TIME TO RESTORE THE SALES TAX ON FOOD, WITH CORRESPONDING CUTS IN OTHER TAXES

November 9, 2009 – The Utah Taxpayer—My Corner by Howard Stephenson

Like any group of humans, sometimes the legislature makes mistakes. Sometimes these mistakes are inadvertent – the result of not fully understanding the hidden impacts of the language in a piece of legislation until it is implemented. Sometimes these mistakes are a result of peer pressure from very influential persons inside and outside the legislature.

A few years ago the legislature made a major mistake when it eliminated a portion of the sales tax on unprepared food items. Legislators were highly influenced by the fact that Governor Jon M. Huntsman, Jr. had made a campaign pledge to remove the sales tax on food. House members were influenced by then Speaker Greg Curtis, who said he wanted to be remembered in his obituary for winning the removal of the tax, instead of some of the negative stories which the media had published about him.

Neither of these reasons should have been sufficient to win passage of the reduced tax on food. Other taxes should have been cut instead, like taxes that would actually stimulate economic growth. Corporate and individual income taxes should have been reduced, making Utah more competitive for the location of high paying jobs.

Some argue that the food tax is regressive, impacting most heavily those least able to pay. They’re right, but the answer is not to eliminate the tax for everyone. The answer is to mollify the regressive impacts by targeting repayments to the poor, equivalent to the taxes they pay.
Providing a refundable income tax credit for low-income families is an equitable way of replacing the sales tax on food without unnecessarily burdening those least able to pay the tax.

According to the federal Department of Agriculture’s “Thrifty Food Plan,” an average low-income family of four with young children pays approximately $6,286 per year on food. If the
Legislature imposes the same 4.75 percent sales tax on food that it imposes on other goods, that average low-income family would pay an additional $188.57 per year in sales tax.

The Legislature could provide an income tax credit of $188.57 for families whose family size and income place them at no more than 150 percent of the federal poverty line. That would be a total tax cut of $27.6 million. Imposing the full 4.75 percent on food, however, would raise $144.4 million. If the Legislature uses the remaining $116.8 million to lower the state income tax, Utah’s income tax rate could decline from 5.30 percent to 5.03 percent, and the state would lose no revenue.

And while we’re at it, let’s drop it to an even 5.0 percent. By lowering the income tax rate while restoring the full sales tax on food, the Legislature would not be increasing taxes. Making the full sales tax apply to the most stable portion of the sales tax base would stabilize sales tax revenues, which would decrease the pressure future Legislatures will feel to increase taxes during an economic downturn. At the same time, lowering the income tax rate will make Utah more economically competitive, as businesses and families will see that living and doing business in Utah is less expensive than in our competitive states.