Originally published in the Deseret News.
A lot has been written on these pages about the problems with Utah increasing the sales tax on food. I would like to offer a different perspective. I think there are far better ways to help low-income Utahns. Legislators would be wise to tax unprepared food at the same rate as other commodities and find a much more tailored way to help Utahns in need.
Approximately 12 percent of Utahns live in poverty. The reasons for their financial struggles vary, but they all need public assistance. It’s right that we band together as a generous society and give of our means. The question is, what is the best way to help?
In 2007, Utah joined many other states in charging a lower sales tax on unprepared food (groceries with many exceptions). Since food is a necessity, supporters argued that we shouldn’t charge sales tax on it. It was too expensive to remove the entire sales tax on unprepared food and so we dropped the state sales tax rate from 4.75 percent to 1.75 percent. Today, state tax collections are approximately $175 million less each year because of this tax change.
I support helping low-income Utahns, but think we should do it in a way that is targeted to match our policy goal. By removing the sales tax on food, we gave everyone a tax break even though our policy goal was to help a subset of the population. We used a blunt policy tool instead of a tailor-made approach. As is often the case with blunt policy tools, we created lots of unfortunate unintended consequences.
The biggest unintended consequence is that instead of giving a $30 million tax break to those in need (the estimated revenue from low-income Utahns who paid the sales tax on food), we gave a $175 million tax break to all Utahns. This action leaves $145 million in revenue each year out of state coffers that could have been used to keep tuition costs lower, pay for more social workers, help with high quality preschool, invest in infrastructure that keeps our economy strong, or other public benefits that help Utah prosper.
Another unintended consequence is the complexity we added to our tax code. Are breath mints food? What about crushed ice? What about nutritional supplements? How about Pam cooking spray? In case you were wondering, the answer to these is “yes,” but you can see the complexity. Blocked ice is charged the full sales tax rate, crushed ice is charged the discounted food tax rate. By charging varying sales tax rates we added an administrative burden to our tax code.
Another unintended consequence is increased volatility. By reducing the sales tax rate on food, we added more volatility to our tax collections because food purchases are more stable than other purchases.
I suggest implementing a more targeted approach to help economically disadvantaged Utahns. My favored policy intervention is a refundable earned income tax credit (EITC) for low-income households. The credit reduces the amount of tax owed, and often provides individuals and families with sizable refunds. As a policy intervention, it captures the “triple play.” It incentivizes work, targets the exact population you want to help (working parents with children), and spreads the social cost to all taxpayers. It’s also easy to administer. Twenty-six other states have adopted a state EITC, and the results have been positive.
The Legislature could also expand property tax relief to low-income Utahns through the circuit breaker property tax relief program. This program provides credits for renters and homeowners who qualify.
We have many ways to help Utahns in need who are targeted, and even more generously than with the lower sales tax on food. These policy tools support the exact population in need, have fewer unintended consequences and pose less administrative burden. They also allow the state to collect needed revenue for a growing state.