Cutting grocery tax eats into states' coffers

[March 13, 2009]  PORTLAND, Ore. (AP) -- States looking to cut grocery taxes are running into a serious obstacle: their own desperate need for income amid the recession.

In Oklahoma -- where lawmakers are considering eliminating a 4.5 percent grocery sales tax even as they confront a $900 million shortfall -- Gov. Brad Henry has dismissed the proposal as "unrealistic." One state senator even called it a "fairy tale." State lawmakers are also considering expanding the state's grocery tax credit for lower-income residents.

In Alabama and Mississippi, the issue comes up nearly every year but has yet to overcome opposition from Republicans, despite their general support for tax cuts. And South Carolina -- financially hurt in part by a series of recent tax reductions, including the elimination of a grocery tax -- is facing cuts in education, health and other services to make up for the loss.

"I don't think anyone disagrees with it conceptually," Nick Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities in Washington, D.C., said of not taxing groceries.

"The only objection is the fiscal one."

The vast majority of states either don't tax groceries, tax them at a lower level than other purchases or offer a credit to offset the tax for some residents.

Though just a few pennies on the dollar, grocery taxes can add up. State officials estimate they amount to $225 a year for a family of four in South Carolina. And Alabama Arise, an advocacy group for the poor, estimates that a family of four in that state typically pays $468 a year in grocery taxes.

Alabama lawmakers are looking at two proposals for cutting the 4 percent tax. A bill Democrats support would offset the revenue loss by repealing an income-tax deduction some wealthy taxpayers receive. A Republican plan would gradually remove the tax but not replace the revenue.

Either one works for Carlita Daniels, a 46-year old employee at Faulkner University in Montgomery, Ala.

"Groceries are high enough as is," she said.

Opponents of grocery taxes argue that they're a burden for everyone, particularly low-income families who spend a greater portion of their income on food. With grocery prices rising faster than inflation, they say there's never been a better time to cut grocery taxes.

Supporters say changing the tax can be cumbersome and would be the wrong thing to do during a down economy.

"It's a gut reaction; people say, 'Of course we don't want tax on food,'" said Verenda Smith, government affairs associate at the Federation of Tax Administrators, a Washington-based group.

"But using the tax law to promote social progress is always complicated and imprecise," she added.

Arkansas Gov. Mike Beebe is so passionately opposed to his state's grocery tax that he made eliminating it part of his campaign platform.

"It's such a regressive tax," said Matt DeCample, a spokesman for Beebe. "It's one tax that across the board impacts people. Everyone has to eat."

The state's grocery tax went from 6 percent to 3 percent in 2007, and the state legislature is expected to approve a further 1 percent cut this year.

"If we had our way we'd get rid of the whole thing right now," DeCample said.

But Arkansas lawmakers decided that phasing it out slowly would be more judicious in this economy, even though the state is one of very few not running a deficit.

Forty-five states levy a general sales tax, but 30 exempt food to be eaten at home. Other states tax groceries at a lower rate or offer credits or rebates, primarily for low-income taxpayers. Only two states -- Alabama and Mississippi -- apply their full state sales tax to groceries without relief for low-income families. Mississippi legislators have debated and killed grocery tax cut proposals several times in recent years.

Grocery stores could benefit if the tax cuts mean shoppers can spend more on food. The Grocery Manufacturing Association, the industry's lobbying organization, said it supports the concept but has not actively campaigned for the cuts.

"It's just one of these things that in normal or good economic times, it's something that wouldn't have a huge impact," said Scott Pattison, executive director of the National Association of State Budget Officers. "Even a small loss of revenue right now is huge," he said.

Idaho addressed the challenge by raising an income tax credit, beginning last year, that offsets its 6 percent grocery tax. But some lawmakers there now want to delay that process until the economy improves.

Once states cut their grocery tax, few bring it back. In Wyoming, that's meant a struggle to make up for millions of dollars in revenue. But a key champion of Wyoming's cut, which became permanent in 2007 after years of debate, doesn't regret her eight-year fight.

"I still have people I don't know come up to me in the store and thank me," said former state legislator Anne Robinson, whose father battled the tax when he served in the legislature before her.

[Associated Press; By SARAH SKIDMORE]

Associated Press writers Bob Johnson and Phillip Rawls in Montgomery, Ala., and John Miller in Boise, Idaho, contributed to this report.

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