax aid to lower-income Kansans could be to increase Kansas’ present income-tested Meals Gross sales Tax Credit score—not to exempt groceries whereas repealing the credit score.
Moreover, there’s widespread consensus amongst economists that broad-based, low-rate taxes are superior to narrow-based, high-rate taxes. As a income, a well-designed retail gross sales tax is among the least economically dangerous taxes a state can levy. Revenue taxes, by comparability, discourage labor and funding and decrease the payoff to work on the margin. The financial literature constantly finds that gross sales taxes are much less of an obstacle to financial development and placement choices than are revenue taxes.
When interested by main modifications to the gross sales tax base, Kansas policymakers ought to subsequently concern themselves not simply with the right here and now but additionally with the longer term. A gross sales tax carveout for meals would erode a large and secure share of Kansas’ gross sales tax base and put upward stress on charges, making tax price will increase extra possible sooner or later. Kansas’ gross sales tax base, like these of many different states, has eroded over time, and declines in actual income have been met with repeated gross sales tax price will increase. Kansas’ gross sales tax price is now the ninth-highest within the nation, leaving little room for price will increase if Kansas needs to stay aggressive on this entrance.
This legislative session, Kansas legislators have debated a number of payments reflecting various approaches to a gross sales tax exemption for meals, two of which we testified on. The Home and Senate tax committees reported HB 2711 and SB 339, respectively, however no such proposal has come earlier than the complete Home or Senate for a vote.
Shortly earlier than the legislature’s spring recess, an unrelated tax invoice, HB 2106, was gutted by a convention committee and changed with language that takes yet one more method to phasing out the gross sales tax on groceries, a legislative process referred to as “strike out and insert” in Kansas. The convention committee report proposes phasing out the gross sales tax on unprepared meals incrementally over three years, decreasing the speed to 4 p.c in 2023, 2 p.c in 2024, and 0 p.c in 2025.
The differing approaches to meals gross sales tax exemptions explored in numerous payments make clear how advanced it’s to land on a definition of “meals and meals components” for gross sales tax functions. The convention committee report language for HB 2106 would lengthen the proposed gross sales tax exemption to unprepared meals and meals components, together with sweet, smooth drinks, bottled water, dietary dietary supplements, and meals bought by means of merchandising machines, which might make it a bigger exemption than is accessible in most states. In a far-from-perfect try to rescind the advantage of a grocery exemption from meals that carry little dietary worth, most states that present preferential tax therapy to groceries claw again any profit for sweet and/or soda. At present, 33 states and D.C. apply gross sales taxes to soda, whereas 27 states and D.C. apply gross sales taxes to sweet.
Notably, the convention committee report back to HB 2106 does not lengthen the proposed meals gross sales tax exemption to restaurant meals and different ready meals, as SB 339 and HB 2484 would have completed. Each state with a gross sales tax applies the tax to restaurant meals, so a carveout of this nature would make Kansas an excessive outlier. In response to the Kansas Division of Income, gross sales of meals and meals components, together with restaurant meals, generate almost one-quarter of the state’s gross sales tax income. A gross sales tax exemption that features ready meals would subsequently be an especially expensive carveout that might include far fewer financial advantages than many different tax aid proposals of the identical dimension, similar to revenue tax price reductions.
Home Invoice 2106 would additionally require meals to proceed to be taxed on the native degree, which differs from SB 339, which might permit cities and counties to exempt meals on the native degree in the event that they so select. Gross sales taxes are a significant income not only for the state, but additionally for cities and counties in Kansas. State policymakers ought to keep away from pressuring native governments to erode their gross sales tax bases, as this, in time, may result in price will increase. Various native bases would additionally improve complexity and trigger some shoppers to do their grocery purchasing throughout metropolis or county traces to keep away from any tax. Even this method provides complexity, although, because it yields a category of products taxed on the native however not the state degree.
In terms of offering tax aid to middle-income taxpayers, as an alternative of exempting groceries, a greater method could be to scale back revenue and/or gross sales tax charges for all taxpayers. Lowering the revenue tax price would promote financial development and entice in-state funding, and decreasing the overall gross sales tax price would assist all shoppers by decreasing the speed they pay on all taxable purchases, together with ready meals and households objects as an alternative of simply groceries.
To supply focused tax aid to help lower-income shoppers, Kansas’ Meals Gross sales Tax Credit score might be reformed in a wide range of methods. Beneath present legislation, Kansas affords a nonrefundable revenue tax credit score that reduces revenue tax legal responsibility to assist offset gross sales taxes paid on meals all year long. Eligibility is restricted to Kansas residents with Federal Adjusted Gross Revenue (FAGI) of $30,615 or much less who additionally both (1) are age 55 or older, (2) have a incapacity that stops them from working, or (3) have a dependent underneath the age of 18. The credit score quantity is $125 per particular person for the taxpayer, partner, and minor dependents.
Policymakers have a plethora of choices for making this credit score accessible to extra low- and middle-income taxpayers, together with: (1) making the credit score refundable, (2) rising the revenue eligibility threshold so extra taxpayers can declare the credit score, (3) adjusting the eligibility threshold based mostly on submitting standing, (4) indexing the credit score quantity for inflation, and (5) modifying or eliminating non-income eligibility necessities.
Earlier this 12 months, for instance, Idaho policymakers elevated the state’s present meals gross sales tax credit score whereas extending revenue tax aid within the type of each a one-time rebate and a everlasting revenue tax price discount reasonably than exempting groceries from the gross sales tax.
As this 12 months’s legislative session winds down, Kansas policymakers ought to take into account the same method to supply tax aid in a extra pro-growth, structurally sound, and distributionally significant method.