Jared Walczak, Vice President of State Projects for the Tax Foundation, joins Cheddar News' Closing Bell, where he explains why a tax exemption for groceries does not benefit lower-income families as much as one would expect. He also makes the argument that a rate cut would actually be more beneficial.

Closing Bell

Exempting Groceries from Sales Tax Not Necessarily Best Solution

and we discussed the price hikes at the pump as the US wrestles with rising inflation and Russia's continuing invasion of Ukraine. But americans are also feeling the pain at the grocery stores. These basic necessities that are really crimping the wallet and as a result, many states are considering cutting taxes by exempting groceries from the base while keeping the sales tax rate the same. Is it a winning strategy? That's the question. So joining me now is Jared Walczak, vice president of state projects for the Tax foundation and Independent Tax policy nonprofit organization. Thank you so much for joining As two. On the surface, less taxes on groceries seems like a positive right meaning, especially lower-income families are spending less. We know a group hit the worst by inflation is that the surprising truth, it's not and this is I think a surprise because if you're comparing a general rate cut in the sales tax, we're putting that same amount of money towards exempting groceries. A lot of people, including a lot of policymakers assume that exempting groceries is going to be better for the lowest income individuals. It makes sense, right? I mean, low income individuals spend more as a share of their income on necessities like groceries. But what we found, and it's not really surprising if you dig into this is that cutting the general rate is actually better for low income households than exempting groceries. And the basic reason for this is that groceries are actually often already exempt for some of the lowest income households if they're purchasing with snap or wIC benefits, that's exempt, They're only paying sales tax on the rest of the grocery purchases, but they're also spending on a ton of other things and paying sales tax on those items. The lowest income households benefit more from a rate cut than they do by exempting groceries, interesting. So here's the question, do we know the price differential Jared for some of those families who are using snap to purchase their groceries? Any idea what that cost would be versus if we did see some of these states just outright takeaway taxes on groceries. Yeah. So we looked at some death styles of income and one thing that's worth noting, uh, the top decile spends three times as much on groceries as the bottom decile, but where it gets a little mixed is of course the lowest decile is spending more as a percentage of their overall budget on groceries. But for those lowest to death styles, the vast majority of that is already snap eligible. So we're seeing essentially about, um, you know, negligible reduction. We're talking a couple percentage points reduction of sales tax for the lowest income households, very significant for the highest income. Um, you basically see an 11% gain in, um, you know, in retention of taxes, um, if you are able to keep the groceries in the base And, and, and lower the rate for the lowest income households, it's the opposite for the highest income. Okay, here's a question, I know 13 states do tax groceries, to some extent, not all 50 states, but more than a dozen do actually do that. What should they do? What's the best option here to help low income earning americans? They have two options that are better than exempting groceries. One is whatever revenue they can forego that they're willing to put towards a cut. Just do a general sales tax rate reduction that is better for everyone um In terms of competitiveness and it's better for low income households in terms of the distribution. If you really want to focus on low and middle income households consider a grocery credit, This is often run through income taxes, but it's refundable. It's available for individuals who don't have income tax liability as well. It's basically just a lump sum payment to lower income households, maybe even middle income households to offset the cost of groceries without exempting the grocery purchases all of us make. And by the way, groceries is a weirdly defined term, a lot of foods you buy don't get college groceries for tax purposes that rotisserie chicken that prepared sandwich a lot of prepared foods, those are not groceries. So a lot of things that lower and middle income households are purchasing are already subject to sales tax and will be even with the grocery exemption, lower rates better for a lot of households interesting. Um even though you buy it at the grocery store technically always isn't considered a grocery, it sounds like, so unfortunately, we do know, certainly Food and energy, two of the most volatile historically volatile sectors of the inflation report about food in particular, those prices of 8.8% in the month of March for consumer prices for any shop or watching this? What are the best ways to save when it comes to rising inflation at the grocery store? There aren't easy answers here. And unfortunately state tax policy is not going to be the solution to this. Uh the inflation is being driven by federal monetary policy. It is a fundamental monetary question. Uh These require federal policy changes, which I think we're starting to see a greater appreciation of. Of course, certain types of groceries are rising more than others, and unfortunately it's often hitting the lowest income households the hardest. The things that require more labor, the prepared foods are rising much faster. Uh frozen foods are rising faster than, you know, sort of your ingredients and even the ingredients are theoretically cheaper. There's a cost to the labor that you put into this. So a lot of low income households are paying maybe a little more for prepared food because they're working maybe two jobs. Um and this is the cheaper, better option. And unfortunately, that's where the pinch is really being felt right now. Uh poor federal policies are meaning that a lot of the things that lower and middle income households are paying for or even more than 8% inflation. I mean that's an average. But you know, some of these items are seeing much higher prices, Jared Walczak, vice president of State projects for the Tax Foundation. We appreciate the time and certainly a challenging road ahead. Thank you.