Thursday, November 15, 2012
In Part I, I provide an empirical snapshot of food consumption in the United States based on data published by the Bureau of Labor Statistics in the Consumer Expenditure Survey (CEX) and the U.S. Department of Agriculture’s Economic Research Service (ERS). The CEX/ERS data, published annually, contain estimates of amounts spent on food purchased away from home (typically taxable) and food purchased for home consumption (typically exempt). Of particular interest to the question of how or whether states should tax food are data relating to (i) how food consumption as a percentage of disposable income varies by income level, and (ii) how food consumption varies for all households over the business cycle for all households.
In Part II, I provide an overview of the state sales tax treatment of food. The approach followed by the majority of states (31 out of 45)—i.e., exempting from the sales tax base food purchased for home consumption—is then critiqued in Part III on several grounds, including its effect on revenue volatility, efficiency, and administrative complexity. These considerations support a strong prima facie case for taxing food, which must then be weighed against the costs of that approach, which are outlined in Part IV of the paper.
Finally, Part V considers the possibility of a federal tax subsidy, most likely delivered via a refundable tax credit, that would be made available only to residents of states that tax food purchased for home consumption. Such a subsidy might be modeled after the refundable food tax credits currently available in a handful of states, such as Hawaii and Kansas, that currently tax food. The proposal considered in this paper can be viewed as an expansion and federalization of the food tax credits currently in place in these states. In addition to enabling the states to remedy the flaws associated with exempting food, this policy is consistent with standard principles of normative fiscal federalism, which hold that redistributive programs like food tax credits should generally be assigned to the central government rather than residing with subnational jurisdictions.