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Monday, November 19, 2007
Is the Food Exemption Worth It?
The exemption of food from the state sales tax is lauded and maintained because it mitigates the regressivity of the sales tax. This may in fact be the case, but it's a poorly targeted remediation that is a massive drain on state revenues.
In 2005, states collected $213 billion in sales tax revenue. According my back-of-the-envelope calculations (based on data from the Consumer Expenditure Survey), the food exemption costs state governments some $22 billion per year. This represents more than 10 percent of sales tax revenues. And of that $22 billion, $9.4 billion goes to households earning more than $70,000. Furthermore, these upper-income households ($88,774 is the threshold of the top income quintile) represent about 30 percent of all households yet receive over 40 percent of an exemption that is intended to benefit lower-income households.
But this is a bit of a sticky wicket for state policy makers. In order to preserve this element of progressivity in the overall tax scheme, the removal of the exemption would have to be replaced by either a tax credit or a spending program targeted to low-income families. And this is of course the object of progressive fiscal policy - the transfer of wealth from those who need it least to those who need it most. Unfortunately, it's the former who are more effective in seeing their policy preferences expressed in the political system.
I offer no solutions today, only a chart.
Click on image to enlarge
Posted by Craig Jennings
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