Utah lawmakers are considering legislation to eliminate the 1.75% state sales tax on food out of a concern that its burden falls disproportionately on poor households. Unfortunately, that laudable motivation is based on a misinterpretation of economic data. In reality, most of the benefit of the tax cut would go to higher-income households.
A better approach is to provide low-income families an income tax credit proportionate to what they pay in sales taxes. A credit targets relief directly to low-income families, allows families to decide which necessities to spend the savings on, and more directly addresses a broader budget problem of having “too much” income tax revenue and “too little” sales tax revenue.
Advocates for eliminating the sales tax on food point to federal data showing that low-income families (those in the lowest 20% ranked by income) are especially burdened because they spend a disproportionate share of their income on food — 31% in 2021. For context, the same data show that low-income families spend an additional 27% of their income on transportation, 81% on housing, 6% on clothing, 19% on health care, and 29% on other goods and services.
One lesson from these data is that the problems poor households face aren’t narrowly about food or food taxes. Low-income families struggle to pay for a wide variety of necessities, and state sales, property and excise taxes add to their financial burden.
A second lesson is that the way these data are constructed exaggerates how much low-income households would benefit cutting taxes on food. Adding up all the spending categories above, poor families appear to spend 193% of their income. That, however, is an artifact of how income is measured and how households are classified in the data.
Students and retirees appear poor because they’re not actively earning income, but their standard of living is higher because they’re drawing on support from their parents or retirement accounts. Likewise, income and consumption are measured with error, such as when survey respondents forget to report a source of income. Such errors make it look like families are consuming more income than they have.
In this context, a family’s total consumption provides a more accurate measure of their financial resources and how much they spend on food. Measured this way, low-income families spend a more similar fraction of their budget on food (16%) as the highest income families (11%). Poor people spend a lot of their budget on food because they have little income. But rich people spend a lot on food, too, because they buy more expensive items. How much a family spends on food just turns out not to be a very good way targeting tax relief to people who are struggling.
In absolute dollars — which is what matters for who benefits from the proposed tax cut — the highest-income 20% of households consume 34% of all food. That implies they would get about $67 million of the estimated $200 million cost of the tax cut. The bottom 20% of households would get $24 million (12% of the total), which is about $50 per person each year.
Instead of spending roughly $200 million on a food tax cut, the Legislature could enact an income tax credit that averaged $150 per person for the lowest-income one-third of Utah income taxpayers. That would cost less than eliminating the tax on food, but would deliver three times the benefit to low- and middle-income households. The remaining savings could be used to increase direct services to individuals and families experiencing food insecurity.
In the context of the broader budget, by retaining sales tax revenue and reducing “excess” income tax revenue, lawmakers would come closer to achieving their desired balance between the two revenue streams without amending the state constitution and eliminating the income tax’s earmark for education.
I don’t presume to know what constitutes a necessity to other Utah parents and families. To some it might be food, but to others it might be filling the gas tank, buying school supplies, repairing a water heater or putting a toy under the Christmas tree. If legislators want to give low-income families a break, give them an income tax refund and let families spend it on what’s best for them.
Adam Looney
Adam Looney is a clinical professor of finance and director of the Marriner S. Eccles Institute, David Eccles School of Business, University of Utah.