As food prices soar, some states consider cutting taxes on groceries

New government inflation data shows prices are surging in one key area – food.

Now some states are looking at helping to reduce that burden on consumers by curbing their taxes on groceries.

But such moves may not be the most beneficial to those who such policies aim to help – low-income taxpayers, according to a new report from the Tax Foundation.

What’s more, the policies would only provide modest tax savings to the middle class, the report found.

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A better solution may be to provide a one-time credit of $75, for example, which could help the poorest households save 31% on their tax liability, the independent tax policy nonprofit found.  

“There are far better ways to help lower- and middle-income households, including grocery tax credits, than the grocery tax exemption,” said Jared Walczak, vice president of state projects at the Tax Foundation.

Currently, 13 states impose levies on groceries.

Seven states tax groceries at the level of the ordinary sales tax rate, including Alabama, Mississippi and South Dakota. The other four states — Hawaii, Idaho, Kansas and Oklahoma — also provide a credit or rebate to low-income households.

The other six states — Arkansas, Illinois, Missouri, Tennessee, Utah and Virginia — tax groceries at reduced rates.

This year, most of those states have proposed legislation to reduce or eliminate those taxes, according to Walczak. “The intense focus this year has everything to do with high grocery prices,” he said.

Notably, many states have considered reducing the levies they impose on gas in the face of record-high inflation. Certain states including Connecticut, Georgia and Maryland have successfully put temporary gas tax suspensions in place.

Like gasoline, food costs have also soared.

Recent consumer price index data shows food prices jumped 8.8% over the past 12 months, the largest increase since 1981.

But curbing grocery taxes might backfire on the low-income shoppers the policy is meant to help.

Such a move is designed to be progressive, so that higher earners pay a higher rate of sales tax. But many low-income families rely on benefits like the Supplemental Nutrition Assistance Program, or SNAP, to pay for food, and that may reduce their taxable consumption of food, and therefore limit how much they may save from a sales tax exemption. In addition, people in this category do not necessarily spend more on groceries compared to other necessities.

Consequently, policies to reduce or eliminate grocery taxes actually tend to benefit middle-income households the most, according to the Tax Foundation.

A better solution would be to extend sales tax bases to also include grocery taxes and consumer services, which are more frequently used by high-income consumers, according to the nonprofit’s report.

If paired with a modest grocery tax credit, say of $75 per person, that may help the poorest decile of households save 31% on their sales tax liability, the study found.

“It’s very poorly targeted towards low-income households,” Walczak said of proposed grocery sales tax cuts. “It is inferior to using the same amount of relief, either for a general [sales tax] rate reduction or credits.”