Should we put food back on the table? An examination of food in the tax base

• In Event: Sales Taxes as Social Policy: Incidence, consumer responses and benefits distribution of wax waivers and inclusions

Abstract

Most states have a grocery tax exemption and do not levy sales taxes on unprepared food. This is because taxes on food are especially regressive, with higher effective tax rates on lower-income households. However, as the sales tax base continues to dwindle and sales taxes grow as a share of their own-source revenue, this paper asks: should states consider putting food taxes back on the table? Unprepared food is exempted from North Carolina’s state sales tax but not from the local sales tax. The state reports the grocery tax separately, allowing us to estimate the state’s forfeited revenues, the elasticity of revenue generated by the grocery tax, and whether the taxation of food at the local level improves interjurisdictional equity. The preliminary results suggest North Carolina would increase sales tax revenue by 13 percent ($1.3 Billion) if it reinstated a tax on unprepared food. Revenue from food would have been more volatile than general goods revenue between 2012 and 2024, but the two revenues tend to grow countercyclically, smoothing overall volatility when combined. Lastly, though sales taxes on unprepared food impose regressive tax burdens for individuals, they improve revenue equality between counties. This research comes at a critical time where states are reconsidering sales tax base, the inclusion of services and additional exclusions of necessities. However, few are asking “what are the costs and benefits of taxing food” and we argue it is time to revisit the grocery tax.

Author

• Alex Combs, University of Georgia
  Presenting Author