Wednesday, June 10, 2015

Income Versus Sales Tax Pt. 2: Exempted Food

This is a followup to yesterday's post analyzing the different impact between raising income tax and raising sales tax.  There's a proposal to (in FY 2017) tax grocery purchases at a different rate than other sales-taxed items. 


METHODOLOGY

If you're not a tax wonk, or nerd, skip to the results. 

For long methodology and background, see yesterday's post.  This post focuses on the current plan to charge a lower (4.95%) sales tax on food, beginning in Fiscal Year 2017.  A few methodological notes:

  • Regular sales tax would stay at the 6.55% rate from yesterday.  
  • Food sales tax would fall to 4.95%.
  • The biggest estimate I had to make in this analysis is the portion of taxable purchases people in different income groups make on food.  I used USDA data, that shows (unsurprisingly) households in the lowest income groups spend the highest percent of their income on food (~40% in the lowest quintile).  
  • I used the USDA data to model estimates of the portion of purchases that would be taxed at the lower lower food rate, by income group.
  • Once again, if anyone has any questions, or would like me to re-run numbers under different assumption, I'm happy to do that.  However I believe this is an honest attempt to accurately represent the impacts of tax change.

RESULTS

FIRST: Because food sales taxes make up a larger portion of low income family expenditures, this is a massive move to a more "progressive" tax system.  First compare yesterday's sales tax change (all purchases from 6.15% to 6.55%) where lowest income groups saw a 5% plus tax bill increase:

To today's (general purchases from 6.15 to 6.55, food from 6.15 to 4.95) where lowest income groups see a tax cut:

This shows that lowering the food sales tax significantly reduces the additional tax on lower income groups, and is in fact about a 4% cut to their overall tax burden.


SECOND:   Why is this such a massive impact on effective sales tax rates?  Simple, because the downward change to the food sales tax is three times the magnitude of the upwards change to the general sales tax.  This has an interesting impact: if you make more than a quarter of your sales taxable purchases on food, this is a net tax cut.


And once again for you nerds who like charts:

CONCLUSION

Two easy things here.  First, moving the food sales tax lower is a big move towards a progressively oriented sales tax.  In fact, even with the general rate rising from 6.15 to 6.55, reducing the food sales tax makes this a net tax cut on low income families.

DISCLAIMERS:
  • There are a lot of things in the current bill, and at this moment (9pm, June 10th) no one knows how it will end up, and some could impact this analysis, including ending certain sales tax exemptions, and ending the low income food sales tax credit.
  • I'm really cheap.  Ask my wife.  Will not spend money.  Likes to save.  As such, I have probably erred on the conservative side with spending assumptions.  I don't think this materially; directionally impacts my analysis, however numbers will vary by different household spending habits.  In short, you spend more on non-food items generally, this costs you more.  That 25% number is key.
  • You may notice that after accounting for food tax, only higher income households see a tax increase, and that increase is moderate.  Two things, this is generally in-line with revenue estimates I have seen.  Also, this analysis is specific to four person families, living under certain conditions.  Households with fewer people and lower percent food expenditures will see more of a tax increase.

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