The state of Mississippi’s ongoing controversy about whether to lower its sales tax on groceries may be a local issue there, but it carries implications for many other states.
It demonstrates a perennial quandary in sales-tax policy. Taxing a broad range of goods and services raises more revenue and keeps overall tax rates lower. But sales taxes inherently lay proportionately heavier burdens on the poor than on the rich. This is particularly true when taxing basic necessities like food.
Taxation does not take place in a social and economic vacuum. Mississippi remains one of the poorest states in the country. It has a highly skewed income distribution. African-Americans form a high proportion of its population. It has a 7 percent state sales tax that applies to food as well as other goods.
That is the highest tax rate on food in the nation, although Arkansas, Alabama, Tennessee and South Carolina also tax groceries. So do Oklahoma, Kansas, South Dakota, Wyoming, Idaho and Hawaii. However, these states have some rebate for poor households, usually as part of a state income tax. (Mississippi does exempt food purchased with food stamps.)
Arkansas is dropping its tax on groceries from 6 percent to 3 percent. That has revived controversy in its neighbor to the east.
There is support for Mississippi’s change among politicians in both parties and among the general public, but Republican Gov. Haley Barbour has vowed to veto the change. A Republican state senator who chairs the key Finance Committee supports him.
Their opposition supposedly stems from the fact that the bill to reduce taxes on groceries by half also would increase Mississippi’s current 18-cent-per-pack cigarette tax. Barbour says, “I’m against raising anyone’s taxes,” and thus threatens to veto the bill. (Barbour became wealthy as a lobbyist for tobacco firms.)
Sales taxes are the most common U.S. tax on consumption. Since lower-income households consume a higher proportion of all their income than do wealthier ones, poor households inevitably pay a higher proportion of their income in consumption taxes than do rich ones. Consumption taxes are thus termed “regressive.”
Sales taxes on groceries are particularly regressive since food purchases are a much bigger component of all spending for the poor than for the rich. Twenty-nine states exempt groceries altogether. In Minnesota, we generally exempt food purchases, though we do tax prepared food, some beverages and candy.
It is no accident that the states that tax groceries most heavily are in the South. These taxes are a legacy from economic structures pre-dating the Civil War.
Slave-owning plantation owners were a minority of the population, but they exercised great political power. They structured state tax systems to favor themselves.
Indeed, when seceding states formed the Confederacy in 1861 and established a tax system to fight the war, Southern legislators taxed many things but exempted any taxes on land or slaves, the two most valuable categories of property.
Financial woes eventually forced the Confederacy to draconian “taxation-in-kind” under which roving squads of tax agents seized farmers’ livestock and crops. But the property of powerful landowners remained exempt to the bitter end.
Following the war and emancipation, the tax system continued to tax items consumed by the poor and by African-Americans and applied a lighter load to the wealthy. Excise taxes on necessities were one tool. This pattern continued into the 20th century.
For example, many Southern states long had annual car license fees that were five to 10 times higher than in the North and West. Real estate taxes generally were lower and those on agricultural land particularly low. Blacks could aspire to own a car but not a farm of any size. The infamous poll tax kept blacks and poor whites from voting but posed little deterrent to the overwhelmingly white middle and upper classes.
Sales taxes on groceries thus form part of a larger historical pattern of taxing the powerless.
This pattern is not unique to the U.S. South. Many developing countries, particularly in Latin America, have tax systems that hit the poor proportionately much harder than the rich. Brazil and Mexico are good examples.
Taxes are a disincentive to whatever is taxed. Taxes on consumption discourage consumption and thus encourage saving. That is good if greater saving increases investment and thus boosts economic growth.
Moreover, revenue from consumption taxes fluctuate less with recessions and booms than do income taxes. This simplifies administering state finances over the entire business cycle.
However, consumption taxes relate poorly to ability to pay. Retirees and others with zero income can still pay considerable amounts in taxes. Coordinating a sales tax with an income tax so that low-income households get lump payments to offset sales taxes paid while maintaining incentives to save rather than consume can diminish these effects. Structuring such rebate programs is tricky, however, and it is easy to introduce other, previously unforeseen, perverse incentives.
There are no perfect answers, but taxing groceries remains a bad policy.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.