To note: The following is testimony from the Tax Foundation on Kansas House Bills 2484 and 2487 (Neutral), submitted to the Kansas House Committee on Taxation on January 25, 2022.
President Smith and committee members:
My name is Katherine Loughead and I’m a senior policy analyst at the Tax Foundation. I appreciate the opportunity to speak with you today in a neutral way regarding House Bills 2484 and 2487.
For those unfamiliar with the Tax Foundation, we are a nonprofit, nonpartisan tax policy research organization that has monitored tax policy at all levels of government since 1937. Although we take no position on the legislation, I plan to share some of our research on sales taxes. and the economic evidence surrounding the issue of exempting groceries from the sales tax base.
House Bills 2484 and 2487 would remove grocery foods from the state sales tax base and repeal the food sales tax credit. Under both bills, groceries would continue to be taxed at the local level.
While extending tax relief to Kansans is a laudable goal, different types of tax relief produce different economic effects. It is important to examine the effects – and the alternatives – of the proposals before you today.
There is a broad consensus among economists that a well-structured retail sales tax applies to a broad base of final personal consumption – including most, if not all, final goods and services – while exempting business inputs to avoid the tax pyramid. While no state sales tax fits this ideal perfectly, the best-structured sales taxes are those that maintain a broad base and a competitive low rate. Currently, Kansas sales tax has a relatively narrow base and a high rate. Only 36% of Kansans’ personal income is spent on purchases subject to sales tax, and as of July 2021, Kansas had the ninth-highest combined local and state sales tax rate in the nation.
Grocery purchases are a major category of personal consumption. Creating an exemption for grocery foods would significantly reduce Kansas’ sales tax base, put upward pressure on rates, and make tax rate increases more likely in the future. A more neutral approach would be to keep groceries on the sales tax base while reducing the general rate of sales tax that applies to all taxable goods and services, including groceries, or by modifying the existing food sales tax credit.
Sales tax exemptions for groceries are often cited as an incremental reform designed to provide tax relief to low-income households. But most of the benefits of a sales tax exemption on groceries would go to middle- and upper-income consumers who spend more on groceries and tend to buy more expensive brands and products. Also, it’s important to keep in mind that under federal law, sales taxes cannot be imposed on products purchased with SNAP and WIC benefits, so many low-income Kansans already benefit from tax-free groceries.
Further research needs to be conducted to establish a consensus on this topic. But some public finance experts have found that if a state is able to commit to sales tax relief, lowering the general rate actually benefits low-income consumers more than the grocery exemption. . Lower-income households spend more of their total income—and not just on groceries—than higher-income households, so a lower overall sales tax rate (with continued SNAP purchase exemption and WIC) is more advantageous than a targeted exemption for groceries.
If policymakers wanted to provide additional targeted tax relief to low-income households while keeping groceries on the sales tax base, several changes could be made to the existing food sales tax credit. For example, the amount of credit and income eligibility thresholds could be adjusted annually for inflation, and credit could be extended to households with income below a certain level, regardless of age. their disability or dependent status. The income threshold could also be adjusted based on filing status to avoid a marriage penalty.
Tax breaks can take many different forms, but not all tax cuts have the same effects. Ultimately, maintaining broad tax bases while reducing tax rates is a more neutral and less complex approach than further narrowing an already narrow sales tax base.