Thursday, March 20, 2008

Grocery tax not a done deal

While it is true that the Senate just concurred with the House on a bill to increase the income tax credit for groceries, I sincerely hope that this doesn't stifle the discussion in the future. While some may disagree, I can not justify taxing something as necessary as food. If the legislation has the impact of making the tax on groceries a non-issue, then the Legislature has failed the people of Idaho.

For the purposes of transparency you should know that I supported the legislation, albeit reluctantly. Still, I hold out hope that future legislatures will have the political conviction to put individual taxpayers above political wrangling. What you may not know, however, is that the proposal that I (along with the rest of the House minority caucus) put forth was never given a hearing. The proposal called for the repeal of the sales tax on specific grocery items at a rate of one cent per year until such time as the tax were no longer around. At the same time, the grocery tax credit would be phased out. This solution was fiscally responsible and represented a real solution, but alas politics won.

I have been asked by some where the money would come from to make up the loss of revenue. This is a very legitimate question and I would like address it in this public forum, so here it goes.

First, lets identify the underlying assumptions. Number one, food is a necessity. Number two, revenue neutrality is preferable. Number three, everyone pays sales tax. Number four, money now is nearly always preferable to money later.

Okay, now that we have those out of the way, lets get to the options for funding. In order to fund a repeal of the tax on groceries, or as my colleague Rep. Liz Chavez (D-7) insists the tax on food, I believe we should attempt to address each of the underlying assumptions. The inverse of a necessity is a luxury and this, I believe, is the key to our solution. As was noted, everyone pays sales tax, that is not the case for income tax, however. This, along with the fourth assumption explains why the tax credit doesn't make as much sense. While it true that most everyone will get access to the new grocery tax credit, regardless of income tax filing status, it is also true that those that those really need the break will find it difficult to wait for the day when the check comes in the mail (assuming that they submit a request for it). This time lag is not advantageous in budgeting for any organization including a family (why do you think that banks get so up in a tizzy when you try to spend money you don't have?!).

Now, we know that everyone pays the sales tax on groceries regardless of their income. Unlike some, I disagree that wealthy folks should still have to pay. After all, if the first assumption is true, it applies equally to everyone. That means if you say that you can discriminate based upon income, I believe that you lose the ground of the argument that you shouldn't be taxing something that is necessary. Instead, I believe you should consider taxing something that isn't necessary. Luxury taxes would be ideal because the consumer would have to opt-in. Unlike food, where opting-out isn't really feasible, a luxury tax gives the consumer plenty of leeway. I am not sure what the luxury tax would look like, but presumably it would apply to things that are big ticket items that are nice to have. However, I would never advocate putting more taxes on housing because shelter is a need. Conversely, a new Beamer, while attractive and seemingly difficult to live without, would not result in significant trauma.

It seems to me that an important component of deciding what is and is not a luxury is related to marginal utility of a dollar. That is, the marginal utility of $50 is much lower on a purchase of a new Beamer compared to other items. I would also contend that price elasticity has something to do with this, but I don't want to get into the economic theory so I'll leave it there. Anyway, this is just one potential approach. Either way, the discussion can't end because unlike what some may say, the mission is not accomplished.

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