Even the most diligent members of the coupon club may often find their savings mocked in the face of grocery taxes. This reality can be frustrating and bewildering, especially when you’ve spent so much time seeking out the best deals. Moreso, the inconsistency between states can add another layer of complexity to the situation. Why is it that some states apply taxes on grocery items, while others don’t?
The thought has undoubtedly crossed everyone’s mind at one point or another: is grocery tax just another way for Uncle Sam to show his unyielding, greedy hand, or are there underlying rationales to this added cost? Since Covid-19, food insecurity has increased 4.6% across the United States, with 63.2% of adults reporting a high increase in their grocery bills as compared to 2021. With this data, it comes as no surprise that many are advocating for the reduction or elimination of food tax. While many states have done away with grocery taxes there are some that still levy it, and others that allow local governments to make the intricate choice: grocery tax or no grocery tax?
What are grocery taxes?
Grocery taxes, in essence, are the taxes you are required to pay on the final bill when purchasing food products. Although this levy bears similarities to sales tax, they are often categorized and reported differently. Determining the taxability of a certain food item usually comes down to if the item is:
- non-prepared, such as ingredients
- intended for human consumption
- meant for home consumption
- essential or has nutritional value
But in the world of taxation, nothing is ever cut and dry. This is especially true in the United States, where each state determines its own tax rules, meaning the regulations concerning grocery taxes vary substantially.
For instance, in Texas, all types of beverages are subject to taxation except for water, beverages containing milk, and juices with more than 50% vegetable or fruit juice.
Meanwhile, Virginia adopts a different approach, as most staple grocery items and cold prepared foods qualify for a reduced sales tax rate of 1%. However, this reduced rate does not apply to alcohol, tobacco, prepared hot foods, and seeds and plants used to grow food for home consumption.
Adding to the confusion, some states may exempt groceries from taxes altogether, while others allow their local governments to choose whether to tax food at their own rates. This fascinating patchwork of regulations can make understanding grocery taxes a true challenge, but having insight into these nuances can help you better understand what to expect from your shopping excursions.
Why grocery taxes?
Grasping grocery taxes hinges primarily on their raison d’être, (or, in other words, the why). The reasons for their implementation differ among states, with some choosing to retain them while others have long dropped these policies. Much like sales tax, food taxes serve as substantial revenue for states to fund departments like education, transportation, and other public services. And because people always need to buy food, it’s a very consistent financial source.
Tax Policy Center researchers underscore the significant financial implications:“Annually, grocery taxes generate roughly $500 million in Alabama, $450 million in Kansas, and $300 million in Oklahoma – about 2 to 3 percent of each state’s total tax revenue. Even states that tax groceries at lower rates still collect hundred of millions of dollars from the tax.”
Despite the amount of revenue these taxes generate, many critics consider it to be regressive and disproportionately unfair to low-income households and minorities. A 2021 study by ScienceDirect found a positive correlation between grocery taxes and food insecurity, especially among low-income populations. They argue that this is a result of low-income households devoting a larger percentage of their income to food in comparison to those in higher income brackets. A study done by the USDA Economic Research Service affirmed this in 2021, noting, “households in the lowest income quintile spent an average of $4,875 on food (representing 30.6 percent of income), while households in the highest income quintile spent an average of $13,973 on food (representing 7.6 percent of income).”
However, eliminating food taxes in the 19 states and local governments that still implement is no small matter. This transition requires a strategic and cautious approach. Referring to an article written by the Center on Budget and Policy Priorities:
States that fail to offset the drop in revenue will put funding for schools, health care, and other crucial public services at risk. This hurts all communities, but especially people of color, low- and moderate-income families, and places historically excluded from opportunity, which typically experience the most harm from public service cuts.States Can Thoughtfully Implement Grocery Tax Reforms to Help Families and Improve Equity
How are grocery taxes are collected and calculated
Grocery taxes are generally assessed as a percentage of the total bill during the checkout process. Some items, like alcohol and tobacco products, may be subject to different or higher tax rates than other consumables.
Four states – Hawaii, Idaho, Kansas, and Oklahoma – provide applications for partial refundable credits on grocery taxes. However, the qualifying criteria for these credits can be highly specific.
- Hawaii: The refundable food tax credit is only available for taxpayers with a federal adjusted gross income below $50,000 for married filing jointly or less than $30,000 for single status.
- Kansas: Only individuals aged 55 or older, as well as those who are blind, disabled, or have a dependent child under 18 living with them are eligible for this credit.
- Idaho: Most applicants can receive a total credit of $120, provided they are required to file and/or have filed an Idaho income tax return.
- Oklahoma: To be eligible for this credit, applicants must be Oklahoma residents with a total gross household income of $20,000 or less, or a total gross income of $50,000 for those with dependents, physical disabilities, and who are over 65 years of age. However, those who have received Temporary Assistance for Needy Families (TANF) during any month of the year are not eligible.
State governments may choose not to levy grocery taxes or tax them at a reduced rate, but local jurisdictions often have the authority to decide their own rates and taxability. This is true of many sales tax exemptions, including baby and menstrual products. For instance, Utah imposes a state rate of 1.75% on food but allows local jurisdictions to add an optional 1% rate and a county option rate of 0.25%. Consequently, groceries can be taxed up to 3% in some areas. Additionally, alcoholic beverages and tobacco are taxed at the full state and local rates.
Regardless of how a state chooses to tax food, the seller is responsible for reporting and remitting the tax back to the state.
States With Grocery Taxes
Only thirteen states still levy grocery tax, with some of them considering food tax elimination altogether. Eight collect at a reduced rate from the statewide sales tax rate, and certain locations within six additional states still levy food tax while the state does not. Refer to the chart below for a breakdown.
What about taxes on candy and carbonated beverages?
Taxes on food items don’t always apply evenly across all products, with a particular focus on items like candy and carbonated beverages. While only 19 states or local jurisdictions apply grocery taxes, 23 states and the District of Columbia treat candy and soda differently regarding their tax status.
The motivation behind taxing these items comes down to two primary arguments:
- Candy and sugar-sweetened drinks aren’t essential food items and, hence, should be subject to different tax rules.
- By taxing these products at a higher rate, their consumption might go down, potentially leading to healthier lifestyle choices among consumers.
Despite these arguments, there isn’t enough data supporting either of them, and they’ve received their fair share of criticism. South Dakota Governor Kristi Noem highlighted this concern when discussing the proposal to remove grocery sales taxes:
“This proposal includes eliminating the tax on candy and soda. We shouldn’t choose what our citizens do or don’t eat, and this will make implementation easier for retailers and businesses across the state.”Eliminating Sales Tax on Groceries
To further the arguments against sugar and soda tax, a 2019 study examined the impact of taxing sweetened beverages in Philadelphia, PA and Oakland, CA. The research aimed to examine the effect of the tax on purchases, consumption rates, and the retail environment, by analyzing data collected before and 11 months after the implementation of the tax.
The study noted a decline in the purchase of sweetened drinks within city boundaries. However, it also suggested that city residents may have increased their shopping outside city limits where the tax might be cheaper. Regarding consumption rates, no significant overall decline was observed in either city.
However, the World Health Organization (WHO) continues to advocate for sugar taxes.
“Taxes on sugar-sweetened beverages can be a powerful tool to promote health because they save lives and prevent disease, while advancing health equity and mobilizing revenue for countries that could be used to realize universal health coverage.”Dr. Ruediger Krech, Director of Health Promotion and WHO