We generally like to favor progressive tax systems in the United States. Typical tax systems favor taxing those that make more money at a higher rate and those making less at a lower one. As it is often an outlier, most states’ sales tax systems are an outlier in this respect as well. Being that sales taxes are usually based on sales price; the wealthy actually pay less as a percentage of their income in sales tax and those who make less money. The regressive nature of sales tax regimes has been a hotly discussed topic since its invention.
In order to combat the regressive nature of a sales tax, many states have decided to exempt grocery items from sales tax completely or tax it at a reduced rate. In fact, of the 45 states with a state sales tax, 32 exempt groceries from their base completely. Further, six additional states tax groceries at a lower rate. Luckily your state is one of the states that exempt grocery items!
Sales Tax on Groceries – Luxury or Necessity?
The primary idea of driving the tax-exempt nature of necessity grocery items is fairly obvious. Conceptually, most individuals consume and need the same amount of necessities irrespective of income. Being that a wealthy and a struggling individual will need certain necessities, public policy pressures states to not force the person who makes less money to pay a disproportionately higher tax percentage for items they need. Further, governments are often discouraged from taxing need-based items, which may discourage people from buying items they need.
While certain items like water, bread, and medicine are almost always exempt, other food items like chips, ice cream, and other snacks are often up for debate. The necessity vs. luxury debate is an obvious result of the grocery exemption in most states that leads to bizarre results. For example, Indiana taxes marshmallows and cake decorations but exempts canned marshmallow crème and frosting in containers. Florida views deli meats and bread as a tax-free necessity but if those items are put together in a sandwich they become a taxable luxury. And, New York seems to believe that the luxurious cut bagel is subject to tax, while the uncut variety is clearly a tax-free necessity.
Government Controls What We Eat Through Sales Tax
While the government cannot tell us what we can and cannot eat, it sure can try to shape our behavior through sales tax policy. Allegedly to improve the health of its residents, many states, have excluded so-called unhealthy food items from the general grocery exemption. In fact of the 32 states that tax groceries, only 11 include candy and soda in the definition of a grocery. Those states are Arizona, Georgia, Louisiana Massachusetts, Michigan, Nebraska, Nevada, New Mexico, South Carolina, Vermont, and Wyoming. Of course, your state is one of those states that care about your well being and tries to dissuade you from buying that unhealthy soda. However, your state doesn’t seem to mind that you eat that sugary packed candy bar because it chose not to impose a state sales tax on its purchase.
Grocery Exemption Benefits State Residents
Although they would really really like to, a state cannot tax out-of-staters differently than its own residents. The constitutional prohibition against doing so has led to states taxing tourists in creative ways. Certainly, a tax regime, which exempts groceries and taxing prepared meals at restaurants would result in a higher tax on tourists, who tend to eat out, as opposed to locals who tend to represent the higher percentage of sales for grocery stores. So, in addition to preventing a regressive tax on necessities and shaping what we eat and drink, sales tax regimes can heavily impact public policy.