Congress Isn’t Interested in Discussing the Payroll Tax Cut Right Now

An interesting idea from the Tax Foundation’s Blog today that comes by way of Nebraska State Senator Rich Pahls. TF reports that Senator Pahls plans on introducing legislation that would broaden the sales tax base that would, theoretically, lower income or property taxes. TF takes it slightly further than Senator Pahls and suggests that groceries should be included in this broadened base.

There are few states that already tax groceries: “Alabama, Arkansas (3%), Hawaii, Idaho, Illinois (1%), Kansas, Mississippi, Missouri (1.225%), Oklahoma, South Dakota, Tennessee (5.5%), Utah (1.75%), Virginia (1.5% + 1% local option tax), and West Virginia (5%),” and TF argues that more states could benefit from this policy:

Broadening the sales tax base and lowering the rate is a good idea and a move in the direction of sound tax policy. Services should be taxed. Groceries should be taxed. All end-user consumption should be taxed. There is no reason that entire sectors of the economy and swaths of consumption should go untaxed while others are singled out for taxation. Broadening the tax base allows the government to raise the same amount of revenue with a lower tax rate, which reduces distortions in the economy. Taxing all consumption at the same low rate keeps lawmakers from picking winners and losers in the market and ensures you will be taxed equally no matter what you choose to purchase.

Unless you’re one of those people that doesn’t want pay taxes period, this is a sensible solution for states looking to close their budget gaps (even just a little bit). BUT! As you might imagine, taxing groceries is a hot political spud that, for some, is simply not an option:

[T]his type of reform is seen as radical and a political non-starter. One reason is that people have concerns that changes such as applying the sales tax to groceries might unfairly or disproportionately impact the poor. Even Sen. Pahls seems reluctant to embrace this “emotional” reform.

First, remember that broadening the tax base allows us to lower the rate, so that everyone, poor and rich alike, will be paying a lower tax rate on their non-grocery purchases, offsetting some of the increased tax paid on groceries. Still, lower income people spend a disproportionate amount of their income on necessities like food, and they may very well come out behind even after accounting for the lower rate. Then I would recommend implementing or expanding food assistance programs (which provide free food, not just tax-free food) targeted at those who truly need it.

The bottom line is that most of us can afford to pay sales tax on our grocery purchases. Exempting groceries for everyone is a very costly and indirect way of providing assistance to the poor.

Forget for a second that most state politicians can’t entertain actual solutions to budget problems and taxing groceries is sound policy. Think about it. If a states settles on a 5% grocery tax and you purchase $100 worth, that’s an extra $5. That isn’t going to put anyone on the street and if it does, we recommend sticking to the produce section where food is considerably cheaper.

And from a more practical standpoint, it certainly makes more sense than taxing shoe shines and jugglers.

Broadening the Sales Tax Base in Nebraska is the Right Idea [Tax Foundation]