Grocery Tax

Doug Rich for State Senate

My Observations:

I beleive there is a significante number of low income people who do not take advatage of the the tax credit for groceries! Many do not file taxes because they don't make enough. They may not know the tax credit is avaiable. They may not know how to get the help to file for the credit. They are the most damaged by the grocery tax. Let's just figure out how to balance the budget without the grocery tax revenue.

Ronald M. Nate, Ph.D.

Budget & Tax
August 8, 2024

Idaho Freedom Foundation President Ronald Nate lays out the case for grocery tax repeal in this article.

It’s been fascinating over the years to see Idaho families consistently ask for grocery tax relief only to encounter a barrage of falsehoods and unsubstantiated claims from lawmakers who think they know better. Here are a few of the most egregious bogies offered up, contrasted with the reality of how it works:

Claim: The grocery tax is good because it allows Idaho to collect taxes from out-of-state tourists.

Reality: The claim is never backed up with numbers, but it’s not very reasonable to think tourists are buying tons of groceries. Also, we should not support a shoddy tax policy burdening all Idahoans for the mere purpose of collecting some small amount of money from tourists. Certainly, there are better ways to target tourists if that’s the Legislature’s desire — might as well put tax booths at the borders. Finally, we should not support taxes for the mere purpose of extracting dollars from tourists. Wouldn’t it be better for Idaho if tourists spent their dollars on Idaho business and not on Idaho government?

Claim: Repealing the grocery tax will just make it so grocery stores can raise their prices by 6%.

Reality: No economic theory has ever suggested that removing a tax on a good will cause its price to go up. Instead, it’s just the opposite; competition keeps prices at their lowest levels. For example, if Idaho repealed its tax on gasoline (32 cents per gallon), does anyone think the price would not immediately drop by nearly 32 cents per gallon? It’s called competition. Idaho grocery stores are making a profit now, and get nothing from the grocery tax. A store raising its price after the tax goes away, would risk losing business to other stores that didn’t raise prices. And, here’s the best part for the stores; customers with 6% more purchasing power will increase grocery store profits, without any changes in prices.

Claim: The grocery tax is most fair because everyone pays it.

Reality: Not everyone pays it. Those on food stamps (SNAP program) pay no sales taxes on groceries. Those who live near state borders avoid the tax but still enjoy the tax credit. Idahoans from the western edge of the state, in Fruitland, often cross into Oregon to get tax-free groceries but still get the full credit on their income taxes. Also, because poor and near-poor families pay a larger portion of their incomes on groceries than wealthier families, the tax on groceries disproportionately hurts the lower-income families. This is the unfair burden of a regressive grocery tax.

Claim: The sales tax is important to maintain because it provides stable tax collections to government compared to other taxes.

Reality: The grocery tax is only a tiny fraction of Idaho tax collections. Of all the sales tax collections, only about 11% comes from groceries, and sales taxes overall only represent a fraction of Idaho government tax collections. The $350 million in grocery taxes (projected for FY2025) amounts to only 4.0% of the state budget, and only 2.5% of all government collections/spending in Idaho — hardly an offset for a volatile economy. Even so, it doesn’t seem fair to construct a tax system that maintains a higher burden on families in hard economic times just to shield government from economic pain. Government should feel the effects of economic downturns, too.

Claim: Repealing the sales tax on groceries would cost too much.

Reality: Let’s be clear, when government spends tax dollars, those are costs. But, when government reduces taxes, those are not costs, those are savings (for families). Second, as mentioned above, the estimate of $350 million in reduced tax collections is not a big chunk of Idaho’s government budget. It’s only 4% of the state spending. And that doesn’t even account for the dynamics of how lower tax rates change incentives. Removing the tax on groceries would mean fewer Idaho residents would cross the border to buy groceries. More grocery stores in Idaho would thrive (more income taxes, too). Idahoans would have 6% of their grocery expenses still in their pockets to spend elsewhere. Those dollars would lead to more economic activity and more tax collections in other parts of the budget. The “cost” to the budget will undoubtedly be lower than static estimates suggest.

Claim: Idaho’s grocery tax system has worked for decades, and it’s just fine.

Reality: If Idaho’s grocery tax was so brilliant, we wouldn’t see 38 other states with zero taxes on groceries (plus two more in the works), including five of our bordering states, with the sixth at a very reduced tax rate. Maybe Idaho needs to catch up to other states in protecting families from undue tax burdens instead of spinning false narratives.

Claim: Repealing the sales tax on groceries would be difficult for Idaho grocery stores to administer.

Reality: Idaho grocers already deal with grocery tax exemptions for Idahoans on food stamps. It’s factored into their computer systems and easily excluded for qualified grocery purchases. Idaho’s grocery tax repeal proposal uses the same definitions for qualifying groceries as the food stamp recipients. And remember, 38 states collect zero taxes on groceries (plus two more in the works), and they are able to easily manage their systems and collections on non-grocery items.

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Idaho is the only state in the west that has Groceries includedd in the Sales tax rates.

Oregon and Montania have not State Sales Tax

Utah has Groceries taxed at a lower Rate

Mississippi has the contry's highest sales tax on groceries at 7%. The lowest rate is0.125 in Arkansas. Candy and soda aren't considered grocery items in several state.

Three states tax groceries at the same rate as thier general sales tax - Hawaii, Idaho, and Oklahoma and offer a credit.

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Are there tax exemptions for low-income families?

The concern over grocery taxes is that it disproportionately impacts low to moderate-income families, who spend much of their income on food. According to a 2020 report by the Center on Budget and Policy Priorities titled “States That Still Impose Sales Taxes on Groceries Should Consider Reducing or Eliminating Them,” families with household incomes of $20,800 or less pay almost twice as much of their income on food than those in the highest 20 percent income bracket.

For low-income families that receive SNAP benefits (food stamps), groceries purchased with those benefits are exempt from sales tax per federal laws. However, not all low-income families are eligible for SNAP benefits.

Alabama
Alabama still taxes groceries, but the state passed legislation that would reduce Alabama's grocery tax by 2%. The first 1% cut went into effect last September, reducing the state's tax rate from 4% to 3%.

The second 1% tax cut will be imposed on Sept. 2024, according to the Alabama Policy Institute.

However, the 1% food tax reduction doesn’t apply to local tax jurisdictions. So in areas where the local and combined sales tax rate is 10% (such as Montgomery), Alabama residents still pay a 9% tax when they visit the grocery store.

Arkansas In Arkansas, the sales tax on groceries is reduced to 0.125%. This is the lowest tax rate of the states that tax groceries.

A bill to eliminate this "food tax" was introduced last spring, but it never passed the Arkansas House or Senate.

Hawaii
Although Hawaii doesn’t technically have a sales tax, the state does have an excise tax, which is passed to consumers and reflected in retail prices. This tax applies to groceries. The tax rate averages 4.44% in Hawaii, according to Tax Foundation data.

However, eligible residents may claim a Hawaii grocery tax credit to help offset the tax on groceries. There are several requirements for claiming the state's grocery tax credit, and federal adjusted gross income (AGI) is a factor.

For the previous tax year, single filers with an AGI of $40,000 or more ($60,000 for joint filers) couldn’t claim the credit. Additionally, those listed to claim the credit including yourself, your spouse or dependents must have been present in Hawaii for more than nine months in 2023 to be eligible.

Idaho
Idaho taxes groceries at the full 6% state sales tax rate. However, the state offers a grocery tax credit. The refund averages $120 for most Idaho residents, according to the Idaho State Tax Commission.
Idahoans may also receive a credit for each qualifying dependent. Part-year residents may receive a partial tax grocery tax credit.

Illinois Some Illinois taxes increased in July, including the state’s sales tax on groceries. However, Illinoisans won't have to worry for long. On Aug. 5, 2024, Illinois Gov. J.B. Pritzker signed legislation repealing the state grocery tax on items meant to be consumed off-premises.

Starting January 1, 2026, Illinois will eliminate the 1% sales and use grocery tax on food for human consumption. The tax break doesn't include alcoholic beverages, foods infused with adult-use cannabis, soft drinks, candy, or food prepared for immediate consumption.

Still, local governments will have the option of imposing the 1% tax by ordinance.

This isn't the first time Illinoisans have had tax-free groceries. The state temporarily rolled back its 1% rate on food tax for one year, which ended on July 1, 2024.
The expiration of the grocery tax suspension came at a bad time for many state residents since Illinois increased its already high gas tax the same day along with a number of other states that increased gas taxes on July 1.

Kansas
Kansas still taxes groceries, but the state is gradually reducing the tax until it’s eliminated in 2025. The first reduction went into effect last year.

Kansas grocery tax is now 2% (reduced from 4%), but this reduction does not apply to local tax rates.

Mississippi
Mississippi currently has the highest-taxed groceries in the U.S. The state taxes essential food items at the regular 7% tax rate. Some Mississippi lawmakers proposed reducing the grocery tax, but their efforts haven’t succeeded.

Efforts to reduce the state’s income tax have been more successful. As a result, some Mississippians began paying less income tax last year.

Missouri
Missouri is another state with a reduced tax on groceries. The state currently imposes a 1.225% tax, down 3% from 4.225%, but cities and counties can charge their own sales tax rates.

Local tax rates alone can exceed 8% in some areas of the state, according to the Tax Foundation.

Oklahoma
Oklahoma eliminated its 4.5% statewide grocery tax on August 29, 2024. According to state lawmakers, each family could save as much as $648 a year once the tax cuts are enacted.

Still, Oklahomans are not entirely off the hook. Grocery shoppers can expect to pay a sales tax on some items since the tax cut doesn't include all foods. For more information see Why You'll Still Pay Oklahoma Grocery Tax.

Local sales taxes, as high as 7% in some areas, will still apply once the Oklahoma grocery tax cut takes effect.

South Dakota
A four-year “tax holiday” reduces South Dakota’s sales tax rate, including the tax on groceries, from 4.5% to 4.2%. This temporary tax cut took effect on July 1, 2023.

Some South Dakota lawmakers want to repeal the state’s grocery tax, but that hasn’t happened yet.

Tennessee
Tennessee’s tax on groceries is 4%, but local jurisdictions can add up to 2.75% in local sales taxes.

Last year, state residents received a three-month break from the state-wide sales tax on food ending in October. WKRN reported that Tennessee families were able to save at least $100 during the three-month break for tax-free groceries. If the state eliminated its 4% tax rate on grocery items, the average family could save up to $400 annually.

While the state will not offer a tax-free holiday on groceries this year, a bill was introduced that aims to eliminate the tax on grocery items. If passed, the state would cut its grocery tax starting January 1, 2025.

So far, the bill seems to be stalled as of April 2024.

Utah
Although the state’s portion of the grocery tax is 1.75%, Utah residents are charged a 3% tax on groceries statewide. A bill passed by lawmakers would eliminate the 1.75% state portion of the tax.

However, for this change to take effect, voters would need to approve the measure in November 2024. Even if voters give the OK, Utah residents will still pay the remaining 1.25% food tax.

Honorable Mention: Virginia
Virginia technically eliminated the 1.5% state sales tax on groceries last year, but localities still charge a 1% tax rate. So, residents in the commonwealth aren't completely off the hook.

Republicans previously proposed a bill that would end the local sales tax option on groceries, but efforts to eliminate the food tax at the local level have failed so far.

Honorable Mention: Georgia
In Georgia, groceries aren’t taxable at the state level, but individual counties and other jurisdictions are still allowed to implement a sales tax on groceries. As of July 1, 2024, the state’s sales and use tax rate is 4%.

Honorable Mention: Alaska
Alaska does not have a statewide sales tax, but local jurisdictions may charge their sales taxes.

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'Food tax': Why states tax groceries
Grocery taxes can provide significant revenue for states, often used (at least in part) to fund essential departments, such as education and transportation. Of the 11 states that still tax groceries, five impose a reduced tax rate.

Additionally, three states are preparing to eliminate their grocery taxes — with one repealing the tax on food items this summer.

Some states offer a grocery tax credit that helps offset taxes paid throughout the year. Lawmakers in several states have introduced bills to reduce or eliminate taxes on groceries over the past few years.

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Jim Woodward - Former Idaho Senator and now running for a new term - North Idaho District 1.

Idaho’s grocery sales tax is an issue at every legislative session.

Sales tax on groceries is an issue that comes up every legislative session. I believe most folks agree that we shouldn’t tax food. We require it for our subsistence. Why would we tax something that is a staple of life?

There are two methods of not taxing food. The first is simply to not collect the tax when selling food. This method does require distinguishing what is and is not food — which is a tougher question than it first appears. The second method is to collect sales tax on all transactions, but then return a certain amount of sales tax back to the taxpayer at the end of the year. That amount should reflect the sales tax paid by the average resident for groceries during the year.

In Idaho, we have the second method in place and have had for decades. The grocery tax credit is available to all Idaho residents through the Idaho Tax Commission. Most people receive the tax credit when they file their Idaho income tax return on Form 40. It shows up on Line 43 of Form 40. For Idaho residents not required to file income taxes, the grocery tax credit is still available by filing Form 24.

The grocery tax credit is $100 per person. For a typical family of four, the grocery tax credit is $400. With a 6% sales tax rate, that means the family can buy $6,667 of groceries for the year and not pay tax on those groceries.

There is one bill this year to raise the grocery tax credit to $120. The same family of four could then purchase $8,000 of groceries with no tax paid. I would like to hear from people if they think $8,000 is somewhat close to the amount a family of four spends on groceries in a year. With the U.S. inflation rate now up to 7.5%, we are all feeling the pressure of ever-increasing costs.

I do hear from people who would like to switch to the other method of not taxing food. A number of states around us do not tax food at the cash register. There are pros and cons to switching. With no grocery sales tax at the register, it would be an exact system for each individual. You would not pay tax on food. However, Idahoans would end up paying more tax.

How is it that we would pay more tax? Idaho requires a certain amount of money for roads, police, jails and judges based on the number of people in the state full-time and part-time. Right now, some of that money comes from sales tax on food paid by out-of-state visitors. We know how tourism-oriented our economy has become. Do we want to foot the bill for services provided to people not paying state income tax?

Idaho collected just over $2 billion in sales tax last year. The reporting system doesn’t break out sales tax by category, so we don’t know exactly how much is coming from food. Based on other states, about 12% of that $2 billion is from food sales. If that is the case, we are collecting about $240 million in sales tax on food. Of the $240 million, the most recent estimate I’ve heard is that about $19 million comes from sales to non-residents. If that money isn’t coming from out-of-state, it will come from in-state.

The decision to stick with our current tax credit system where we true up annually or switch to a system of not paying at the register is a policy choice. Either system can yield the desired result of not paying tax on food. I am open to input and would value your thoughts at JWoodward@senate.idaho.gov.

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